Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 06 February 2017 at 9:47 GMT

Le Pen is mightier than the Fillon sword — #SaxoStrats

Head of Macro Analysis / Saxo Bank

  • Scandal enveloping centre-right candidate Francois Fillon derails campaign
  • Front National leader Marine Le Pen reaping the benefits of Fillon demise
  • A Le Pen victory could see a UK-style referendum on EU membership
  • High debt levels means next administration must put cuts in place


Marine Le Pen has got plenty to smile about. Photo: Shutterstock

By Christopher Dembik

The French presidential election is beginning to look more and more like something out of vaudeville. Francois Fillon’s campaign has been completely paralysed by the scandal over his wife’s possible 'fictitious' employment (which is, I have to say, a long-standing French political tradition). 

It looks like the information may have been leaked by someone from his own party (clearly an inside job). Rumours are that Fillon could be replaced by the President of the Senate, Gérard Larcher. 

Larcher has zero charisma but he could get enough votes to earn the nomination through the party’s national council (equivalent to the party’s parliament). Needless to say, Larcher has zero chance of being the next president.

.The main winner here is Marine Le Pen and, to a lesser extent, Emmanuel Macron. For sure, investors are increasingly pricing in the possibility that Le Pen could be elected (the French 10-year bond spread is at 0.64 points this morning – the highest since July 2013).

A very important point regarding Le Pen’s economic programme must be brought out loud and clear here. She does not want to exit the euro anymore but plans to introduce the franc in parallel with the euro. It seems like she wants to reintroduce the snake in the tunnel which was nevertheless a huge failure. It is unlikely that such a system could last.

The expected decline of dollar under Donald Trump's presidency would weaken the currency band as it was the case when the USD exchange rate went lower from 1972 to 1978. In addition, she expects to negotiate with Brussels and if she obtains the result she desires, will propose a referendum to the French to remain in the EU, David-Cameron style.

The macro picture is not looking good at all. Economic growth in 2016 reached 1.1% (consensus at 1.2%) versus 1.2% in 2015. The Socialist government took some interesting economic measures but it was way too late and, often, very poorly calibrated.

For instance, the competitiveness pact has mostly favoured companies that are not facing international competition, such as the postal service company (one of the main beneficiaries!), instead of exporting SMEs.

There have been some positive signals since the beginning of the year but they can be miscellaneous. The decline in business inventories should normally push private investment much higher. However, the exact same situation existed in the first quarter of 2016 and it did not have the desired economic effect on growth. Moreover, many observers pointed out that household confidence is at its highest level since 2007.

I would love to be optimistic but as a matter of fact, household confidence is not a very reliable indicator on the state of the French economy. This indicator is based on a series of questions that have not changed since 1974 and none of which deals directly with confidence.

There is no reason to be positive for French economy this year. My take is that French GDP will roughly be around 1%.

The outstanding issue is France’s high level of debt will certainly be one of the first main problems for the next president. Rising rates will dramatically increase the debt burden. France’s 10-year bond yield is around 1.30% which is well above the budget target (0.9%). Therefore, the first measure of the next government after the legislative election will be to revise the budget for 2017 and implement further spending cuts.


France will have to implement further spending cuts which will have a
knock-on effect throughout the economy. Photo: Shutterstock

— Edited by Martin O'Rourke

Christopher Dembik is an economist at Saxo Bank's Paris office

Michael S. McKenna Michael S. McKenna
Fillon calls press conference for 1600 CET; some expecting candidate to step down while others awaiting new broadside from embattled centre-right leader.


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