Emmanuel Macron’s victory in Sunday’s French presidential election Sunday has been met with a mixture of relief and enthusiasm at home and abroad. He overcame his opponent, the far-right leader Marine Le Pen, by 66% of the vote to 34%.
Financial market participants and the international community were dreading the possibility her winning the presidency because she promised anti-immigration policies and to hold a referendum on France’s EU membership. Her nationalist economic policies were anti-free trade and favoured greater state intervention in the economy.
Much of President-elect Macron’s support was based on his promise to reform the economy through more business friendly policies and liberalising labour laws. However, such a transformation will be very difficult. Previous French leaders have promised similar reforms but have been blocked by protests, national strikes and the failure to secure broad political backing. Macron has a much more difficult task than his predecessors as he is not a member of one of the main French political parties. Instead he founded a new political party last year, En Marche! (or Forward!). The problem is that he will need the backing of parliament to introduce reforms following the forthcoming parliamentary elections in June 2017. However, Macron’s En Marche! party is very unlikely to get a majority. If he does not control the French parliament, any meaningful reform will be difficult to achieve, which implies the possibility of transforming the French economy almost impossible.
While the election of Macron will be viewed as very beneficial for the EU because he is a staunch Europhile (very pro-EU) and a supporter of greater European integration, the underlying issues affecting the Eurozone remain. The most serious of these are the stagnant growth and associated high levels of unemployment, budget deficits and vulnerable banking sectors. The main cause of this is structural inefficiencies in European economies and the common currency – the Euro. The southern peripheral economies are not as competitive as their northern core European counterparts, so sharing the same currency leaves the peripheral economies with an overvalued currency that does not reflect their relative economic weakness. In contrast, the single currency aids the core competitive economies like Germany by undervaluing their currency and fuelling their exports, exacerbating further the economic and financial imbalances in the Eurozone.
Regardless of these underlying EU and Eurozone issues, financial markets around the world will welcome Macron’s victory, and it should be supportive of asset prices worldwide. More fundamentally, the US economy is enjoying an expansionary phase of the business cycle, which is reflected in the upswing of business and consumer optimism, commonly called the “Trump reflation trade”. Both the improvement in sentiment and the impact of the US upswing are spilling over to the rest of the world. In particular, in the current quarter listed companies - especially American firms - are expected to report their best earnings season quarter-on-quarter since 2011. With European assets cheap relative to US equivalents and the hope that the American expansion will continue to boost growth abroad, the Euro and European assets will likely see gains, even if President Macron is not very successful in his domestic reform programme.