Global markets let out a collective sigh of relief after the results of the first round of the French presidential election were announced. As widely expected, centrist Emmanuel Macron and far-right National Front leader Marine Le Pen qualified for the second round.
The euro rallied, equity markets jumped and the French-German bond spread narrowed. Voila, this was the anti-climax that risk-averse investors had been hoping for. According to the latest Ipsos polls, Macron is seen beating Le Pen in the second round on 7 May with two-thirds of the votes.
But before we open another bottle of champagne, here is a gentle nudge as to what could go wrong and why it may not all be plain sailing in what will be very choppy waters for Macron if he is elected into the Elysee.
First, Macron is not yet backed by any political party and may find it difficult to govern.
As Barclays stated in a report yesterday, “the parliamentary elections in June will carry more weight than usual, possibly even more than the Presidential election, but the outcome remains uncertain. In light of the statements from senior political figures – particularly from the Republicans, which is the only party in the top four to have a strong local base – parties appear to be intent on pursuing their own parliamentary campaigns, which might suggest that whoever wins the second round run-off will face a substantial opposition, even if that is Macron. This would reinforce our view that a hung parliament is an increasingly likely prospect.”
Second, Macron’s reform plans seem ambitious – a little too ambitious perhaps given the lack of support he might face in parliament.
Among his priorities is a further labour law, to be implemented before the summer (though he may resort to an executive order to push this through), to tackle the stubbornly high unemployment rate of 10 per cent (and almost 25 per cent for the young). Macron has announced he will overhaul governance within politics, and launch an audit of the public finances. He has vowed to cut public spending, currently 57 per cent of GDP – the highest among advanced economies. He also vowed to re-industrialise France based on innovation – not an easy task given that since the 1970s France has lost 2m manufacturing jobs.
There are other reasons to be cautious. Macron’s former boss, President Francois Hollande, attempted several times to kick-start the French economy and improve its competitiveness, but has failed to bring down unemployment sustainably, ultimately leading to his political demise. He tried to freeze public wages, for example, but had to backtrack as pressure from powerful trade unions grew too large. Macron himself, as Hollande’s economy minister, introduced the so-called “Macron law” to render the economy more agile – with limited success.
Aside from the economy, Macron will have to tackle the threat of terrorism, as France remains under a state of emergency imposed after the November 2015 attacks.
Third, while more unlikely, there is the risk of the unknown – or shall we call it the Fillon factor? As Teneo Intelligence puts it: “Beyond the usual list of another security incident or a financial scandal involving Macron (personal controversies usually do not alienate French voters), the other potential risk is a series of gaffes by the candidate, particularly during the TV debate that will take place on 3 May. Despite not being a great TV debater, however, Macron has shown during the campaign that he can stay on message.”
The challenges seem large, expectations are high and history may not be on Macron’s side. On the other hand, this is Macron’s unique chance to elevate France back to the upper echelons of economic prowess. With the current clearly against him, this won’t be be easy.