It has been an astonishing seven months for Emmanuel Macron, French politics, and the Eurozone.
From polling in the low teens upon announcement of his candidacy last November, Macron won the presidency in a landslide under the banner of his centrist movement En Marche in May, before leading the party to a sizable majority in the National Assembly earlier this month.
The rise of a young, reform-oriented, pro-immigration Europhile in one of the founding EU nations forced a reassessment of European political and financial market risk. Long seen in danger of descent into inward-looking nationalism, optimism around the European project has been restored by Macron’s wins. The promises and challenges of reform now await.
Financial markets have likely priced in the majority of any near-term “Macron effect”. Upon confirmation of his first round victory in the presidential race, risk premia built into markets on fears of success from outsider candidates, such as Marine Le Pen and Jean-Luc Melenchon, evaporated. The euro rose sharply and the rate spread between French and safer German government bonds collapsed. Macron’s final round win extended these moves modestly, but the confirmation of a majority in the National Assembly two weeks ago had less effect.
It is impossible to know if these moves could extend any further, but Macron’s future influence on European politics and markets is likely to come in one of two ways: via his domestic reform agenda (in particular regenerating the sclerotic French labour market) and in his potential role as a pan-European unifier and reformer.
The risks at home
With such a strong legislative majority and given the retreat of left-leaning parties in France, Macron has the best chance of any recent French President to enact long-desired reforms. Success in these ventures, particularly in the labour market, would most likely boost the French corporate sector and the performance of domestic shares. It could serve as a model for centrists and reformers in Eurozone economies with similarly rigid labour markets, particularly Italy, potentially lifting European risky assets and the euro further.
However, while Macron’s chances of success are good, he should not be overconfident. Domestic matters also represent a potential banana skin. His recent wins come against a backdrop of very low voter turnout and some of his proposals will draw ire from still-influential trade unions. Despite enjoying significant support for reform across the French political class, protests in the street later this year might well temper enthusiasm.
Macron should have a stronger influence and greater support internationally. The emphatic repudiation of nationalism that his election represents should allow for greater unity among Eurozone members.
View from abroad
Already last week, German Chancellor Angela Merkel cautiously endorsed Macron’s long term wishes for some degree of common Eurozone fiscal policy, overseen by a single finance minister. Any progress on this front should contribute to Eurozone bonds converging towards a common yield over the long term.
Macron’s win and the newfound hope for greater European unification also strengthen the EU’s position in international relations. No longer as much at risk of fracture, the EU now has a much stronger hand in talks with the UK over Brexit, not least given the relative disarray of Prime Minister Theresa May’s government.
The threats to trans-Atlantic relations rising from US President Donald Trump’s stated admiration for Russian President Vladimir Putin, among other things, are also mitigated somewhat by a more unified EU.
In reducing these existential threats to the Eurozone, Macron’s greatest market impact might well be on the euro. Long held down by the ever-present risk of ruptures in the union and the need for the European Central Bank to maintain easy policies and to stand at the ready to assist ailing bond markets in response, a successful Macron presidency might be just what the euro needs to turn its recent recovery into an extended uptrend.