Are you confused by the French elections?
Well, we all are to varying degrees.
Indeed even those who understand the process and know the candidates were taken off guard by the meteoric rise of Jean-Luc Melenchon over the past couple of weeks. Now we’ve got a four-way, free-for-all and a market that’s visibly concerned.
On top of the “tail risk” presented by a run-off that pits Le Pen against Melenchon, there’s another concern that’s been variously described in these pages over the past couple of weeks courtesy of excerpts from reader commentary. Namely that a “market friendly” outcome would pose its own risks that, ironically, could end up coming back to haunt France down the road. Consider the following out today from Politico:
While much of Europe frets that an extremist victory in France’s presidential election could upend the EU, the country’s political and business elite is worried about something completely different.
Stasis – rather than chaos – is what concerns the civil servants, executives and diplomats who pull the strings in this highly centralized state. “The number one worry is not a victory for Marine Le Pen. Maybe we’re all just in denial, but few seriously believe she can win this time,” said a senior Treasury official, reflecting the views of many fellow graduates of the elite Ã‰cole Nationale d’Administration civil service college. “The fear is more that whoever wins will lack the legitimacy or the parliamentary majority to carry out long overdue reforms.”
Many, he said, are yearning for someone with the leadership skills – a De Gaulle or a Mitterrand – to galvanize the French behind a dynamic political vision. “Five more years of paralysis, high unemployment and next-to-no growth, and the country may be ripe for the National Front,” he said, referring to the anti-EU, anti-immigration party that Le Pen leads and her father created.
France’s administrative caste fears that neither of the two mainstream candidates in the first round of the elections taking place this week – independent centrist Emmanuel Macron and conservative Republican FranÃ§ois Fillon – would be strong enough, if elected, to overhaul the country’s rigid labor markets, fix its costly pension system, slim down its bloated state and cut business taxes, red tape and public spending.
Well, for those struggling to comprehend exactly what’s going on here and how the second round might look, we present the following useful table from BofAML which neatly summarizes the various possible second round combinations and their market implications: