Nationalism, French presidential elections and the euro

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The shock results of US presidential elections and UK referendum are shining the spotlight on the rise of nationalist and populist policies.
 
The rejection of the political, economic and social status-quo has lead to increasingly vocal predictions that populist and/or nationalist parties will cause major upsets at forthcoming elections in EU member states, including Italy and Austria.
But forecasts that a broad-sweep of nationalist parties will rise to the highest political echelons in EU countries may still be far-fetched.
 
In most cases these parties still command only modest popular support which can be overstated in polls and difficult to translate into actual political power.
 
France is such an example. Support for Marine Le Pen, leader and presidential candidate of the far-right Front National (FN) party, has risen in recent years and she will likely make it to the second round of presidential elections in April-May 2017.
But she is unlikely to become President, with opinion polls showing she would lose the head-to-head vote, almost irrespective of the candidate she faces.
 
Moreover, the FN is likely to remain a minority party following next June’s elections for the French Assembly.
 
France’s presidential and parliamentary elections will in any case have far more modest repercussions for the global economy and asset markets than the election of Donald Trump in the US.
 
Even in the very unlikely event of Marine Le Pen becoming president, the impact on the euro could be modest and short-lived as France’s economy accounts for only 21% of the eurozone’s economy.
 
ECB policy and German elections due in September 2017 are likely to exert greater influence on the euro’s path.
 
It is also noteworthy that the euro has been one of the most stable major currencies in the past six-and-a-half years, despite the Greek crisis and the shock UK referendum result.
 

Trump victory latest evidence that nationalist and populist policies still gaining traction

The rise of nationalist and populist parties and policies is not a new theme (see UKIP has what every political party wants – momentum, 30 November 2014). Russian President Vladimir Putin has long favoured inward-looking policies, Turkish President Erdogan has in the past couple of years increasingly turned to a hardline stance and Hungarian President Viktor Orban has taken controversial steps to consolidate his power base. In the eurozone, concerns about immigration, terrorism, slow economic growth, rising inequality and arguably rising European federalism have contributed to the metronomic increase in popularity of nationalist, often far-right parties.

But Trump’s presidential election victory and firebrand politics is the latest, and arguably the most important, in an increasingly long list of markers suggesting that populist political leaders keen to project a strong man (or woman) image and nationalist policies are not only gaining traction worldwide but actually making it into office. Trump’s surprise ascension to power, and his stated penchant for protectionist policies which put the US first, comes hot on the heels of the shock vote by the British electorate in June’s referendum in favour of the UK leaving the European Union.

 

Increasingly vocal predictions that nationalist parties will sweep the board in EU elections

This populist wave and the rejection of the political, economic and social status-quo undoubtedly sweeping across Europe and the rest of the world, has lead to increasingly vocal predictions that populist and/or nationalist parties will cause major upsets at forthcoming elections in EU member states. There is some merit to these forecasts (please see Fast and Furious – Market drift, 16 November, for a detailed data and political calendar).

  • On 4th of December, Austria will likely elect as President Norbert Hofer, the candidate of the far-right Freedom Party of Austria, in a re-run of the second and final round of its presidential elections. He will be going head-to-head with the Independent/Green Party candidate Alexander Van der Bellen and for the first time since the Second World War an Austrian presidential candidate will not be backed by either of the two mainstream parties – the Social Democrats and their coalition partner the People’s Party. While the Presidency is a mostly ceremonial role, the backlash against mainstream parties is clear.
  • On the same day, Italy will hold a constitutional referendum – viewed by political experts as a proxy vote on Prime Minister Matteo Renzi’s leadership. Strong popular support in recent polls for the populist Five Star Movement (about 28%) and far-right Northern League (about 12%), which are both against the proposed constitutional reform, has made the result of the referendum too close to call.

 

But forecasts that a broad-sweep of nationalist parties will rise to the highest political echelons in EU countries may still be far-fetched, more in the realm of the fanciful than the possible let alone likely. In most cases these parties still command only modest popular support, with opinion polls also tending to overstate their true support come election time. Moreover, these parties’ ability to convert popular support into actual political power is often hindered by first-past-the-post electoral systems. France is such an example. Let us not forget that while Donald Trump was an unorthodox presidential candidate, he was the nominated candidate of the Republican Party – one of the two mainstream political parties in the United States.

 

French Front National party on the ascendancy ahead of April-May presidential elections

Predictions are growing louder that, Marine Le Pen, the leader and presidential candidate of the French far-right Front National (FN) party could win presidential elections in April-May 2017 and that the FN will win a sizeable number of seats in the  elections to the lower house of parliament in June. Clearly, popular support for the FN has been rising in recent years (see Figure 1). In the May 2014 European Parliament elections, the FN became the largest French party, wining 25% of the national vote and 23 of France’s 74 Member of European Parliament (MEP) seats. Four months later it won its first ever seats in the French upper house of parliament (Senate) and in the first round of the French regional elections in December 2015 the FN came first with nearly 28% of the national vote.

The very real concerns about immigration and terrorism, tepid French economic growth and infighting and divisions within weak mainstream parties, in particular the Socialist Party, are clearly working in Le Pen’s favour. Moreover, she has toned down her party’s more extreme and divisive policies, making it more electable to centre-right voters.

Recent opinions polls from BVA and Sofres show Marine Le Pen polling around 25-29%, which would likely be sufficient for her to go through to the second round of the presidential elections regardless of the presidential candidates which other parties put forward. As a quick recap, the two presidential candidates with the greatest share of the national vote in the first round go through to a second and final round where the candidate with the greatest share of the votes becomes president.

Her father and Front National founder Jean-Marie le Pen did just that in the 2002 presidential elections when he came a close second in the first round with 17% of the national vote. Moreover, the current economic, social and political backdrop in France could see Marine Le Pen performing even better than her father, who in the second round won only 18% of the national vote (incumbent President Chirac won 82%).

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But Front National leader Marine Le Pen very unlikely to become next French President

Marine Le Pen’s showing in the second round will of course partly depend on her opponent and the Republican Party and Socialist Party will only elect their presidential candidates on 20/27 November and 22/29 January, respectively. But recent opinion polls show Le Pen losing a second-round head-to-head election against all of the main potential Socialist Party, Republican Party and independent candidates (see Figure 2). In particular, polls suggest Le Pen would struggle to win more than 35% of the vote in a run-off with Alain Juppé – still the most likely Republican Party candidate.

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Only in a head-to-head with French President Francois Hollande, who has yet to declare his candidacy, would Marine Le Pen command more than 50% of the share of votes required to win the presidency. But Hollande remains extremely unpopular and may not even put forward his name for the Socialist Party primaries to elect a presidential candidate for fear of being humiliated by coming third behind Prime Minister Manuel Valls (who also has yet to put forward his candidacy) and former Economy Minister Arnaud Montebourg. Even if Hollande does put forward his name and wins the Socialist Party nomination, he would be unlikely to make it to the second round of the presidential elections.

Ultimately, the conservative French electorate is seemingly not yet willing to give presidential power to the FN which it still views as too right wing, despite Marine Le Pen having distanced herself from her father’s more controversial views, and lacking coherent economic policies. There is a perverse yet compelling argument that the situation in France would have to get far worse for the electorate to be ready and willing to give true power to the FN. Moreover, opinion polls may even be over-stating the level of support which Marine Le Pen could command, for two reasons.

First, previous presidential, parliamentary and regional elections show that  mainstream parties/candidates which had fought each other in the first rounds of voting, changed tact in the second rounds. They typically gave their support, whether explicitly (by forming pseudo-coalitions) or implicitly, to other mainstream parties/candidate in order to secure victories for the centre ground and keep the FN out of office. Moreover, the two-stage voting system gives the electorate the chance to post a protest vote against the status-quo in the first round before voting for a more palatable, mainstream party or candidate in the second round.

 

Conservative electorate and political set-up working against Front National

Last December’s French regional elections are a point in hand (see Figure 3) and they also carry important lessons for next June’s French parliamentary elections. The expectation is that the FN, which currently only has two seats in the 577-seat lower house of parliament (the National Assembly) will win significantly more seats next June. This is possible as popular support for the FN has risen in the past five years and the FN could conceivably double the 13.6% share of the national vote it won five years ago.

But the hybrid proportional representation and first-past-the-post electoral system for the National Assembly makes it likely that a large share of the national vote for the FN will translate into only a relatively small number of seats. So while the FN may win a similar number of seats as other small parties, such as the Greens or Social Liberal Party, the Socialist Party and in particular Republican Party are likely to retain the lion’s share of the seats. One could draw parallels to the United Kingdom Independence Party (UKIP) which came third in the UK national elections in May 2015 with nearly four million votes (12.7% of the national vote) but won only one seat in the 650-seat lower house of parliament (House of Commons).

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What is more likely than Marine Le Pen becoming president or the FN becoming a major political force in the National Assembly is that other presidential candidates and parties will beef up their anti-immigration and terrorism rhetoric in a bid to win over traditional FN voters. It is what Cameron did to some extent, with admittedly modest success, when he negotiated a new deal with the EU earlier this year and what Theresa May is seemingly trying to do at present by putting forward a new deal with the EU which favours greater controls over immigration.

While there may be exceptions – such as the forthcoming Austrian presidential elections – generally speaking c. The end-game may ultimately be the same but the shift towards populism and nationalism may be more gradual than implied by some commentators.

 

Limited market impact

At the risk of perhaps stating the obvious, France’s presidential and parliamentary elections will have far more modest repercussions for the global economy and asset markets than the election of Donald Trump in the US. After all, the French economy – the sixth largest in the world – is about seven times smaller than the United States’ and accounts for only 3.5% of world GDP.

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Even in the very unlikely event of Marine Le Pen becoming president, the impact on the euro could be modest and short-lived as France’s economy accounts for only 21% of the eurozone’s economy. European Central Bank monetary policy, and in particular the modalities of its quantitative easing program, and German elections due in September 2017 are likely to exert greater influence on the euro’s path, in my view.

I would also note that the euro has been one of the most stable major currencies in the past six-and-a-half years, despite the Greek crisis and the shock UK referendum result (see Figure 4). While the euro has weakened versus the US dollar, in nominal effective exchange rate (NEER) terms it is currently trading broadly in the middle of a reasonably narrow 15% range in place since mid-2010 according to my estimates (see Figure 5). In comparison the GBP, CNY, USD, and JPY NEERs have traded in ranges of about 30%, 35%, 40% and 55%, respectively.

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Olivier Desbarres

Olivier Desbarres currently works as an independent commentator on G10 and Emerging Markets. He has over 15 years’ experience with two of the world’s largest investment banks as an emerging markets economist, rates and currency strategist.

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