EU Awaits Outcome of France's Prolonged Election Season

France Votes in Super Cycle Election


When the first round of voting kicks off in the French presidential election on April 23, the outcome will determine not only France's political future, but whether the EU moves closer to unity in this critical "super cycle" election year.

We will soon find out whether the wave of populism that swept the world in 2016, resulting in Brexit and President Donald Trump, will reach the shores of France.

From April through September, France will elect a new president, a new National Assembly and half its senators. Perhaps the most significant pro-populist outcome would be victories for the anti-European Union, anti-euro and anti-immigration National Front party and Marine Le Pen – although it looks increasingly less likely that they will ultimately prevail. However, with voter uncertainty in France at record levels – approximately 60 percent of voters are undecided – it is difficult to make any predictions.

Europe, which is in the throes of a "super cycle" election year, will be paying close attention. Following the recent election in the Netherlands, Germany will vote in September and Italy could hold snap elections at any time, although a formal election is not due until next year. Any number of these outcomes could influence whether the EU moves toward closer integration or takes the opposite path.

We believe an Emmanuel Macron presidency would be positive for Europe as a whole and could trigger a mild rally in European equities

So far, the pro-EU forces seem to be winning. The capital markets should welcome this as a way to reduce Brexit-related uncertainty after the UK recently began the formal process of leaving the EU. Germany's economy is doing well, and Paris and Berlin could form stronger ties if pro-EU candidates win in both countries, which would help the EU and euro area.

First, however, France needs to vote. Here is our overview of the races, our perspective on the candidates' policies and prospects, and the overall implications for investors.

Overview of France's national elections in 2017

Between April and June, voters in France will elect a president and National Assembly, and in September an electoral panel will choose the Senate. Ultimately, while the French president holds a powerful position, he or she will need to work closely with colleagues in the National Assembly and Senate to enact any significant policy changes – and there are very few scenarios where we expect to see this kind of close cooperation. France is used to the cohabitation system of government, wherein most members of parliament have different political affiliations than the president, but the more left-wing presidential candidates may have an easier time securing a cooperative parliament. It is also possible that no clear majority will emerge in the National Assembly and additional elections will be needed; a similar scenario happened in Spain last year.

We do not expect Marine Le Pen to triumph in the final vote; if she were to become president, government gridlock should forestall her anti-EU policies but also prevent real structural reform

Five Elections in Six Months

Presidential Elections National Assembly Elections Senate Elections
When April 23, 2017
Round 1
May 7, 2017
Round 2
June 11, 2017
Round 1
June 18, 2017
Round 2
September 2017
Who 11 candidates running 2 candidates compete in final round Candidates compete to win 577 parlimentary seats Half of 348 senatorial seats elected by a panel that includes mayors and National Assembly members
Why it matters
  • French president has executive authority to appoint prime minister and dissolve National Assembly
  • Winner must work with parties elected to National Assembly
The establishment is well-established:

  • Socialists hold 280 seats
  • Republicans hold 194 seats
  • Left-wingers hold 10 seats
  • National Front holds 2 seats
  • The Senate has always been politically conservative
  • This could hold populist policies from other branches in check

Policies and prospects of four presidential candidates

There are four leading candidates in France's presidential race:

  • Emmanuel Macron may have the best chance of becoming president. He is solidly pro-EU but a political outsider. Even if he struggles to gain a majority in the National Assembly, he may have enough support to pass some reforms, although he may find his more aggressive campaign positions neutralized.
  • Marine Le Pen should emerge from the first round but may have a hard time winning the second. If she were to become president, the National Front party may struggle to win enough National Assembly seats to give her any chance of driving through significant policy changes.
  • François Fillon is a right-leaning candidate of the establishment, but his chances of surviving even the first round have been diminishing due to a scandal involving his wife's alleged abuse of public funds.
  • Jean-Luc Mélenchon is a far-left politician who has been compared to ex-US presidential candidate Bernie Sanders. At the time of this writing, he has been gaining ground in the polls, although he remains in third place behind Mr. Macron and Ms. Le Pen.

Leftist candidate Jean-Luc Mélenchon recently made unexpected headway in the polls following a strong showing in televised debates – which could turn the first round into a four-horse race

Outsider Macron Has Best Chance of Winning Both Rounds

Chance of Winning First Round High High Improving Moderate
Chance of Winning Second Round High Low to moderate Low but rising Low
Pro-EU/euro Yes No No Yes
Fiscal Policies Lower income and corporate taxes Lower some taxes Lower taxes Lower income tax but raise VAT
Public Spending Austerity Return to the franc Huge welfare boost Austerity
Labor Some good reforms No reforms Raise minimum wage Some good reforms
Immigration Pro-immigration Very anti-immigration Anti-immigration Anti-immigration
Comment A "new" socialist, but no party and not many policies Must appeal to disaffected working class voters (who like the euro) The French Bernie Snaders Tainted by scandals; part of the establishment

Turnout in France has broader investment implications

Voter turnout will be very important overall, and we expect more French citizens to vote in the presidential race than in the National Assembly elections. Voter enthusiasm tends to wane as the electoral process continues, which gives an edge to parties with more committed voters.

Overall, investors are wary of EU politics and euro-denominated risk assets even though they offer attractive earnings and dividend yields

France's presidential race remains close enough that we would be uncomfortable trying to pick the ultimate winner – particularly given the upsets seen in last year's Brexit vote and President Trump's victory in the US. However, we do expect Mr. Macron and Ms. Le Pen to prevail in the first round.

Once the first round's results are known on April 24, we will see how Europe and the markets respond to the prospect of Ms. Le Pen as president. Her policies are hostile to the EU and could keep Europe directionless, beset by populism across the continent, confused by the complexities of Brexit and uncertain of the attitude of President Trump – all of which could further undermine NATO.

A victory by Mr. Macron in the first round, however, may provide a boost to the EU and could lift the markets. Until then, investors regionally and globally still seem wary of EU politics and euro-area risk assets, even though earnings and dividend yields are attractive and the euro seems undervalued.

Three Scenarios: Political and Investment Implications of the Presidential Race

50%–60% probability
10%–20% probability
5%–15% probability
Political Implications
  • Expect some form of reasonable, pro-EU cohabitation French government
  • Paris becomes gridlocked Washington-style and can’t implement new policies toward the EU, the franc or immigration
  • 1-in-10 chance that Ms Le Pen forms a government if she wins the antiestablishment vote; this would increase the chances of a “Frexit” from the EU and/ or euro
  • High probability of a left-or right-leaning cohabitation government, but little enthusiasm for radical new policy and limited actual reform
Investment Implications
  • Relief for EU risk assets; euro strengthens; more pro-EU political and economic developments after German elections
  • A united France and Germany could firm up EU opposition to Brexit and make negotiations more difficult for the UK
  • EU and euro concerns rise; risk assets, especially financials, suffer despite support from ECB policies
  • If anti-EU passion rises in Paris, Brexit discussions will become easier
  • Focus returns to France’s lack of competitiveness and labor reform; concerns grow over Mr. Fillon’s draconian spending cuts or Mr. Mélenchon’s excessive spending
  • Between first and second rounds, voters whose candidates did not advance will choose a new side – likely Mr. Macron or Ms. Le Pen


'French Risk Premium' Could Persist Until June

Franck Dixmier | 04/24/2017
flag of France


Markets cheered the prospect of an Emmanuel Macron presidency, but even if he wins, his reforms may lack parliamentary support. As a result, Franck Dixmier says the risk aversion of recent weeks could last until France's legislative elections in June.

The worst has been avoided

From the financial markets' point of view, the worst has been avoided in the first round of the French presidential elections. The prospect of Marine Le Pen securing a very high share of the vote – and the potential for a second-round runoff between Jean-Luc Mélenchon and Ms. Le Pen – had led to increased risk aversion in recent weeks. This logically benefited German bunds more than all other fixed-income assets in the euro zone.

Although we are not surprised by the markets' initially positive reaction to the fact that the euro-phobic French presidential candidates fell short of expectations, we are nonetheless wary of how sustainable this fresh rise in the markets' risk appetite can be.

Risk avoidance in recent weeks has benefitted German bunds more than other European fixed-income assets

Opinion polls for the second-round runoff between Emmanuel Macron and Ms. Le Pen are indicating a very likely victory for Mr. Macron, which is so far being reflected in the markets. Calls from the former governmental parties' candidates, François Fillon and Benoît Hamon, to vote for Mr. Macron against Ms. Le Pen have added weight to this potential outcome.

If this scenario were to hold, France's legislative election in June would be the most important event on the horizon – and there are major questions over the shape of the potential majority with which Mr. Macron would be able to govern. Although he is on the verge of achieving an incredible accomplishment as the youngest-ever elected president – younger even than Louis Napoléon Bonaparte – it is far from certain that the momentum sweeping him into power would be strong enough to ensure a parliamentary majority. If his party fails to secure this majority, which cannot be ruled out, or if he needs to rely on cross-party backing for the approval of specific projects, Mr. Macron's reform-minded ambitions would be significantly curtailed. This would undermine the fresh momentum he intends to give to the European project.

France's legislative election in June could be the most important electoral event on the horizon

As a result, we would wait until after the legislative elections to adjust our positioning among risk assets. Once the "French risk premium" dissipates, all euro-zone spreads should benefit, and nothing aside from persistent geopolitical risks should prevent the overvaluation in bunds from correcting.



Franck Dixmier

Global Head of Fixed Income, Chief Investment Officer Fixed Income Europe
Franck Dixmier is Global Head of Fixed Income and Chief Investment Officer Fixed Income Europe. Franck is a member of the Global Executive Committee, as well as the European Executive Committee at Allianz Global Investors. Franck joined Allianz Group in 1995.
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