French elections… French voters will go to the polls on Sunday for the first round of the presidential elections. President Emmanuel Macron and the leader of the far-right National Rally party, Marine Le Pen, are likely to proceed to the second round on April 24.
Macron vs. Le Pen… Polls predict that after winning the first round, Macron will face and beat Le Pen in the second round. This will be a repeat of the May 2017 elections. Last time, Macron had won by a comfortable 32-points in the second round, as polls had predicted. This time, however, Macron’s lead in the polls has narrowed noticeably.
The Economist forecast model, which compiled several polls, sees Macron’s presidential victory on April 24 as high as 76%, but the rate is the lowest ever predicted. Le Pen’s chance is low at 22%, but not negligible and rising.
The French economy and political balances… Even though Le Pen gave up on the idea of a Frexit referendum, her program, unlike Macron, is hostile to European integration. Her election will reduce France’s role in the EU and mark the biggest shift in the balance of power within the union since the UK left the bloc in 2016.
In a generation at the center of the presidential election in France was an inflation shock. France has enjoyed strong investor confidence so far, but financial markets are waking up to increased political risks. Le Pen on the Elysee could further restrain the country due to higher borrowing costs. It would also raise the specter of another debt crisis in Europe.
French – German 10-year bond yield spread… Source: Bloomberg
Financial markets… Political risk, of course, could cause French bond yields to rise faster than German bond yields. In some cases, French interest rates rose, while German bonds were seen as safer and their yields were under downward pressure. The difference between the US-German bond yields tends to widen in favor of the US. As you know, the Fed will increase interest rates after May, and it is very likely that the interest rate gap will widen in the following months when inflation is high. In addition, the economic risks against the Euro Zone due to the Russian crisis do not end.
Conclusion? Le Pen’s ideas may be marginal, but they also have a rationality in themselves because they represent the new world order. This conjuncture has been formed within the framework of increasing economic trends and geopolitical tensions in recent years. Le Pen, who talked about leaving the Euro in the 2017 elections and whose stance towards the EU is very clear, softens this stance and takes a more centralized stance with economic and demographic problems, helping it to appear more at peace with the system and to rise. Macron’s leadership is shrinking, and Le Pen’s victory will be a political victory, but an earthquake for France and Europe.
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