Le Pen’s victory in the French elections could be a bigger blow to markets than Brexit

With polls indicating the presidential election is closer than when the two candidates met in 2017, traders are bracing for a surprise victory for Le Pen, which would rock Europe’s second-largest economy as prices rise. fears of a recession in the region.

“It could be bigger than Brexit. It could be bigger than Trump, if Le Pen prevails,” said Michael Hewson, chief market analyst at CMC Markets.

In research published Tuesday, Citi strategists put the probability of Le Pen winning at 35%. Still, they encouraged clients to hedge their bets on French government bonds and warned that a Le Pen win would hurt stocks.

“The uncertainty stems from the risk of low voter turnout, as left-wing voters refuse to give Macron their vote, even at the risk of giving it to Le Pen,” they wrote. “Voter turnout is a factor that pollsters find particularly difficult to forecast accurately.”

Le Pen’s victory would raise immediate questions about France’s political and economic ties to the European Union, even though she has abandoned her commitment. get the country out of the bloc. His political objectives, such as preventing foreign workers from coming to France, which would end freedom of movement in Europe, could still create serious conflict.

“Most of [Le Pen’s] policies would not be possible within the EU,” said Grégory Claeys, senior fellow at Bruegel, a think tank in Brussels.

That could lead to a “Frexit”, or France’s exit from the European Union “by accident”, he continued. If France under Le Pen went ahead with policies that violated EU law, he predicted there would be an exodus of capital as investors pulled cash out of the country, like when the UK voted for Brexit in 2016.

Economy front and center

Le Pen won support during the first round of voting earlier this month by focusing on rising costs of living and reducing her anti-immigrant and anti-Islam rhetoric.
“My absolute priority for the next five years is to give the French their money back,” he said in the televised debate with Macron on Wednesday.
French inflation reached 4.5% in March, bringing consumer confidence to its lowest level in more than a year. Energy prices, which have soared since the Russian invasion of Ukraine, are up 29% compared to 2021, while food prices are almost 3% higher.
As inflation cuts spending, economists have warned that France’s economy could contract further down the road. this year.

“Wages, especially low wages, do not increase in the same proportion as prices increase,” said Boris Plazzi, a member of the board of directors of the Confédération Générale du Travail, a labor union with 700,000 members. “Therefore, there is a real concern on the part of the workers.”

Le Pen pledged to restore between €150 and €200 ($163) and €200 a month ($217) a month in household purchasing power by cutting taxes on fuel, lowering road tolls, roads and the reduction of social benefits, such as subsidized housing for foreigners.

“Food and fuel prices have really dominated the day-to-day campaign,” said Mujtaba Rahman, managing director for Europe at Eurasia Group, a consultancy. “That’s one of the reasons it’s been so successful.”

But Macron criticized his plans in Wednesday’s debate, saying it makes more sense to continue government policies that help the poorest, rather than pursue less targeted measures like cutting fuel taxes.

He also highlighted the 1.2 million jobs created during his presidency and said the government would maintain a temporary cap on electricity and gas prices, which has helped keep inflation lower than in other parts of Europe.

Still, rising prices are a risk for Macron as he tries to woo millions of voters who remain undecided. About 40% of France’s population lives on less than 1,600 euros ($1,736) a month, and many of them abstained or voted for far-left candidate Jean-Luc Mélenchon in the first round of elections, according to the LeMonde newspaper.

If Le Pen wins

Le Pen’s scrutiny has increased since the first round, particularly for her past support of Russian President Vladimir Putin, and Macron remains the favourite. Eurasia Group believes he has an 80% chance of re-election.

However, if Le Pen were to win, it would shake financial markets, which have already been on edge due to the war in Ukraine and fading expectations for economic growth.
When Donald Trump was elected President of the United States in 2016, the markets initially panicked. But the fears were short-lived, as investors decided cool heads would prevail and Trump would not be able to follow his more extreme policies.

The effects of the UK’s vote to leave the European Union lasted longer. The British pound collapsed and has not yet recovered its level in June 2016.

Amundi, the French asset manager, told clients last week that it does not recommend buying European stocks at this time due to the war and economic uncertainty. The French election, he said, is another reason to stay away.

“Markets seem complacent about a Macron victory, although the probability of a market-unfriendly Le Pen victory is not negligible,” Investment Director Vincent Mortier said in a note.

While Le Pen has reversed her earlier proposal that France leave the European Union, she remains committed to reducing ties between France and the bloc by launching a series of referendums. If it tries to ban workers from other parts of the European Union from coming to France, or takes steps to prevent the free movement of goods, it would still raise tense questions about the future of the country and the EU itself.

“Although leaving the EU is not officially on the agenda, given the policies it wants to implement, it would lead to a confrontation with European partners,” said Claeys de Bruegel.

Much would depend on legislative elections in June, which would determine the strength of any Le Pen mandate.

“Marine Le Pen’s victory would have to be followed by a strong performance by her party in June’s legislative elections if she wants to implement most of her program,” said Jessica Hinds, European economist at Capital Economics.

If he needs to find a broader coalition of support, “I would clip his wings, at least domestically,” Hinds continued. “So a Le Pen presidency could be less radical than many investors fear.”

— Joseph Ataman and Elias Lemercier contributed to this report.

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