Is FREXIT Around the Corner?

Feature_Images_FrexitAfter the United Kingdom voted last year to leave the European Union, each subsequent European political event has received greater than normal attention in the United States.  A significant drop in stock prices after the Brexit vote (followed by a healthy recovery) is the reason political machinations in Europe are of increasing interest to U.S. investors.

Next up on the political calendar is the Presidential run-off vote in France.  French voters will decide on May 7th between Emmanuel Macron and Marine Le Pen.  France’s current President Franҫois Hollande has a dismal public approval rating, largely based on his inability to significantly improve economic conditions and ongoing concerns about terrorism and French national security.  Most pundits describe the race to replace Hollande as a contest between “center-left” Macron and “far right” Le Pen.  However, I don’t believe the characterization is quite that easy.  Both Macron and Le Pen are positioning themselves within the French political mainstream.

Macron was a member of the Socialist Party in France from 2006-2009, and previously served in various government positions through August 2016.  However, he has also worked as an investment banker and is running on a platform which includes key business-friendly proposals that most markets view favorably.

Le Pen comes from a well-known political family, most notably her father Jean-Marie – a long-time leader of the National Front party.  Marine Le Pen previously ran for President and would be the first female French President if she is victorious.  Her positions against the European Union and illegal immigration are well known in the U.S.  However, her stances on key economic and social issues are far from those expected of a “far-right” candidate.  She is running a populist campaign, appealing to voters disillusioned with government.

Ultimately, French voters will decide the presidential election based on the hot issues in their country: the stagnant economy, security and immigration policy, and their feelings on remaining part of the EU.  It is important to recall that none of the initial four main candidates received a majority of support in the initial round of voting, necessitating a run-off.  A large number of French voters will be choosing a candidate that was not their first (or even second) choice.

Complicating matters, France will also be holding parliamentary elections in June.  It can be quite difficult for a French President to implement their agenda without a majority of support from the parliament.  While this risk of gridlock is somewhat mitigated by the short time between the presidential and parliamentary elections, it is important to keep in mind that the newly elected President may not be able to fully implement their agenda without a governing coalition in parliament.

A Macron victory likely would not cause a significant change in financial markets.  However, a Le Pen victory could spark additional volatility and upheaval in markets, as the Brexit vote did. If Le Pen wins, it would also spell immediate danger about the viability of the European Union going forward – even more so than the Brexit vote – which would have far-reaching effects across the globe.  A win by Macron in the run-off has been priced-in by markets, largely based on polling information.  As we recently discovered, it’s never over until the votes are counted!