French elections: Economic and political scenarios – Deutsche Bank

In view of the analysts at Deutsche Bank, the French Presidential and legislative elections are the next political event attracting investor attention.

Key Quotes

“Although uncertainty remains high, polls suggest that the central scenario is a victory by a mainstream candidate (Macron or less likely Fillon) in the Presidential election. Macron or Fillon’s ability to implement his programme will depend on the outcome of the June legislative election. While compromises are to be expected, we think that it is more likely than not that a reformist, pro-European government can be formed. This would be a positive for the short-term and medium-term outlook of France and Europe. In that case, we would expect France GDP to grow ~1.5% in 2018. We estimate France’s potential growth at ~1.1% but it could be increased by ~0.2-0.3%. If a reformist government cannot emerge, the current policy muddle-through would continue, potentially benefitting populist parties.”

“Polls point to a substantial fall in support for centre-right Fillon in the first round to the benefit of Macron. At the second round, Fillon is still seen as defeating Le Pen, but with a decreasing margin. If the recent trend continues, Fillon’s lead versus Le Pen could fall closer to the average forecast error for the Brexit referendum polls. If Fillon becomes President, he will call for a reform-therapy shock to improve France’s competitiveness, while Macron proposes a more gradual reform programme.”

“According to polls, Le Pen seems set to pass the first round. The great majority of client questions are about the consequences of a Le Pen presidential victory in the second round. In our opinion, a President Le Pen would still face material institutional and constitutional hurdles to applying most of her proposals.”

“Le Pen could adopt an aggressive stance by trying to call referenda, e.g. to exit the EMU, prior to the legislative elections. However, we think it is more likely that she adopts a more gradual approach to maximize her chances in the upcoming 11-18 June legislative elections.”

“Calling a referendum is not easy. The easier option for Le Pen would be to organize a referendum on France’s euro membership is Article 11 of the French Constitution. In this case, the key hurdle for Le Pen would be to gain the support of at least a quarter of the Lower House seats. This is, in our view, an even bigger ask than winning the Presidential race. In other words, we think that such an outcome would require a swing in support for the National Front at the June parliamentary election above and beyond that necessary for Le Pen to win the Presidential election.”

“Still, if Le Pen manages to call a euro referendum via Article 11, the conditional probability of France exiting the euro area would likely become a 50-50 call.”

“If the tail-risk event of France exiting the monetary union were to materialize, Europe’s non-populist leaders are likely to attempt “one last stand” to save the euro. That said, the only way to sustain the single currency in the long-run is through a quantum leap in integration and convergence. Even if there is political willingness to fiscal integration in core countries, without France, these countries would probably not have enough resources to support the periphery. Peripherals would have to swiftly implement deep structural reforms that lead to a convergence with core countries – Italy in primis. Europe has probably left it too late to credibly achieve this quantum leap and get to the appropriate depth and balance between solidarity and sovereignty. At best, a hard core of Northern euro area member states could retain a common currency.”