Once the initial market relief plays out — that, even during an unprecedented “anti-establishment” wave in both Europe and the U.S., French voters rejected a far right president in Marine Le Pen of the National Front — interest will shift to how relative newcomer Emmanuel Macron will manage to govern in a country accustomed to mainstream politics. And it is not just about his prospects for reinvigorating the French economy and, working closely with Germany, spearheading a modernization of Europe. It is also about a bigger and more consequential issue: the extent to which endogenous political disruptions are opening the way for better economic governance in the West rather than just setting the stage for a bigger eventual political shock.
Preliminary results from France confirm what markets were expecting: a decisive loss for Le Pen. With the markets’ near certainty now becoming certainty, this is likely to give a further boost to risk sentiment in the short-run. However, the resulting rise in stocks, the appreciation of the Euro, and the fall in the France-Germany government bond spreads will likely be tempered by what has already been priced following Macron’s first round win and the opinion polls forecasting Sunday’s vote. Meanwhile, the European Central Bank and the Swiss National Bank will be putting their contingency plans back on the shelf, with the ECB also preparing for greater pressure to ease off the monetary policy accelerator.
Beyond the immediate reactions, much will depend on the consequences of an establishment shakeup that speaks to considerable dissatisfaction among younger citizens. Remember, over half of them voted in the first round for fringe candidates: Le Pen of the extreme right and Jean-Luc Melenchon on the far left. Like her father’s loss to Jacques Chirac in 2002, Le Pen was unable to convert her relatively good first round showing into sufficient country-wide support in the second round of the presidential elections. Instead, she lost to a combination of genuine support for Macron and the coming together of voters insisting that France should not be led by someone from the National Front.
This highlights the challenges facing Macron who, just a few months ago, was a long shot in a crowded presidential field. He inherits a divided nation that, yes, resisted extreme politics yet remains highly dissatisfied with a system that has staggered through too many years of low growth, high youth unemployment, and glaring inequalities.
Now that Macron has been elected, markets will be gradually shifting their focus to his ability to overcome gridlock both at home and in Europe. Ahead of parliamentary elections in June, his choice of prime minister will signal how he intends to “cohabitate” as he tries to reinvigorate France within what he hopes will be a stronger and more coherent growth-oriented Europe. He must both cooperate with and shape a National Assembly whose long-standing mainstream parties just suffered a humiliating defeat at the polls.
It is a challenge that, in many ways, is similar to that facing two other G7 leaders who came to their countries’ highest office on the back of the anti-establishment wave — President Donald Trump of the U.S. and Prime Minister Theresa May of Britain. All three leaders agree that the economy can — and should — benefit from low corporate tax rates and a slimmed-down government. They also agree that regionalization and globalization — as well as the evolution of national identity — need to pay greater attention to both real and perceived economic losers, even if they constitute a minority relative to the beneficiaries. More generally, the Macron-May-Trump outcomes speak to an historic internal disruption to the functioning of traditional politics in the advanced world. And it is part of the larger erosion of trust, credibility, and effectiveness of the establishment, and not just in the public sector.
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The jury is still out as to whether these three leaders will be able to lead mainstream-dominated parliaments in unleashing productivity, economic growth, and more inclusive market-based economies. Much will depend on the reaction of establishment forces that remain in control of significant parts of the public and private sectors. Rather than a decisive blow to anti-establishment wave, as some are claiming, Macron’s victory is a stop along a journey whose destination is still in question.
If the internal political disruption France and other Western countries are experiencing delivers higher and more inclusive growth, it will mark a revitalization of liberal democracies in a pro-market fashion. If it fails, it is just a matter of time before France will be dealing with a more mainstream National Front, more inward anti-establishment forces, and greater sympathy for the view that the Eurozone is about the past and not the future. And that is an outcome that markets would find destabilizing.