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France: The establishment fight back


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Emmanuel Macron has won the French presidential election with a landslide majority of nearly 32% of the vote. This looks like a pretty reassuring result for the establishment over the rising populist wave.

Investors pay close attention to elections as they expect – or fear - populists will implement economic policies that may seem intuitive but are economically destructive.

France is a prime example of this. Restrictive labour laws have been a factor discouraging firms from manufacturing in France. While the establishment parties recognise to varying degrees that jobs will be created by making jobs less secure, the populist response tends towards some form of economic isolationism.

More French elections to come

To press his establishment agenda, Macron will now look to the parliamentary elections which take place in June. Despite his party only having been created a year ago, polls suggest he may well win these too.

It looks likely he will fall short of an overall majority. But as a centrist and a reformer, Macron is well placed to draw votes from either the centre right or centre left, so he has a decent chance of getting his agenda through.

Macron is part of a political “third way” whose predecessors arguably include former Prime Minister Tony Blair, ex Deputy Prime Minister Nick Clegg, and the former centre-left German Chancellor, Gerhard Schroder.

Third ways in Europe

Back in 2002, Schroder set up the Hartz committee with a view to reforming labour and welfare in Germany. Its measures continue to attract criticism in the same way that zero hours contracts do in the UK, but they have been phenomenally successful in bringing down German unemployment and fostering economic growth.

The Nordic model is also a successful alternative: taxes are high in Scandinavia, but companies are still able to hire and shed workers easily.

Meanwhile, under significant market pressure, countries like Spain have transformed their growth prospects after labour market reforms. Spain is now a real competitor to France for companies looking to establish new production facilities.

Both Spain and Greece had to undertake reforms at a time of incredibly weak economic growth. Now that the eurozone economy is recovering, France - like Germany previously - may be timing its reforms better (if it manages to implement them). However, France would then become one reformed labour market among many. This means there may be fewer economic spoils from success.

Macron and Brexit

There has been plenty of speculation about what Macron’s election means for Brexit. In his manifesto, Macron had harsh words to say about the British decision. That’s hardly surprising: he stood on a pro-Europe platform against an isolationist Le Pen, so he could hardly endorse the UK’s decision. All European leaders are likely to see their own cost of membership rise as a result of the UK’s departure and, like Theresa May, they will now need to try and argue for the best deal that their countries can possibly get.

Populism’s reality check

The media find it easy to use the French result and the failure of Geert Wilders’ Freedom Party in the Netherlands to portray populism as being on the wane. That these populist parties have underperformed may be a relief to many. But they are still making progress.

The last time France’s National Front made it to a presidential run-off was in 2002 when Marine Le Pen’s father led the far-right party. He was crushed 82% to 18%.

Populism’s electoral defeats may give heart to investors. 2017 started with overwhelming negativity about European assets which has gradually turned as the political hurdles have been passed.

Investors should also be thankful that even when populists do break through and win power, as happened in Greece and Finland for example, the realities of government have seen a retreat towards a less radical line. Governing is hard.

There are still challenges ahead (Italy will have an election next year). However, Europe tends to perform well during periods of recovering economic growth and, although we are more cautious than most on the growth outlook, we remain positive on the region.

By Guy Foster, Head of Research Guy leads Brewin Dolphin’s Research team ensuring that a rigorous and exhaustive investment process is employed. He also provides recommendations on tactical investment strategy to Brewin Dolphin’s investment managers and strategic recommendations to the group’s Asset Allocation Committee. Before joining Brewin Dolphin in 2006, Guy was an Investment Director at Hill Martin (Asset Management). Guy has a Masters in Finance from London Business School. He is also a CFA charterholder, holds the CISI Diploma, and is a member of the Society of Business Economists. Guy frequently discusses financial issues with the written and televised media as well as presenting to the staff and clients of Brewin Dolphin.

The opinions expressed in this document are not necessarily the views held throughout Brewin Dolphin Ltd.

The value of investments can fall and you may get back less than you invested.

The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

Past performance is not a guide to future performance. This information is for illustrative purposes only and is not intended as investment advice.

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