Investors had remained confident in the run-up to France’s presidential election, so Emmanuel Macron’s win had little effect on financial markets this week. But his convincing victory came as a relief to pro-European political forces in France and across Europe, for understandable reasons: his opponent, Marine Le Pen, is a long-standing Eurosceptic and friendly towards Russia’s President Putin. Her victory, amidst Russia’s invasion of Ukraine, would have sent shockwaves through Europe (as referred to in Russia’s Invasion: Eurozone Recovery Delayed but not Derailed).
Macron’s re-election should not, however, be taken as a ringing endorsement of his domestic policies or vision for Europe. His support was largely owed to the so-called “Republican front,” whereby some French voters tactically vote for a candidate to avoid the election of a right-wing president. And Le Pen’s tally of 41.5% in the second round was a record for her party.
As a consequence, the French electorate remains deeply divided, despite a solid macroeconomic backdrop of record employment and relatively low inflation, compared to other European countries (Figure 1). Bridging that divide might be an uphill battle for Macron as he simultaneously tries to address the cost-of-living crisis at home, forge unity among EU members to wean them off Russian energy, and advance his pro-European political and economic goals. Success likely means larger government deficits in France and greater fiscal unity at the European level.
Solid Marcoeconomic Backdrop in France
Building Bridges at Home...
Domestically, we expect President Macron to be constrained and less ambitious. Pension reform is the most difficult item on his agenda, and he has already shown a willingness to listen and compromise. A divided electorate means that he will need to build alliances with either the left or the right, but there are big unknowns at this early stage: much will depend on the outcome of parliamentary elections in June, whether Macron will be forced into “cohabitation” with the opposition, and what government he appoints.
Whatever the outcome in June, Macron has already emphasised his commitment to the green transition, a key theme for younger, more left-wing voters. Moreover, increased ESG-friendly investment in nuclear and renewable energy could boost French energy exports. It might also further the French president’s ambition of a more integrated, energy-independent Europe (Figure 2) and contribute towards domestic economic growth.
In summary: less ambitious reforms coupled with higher spending mean that France’s high level of government debt, of around 115% of GDP at the end of 2021, will probably remain an issue in years to come.
France is One of Europe's Largest and Greenest Electricity Exporters
...and Building Bridges Abroad
At EU level, we expect Macron’s re-election to accelerate his pro-European agenda of “strategic autonomy.” This includes reforming the EU’s fiscal rulebook, pushing for central EU financing, and moving towards a banking union. The EU banned coal imports from Russia in its fifth round of sanctions in April. In coming weeks, we anticipate increased pressure from France to also ban oil imports, with Italy appearing on side.
Macron’s success on the European stage will, however, depend on his ability to solidify his leadership role. As part of this challenge, he will need to persuade sceptical European leaders that his motives are to advance the EU’s interests, rather than France’s. In that context, we think that he will try to establish a stronger working relationship with Germany, build momentum in the Italian-French cooperation, push for more fiscal activism while advocating accommodative monetary policy, and—in a break from the recent past—support efforts to anchor the Western Balkans in European institutions.
France’s relations with the UK are less likely to advance meaningfully. France and the UK share common interests as NATO members, not least in confronting Russia’s military aggression. But we expect frequent diplomatic flareups as the EU and UK try to address outstanding issues post Brexit, such as the implementation of the Northern Ireland Protocol.
Finally, under Macron’s leadership, we expect trans-Atlantic relations to remain solid. However, the perception of France as a powerful, but not entirely trustworthy, ally will persist among some alliance members. Macron may find it difficult to overcome this perception.
More Continuity for Investors
A decade of weak growth after the dual global and European sovereign debt crises led to the rise of political leaders who promised to take their countries out of the EU. In response, some investors took flight at the prospect of a European breakup. During the pandemic, however, the EU showed remarkable unity. France’s latest election suggests that that unity at the European level was not a flash in the pan, but more enduring.
That said, Macron “2.0” does not mean that populist and nationalist parties in France are on the decline, or that EU centrifugal forces are weakening. France’s next presidential election takes place in 2027. By then, the success of a centrist, pro-EU candidate will depend on whether the left and/or the right of France’s political spectrum solidify or fragment.
In the interim, we expect President Macron, now Europe’s self-appointed leader, to fight against fiscal austerity in favour of fiscal activism. For high-debt countries within the euro area, continued cohesion requires that fiscal activism go hand in hand with greater fiscal integration and accommodative monetary policy. All else equal, we view Macron's election as supportive of peripheral spreads, even though their relative performance will be contingent on other factors, including the developing energy crisis and ECB policy support (or lack thereof).
Macron’s win has brought continuity and a way forward, but the current challenges due to Russia’s invasion remain. Our forecast for eurozone GDP growth in 2022 remains at 2.7%, with a plausible worst-case contraction of 1.0% if Russian energy supplies were to suddenly stop. In our analysis, Eurozone HICP inflation will average 6.3% in 2022, before moderating to 2.2% in 2023.
The comments, opinions, and estimates contained herein are based on and/or derived from publicly available information from sources that PGIM Fixed Income believes to be reliable. We do not guarantee the accuracy of such sources or information. This outlook, which is for informational purposes only, sets forth our views as of this date. The underlying assumptions and our views are subject to change. Past performance is not a guarantee or a reliable indicator of future results. ESG investing is qualitative and subjective by nature; there is no guarantee that the criteria used or judgment exercised by PGIM Fixed Income will reflect the beliefs or values of any investor. Information regarding ESG practices is obtained through company engagement or third-party reporting, which may not be accurate or complete, and PGIM Fixed Income depends on this information to evaluate a company's commitment to, or implementation of, ESG practices. ESG norms differ by region. There is no assurance that PGIM Fixed Income's ESG investing techniques will be successful.
Source(s) of data (unless otherwise noted): PGIM Fixed Income, as of April 29, 2022.
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