The success earlier this year for new French president Emmanuel Macron has left France’s youngest-ever president with one of the largest parliamentary majorities in a decade. Macron and his one-year-old party have certainly done something remarkable, garnering support from both the left and right in a highly divided political system where right-wing and left-wing politicians quite literally sit on the left or the right side of the house.
Investors, who have reacted positively to Macron’s victory, have two key hopes for his presidency:
- First is Macron’s domestic reform agenda, which has both traditionally left and right-wing elements.
On the right are his promises to simplify the country’s byzantine labor laws to stimulate job growth, a vital move in an economy with an unemployment rate of just under 10%. The French labor code, running at some 3,000 pages, is famously stringent, covering issues from hiring and firing procedures to more unusual demands, including statutory bathroom breaks and specific requirements for the size of office windows.
On the other side of the political spectrum, Macron won the election on a left-leaning policy of supporting the poorest in society, promising to cut taxes for the worst off and increase in-work benefits for the lowest paid, avoiding the paradoxical situation of someone being financially better off out of work.
Achieving both will be a tough task – labor unions appear highly unlikely to roll over in negotiations, and it is still unclear to us how Macron will finance tax breaks for the poor, whether through cutting spending elsewhere or increasing taxes.
- Second is the possibility for greater eurozone cohesion and integration under Macron. The hope is that the pro-European president will reduce the likelihood of a breakup of the eurozone and encourage fiscal integration.
While we believe Macron’s victory is a good outcome for France, we think it’s important not to get carried away. We believe Macron has a tough job internally to achieve his reform agenda, and it is also key to remember he won the election on a mandate of improving the lives of the French people, rather than achieving unity within the eurozone. Interestingly, while investors overall have been positive on his victory, certain French companies which could stand to benefit from labor reforms still trade at a discount to their German peers – suggesting, we think, that the market is still skeptical.
Furthermore, the low turnout in the parliamentary elections (with the first round receiving the lowest turnout in modern French history) suggests, we believe, that France remains politically divided under a president who is not as universally loved as the media often portrays.
Even more important to us is the need to take a longer-term perspective, something we do not believe the market is doing sufficiently. In five years’ time at the next election, what will happen if the unconventional, untraditional Macron has been unable to deliver on his promises? With the rapid rise of the Front National, we would expect that voters would be unlikely to return to traditional politics, but instead that they would pin their hopes on the populist parties.
Renzi’s big Italian job
France is not the only European country on our minds. In June of this year, Italy failed to pass a bill for electoral reform which would have increased the minimum threshold required to be assigned seats in parliament from 3% to 8% (in line with the German model). It was hoped this move would reduce the overall number of parties by eliminating the smaller parties, with the aim of enabling a majority government to make decisions and get things done.
Initially, this reform had been broadly supported by the two largest parties, the ruling center-left Democratic party and the populist Five Star Movement. However, at the eleventh hour, Five Star, which had been facing a backlash from its supporters, voted to approve a last-minute amendment to the bill which ultimately led to its failure.
This reform was seen as a crucial step on the path for Italy to hold an election in the autumn, rather than in early 2018. As such, investors reacted positively to the bill’s failure, with the prospect of an election now pushed out further into the future.
However, we are not so upbeat about this result. We see the bill’s failure after a last-minute amendment, despite such broad initial support, as indicative of the problems plaguing a government with such a slight majority.
So while markets may be overheating following developments in European politics over the summer, at Newton we prefer to stand back, take the long-term perspective and keep a cool head.
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