Political Uncertainty Falls in France

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Well that was anticlimactic. French President Emmanuel Macron cruised to victory over challenger Marine Le Pen in Sunday’s runoff, becoming the first French incumbent president to win re-election in 20 years. Heading into the contest, polls put his lead in single digits, a hair’s breadth from the margin of error. Yet the latest projections put his margin at 58.5% to 41.5%.^[i] Some headlines are breathing a sigh of relief that France won’t be ruled for five years by a nationalist who touted far-left economic policy on the campaign trail. Others warn that Macron’s decision to tack left on economic policy while campaigning could herald a shift away from his first term’s alleged pro-growth reform bent. We think both viewpoints largely miss the elephant in the room: French presidents can’t do much without Parliament, and Parliament holds elections in June. A break from the deep gridlock that marked most of Macron’s first term seems unlikely. While that probably prevents meaningful pro-growth reforms, it should also reduce legislative uncertainty. That likely extends the status quo that French stocks have been fine with for years.

From the start, we doubted the presidential contest was make or break for stocks. Given Le Pen’s National Rally has had difficulties organizing at the grassroots level, the likelihood it won a majority in June was exceedingly low. Her economic agenda likely would have gone nowhere. She might have been a thorn in other EU leaders’ sides, but that probably would have amounted to far less than feared. The European Council operates by consensus, and that process has always been messy, with holdouts holding plenty of influence. That the holdout would have come from the bloc’s second-largest economy wouldn’t have changed much beyond appearances.

As for Macron, his reform credentials have long been overstated. Yes, he ran and won as a reformer in 2017. Yes, he passed some labor reforms that year, but the legislation that passed was watered down greatly from initial proposals and didn’t address the country’s rigid system of employment contracts. Yes, he managed to get France’s budget more in line with EU deficit limits before the pandemic. But one of the deficit reduction tools—which doubled as a “green” initiative—was a fuel tax hike. While it was popular with Metro-riding urban dwellers, it was political poison in the suburban and rural areas where people commute long distances to work. It also roiled truck drivers, sparking the “yellow vest” protests in late 2018, which brought much of the country to a standstill and put Macron’s flagship pension reforms on ice. When he tried to revive those in late 2019, it sparked the longest general strike in French history. Then came COVID, and reform plans disappeared.

This time, Macron again ran on pension reform, including raising the retirement age from 62 to 65. Yet he started walking that back even before the second-round vote, saying 64 might be a better age after 65 proved bitterly unpopular. Now, waffling is the norm for all politicians, but think this through from a political capital standpoint: Macron’s La Republique En Marche (LREM) party currently holds 267 of the National Assembly’s 577 seats.^[ii] It governs in coalition with the centrist Democratic Movement (MoDem) and Agir ensemble, which have 57 and 22 seats, respectively.^[iii] If Macron couldn’t parlay his coalition’s huge majority into significant labor and pension reforms after beating Le Pen by over 30 points in 2017, what is the likelihood he has more success now, after a tougher election fight? If the opposition parties chip away at his majority in June, the participating lawmakers probably become even less apt to rock the boat. Perhaps he could pass something watered down in that scenario. But if he loses his majority, that is likely off the table. Even natural allies like the center-right Les Republicains would likely demur: Why spend capital helping a rival pass their agenda? Better to wait for your own turn in the spotlight.

The presidential runoff cleared much of this year’s early uncertainty—for stocks, we think that is a benefit. In our view, markets generally don’t prefer any candidate over another—policies, not people, are what matter—but simply knowing the winner lets people move on. June’s National Assembly vote will be another opportunity for uncertainty to fall, a plus for stocks. If it extends gridlock, as we think likely, then that helps too. While many characterize France as a country needing reform, its longstanding structural issues haven’t prevented its economy and markets from doing fine over time. Whether any economy needs reform is always a matter of opinion, too. But in our experience, even well-intended changes can risk creating winners and losers, which raises legislative uncertainty for stocks. That can be a headwind even when a government people view as pro-market is in charge. So when the legislature can’t pass much, we think it eases legislative risk and helps stocks. There may be some initial disappointment if reform hopes were high at first, but usually it evens out, with gridlock giving stocks a bit less to worry about.