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The second round of elections will take place on Sunday, May 7th. At the time of the closure of our edition (the day of the very last TV debate, that E. Macron won (see page 2), the polls have forecasted E. Macron (president of the movement “En Marche!”) winner of his duel with Marine Le Pen (president of the National Front) : 59%-60% vs. 40%-41% of the votes. However, Macron ‘s lead has reduced, as campaign timeline approached, as well as the volatility of polls on vote transfers. Voters, especially those of the left-wing party (the Socialist Party of Benoît Hamon and the party of J.-L. Mélenchon), have gradually reduced their support to E. Macron, a former minister of F. Hollande. In the past, right-wing and left-wing parties agreed to cooperate to eliminate extreme right form second rounds of any national, regional, local, or municipal election. This agreement, called “Front républicain” has been partially altered with the rallying of Nicolas Dupont-Aignan to the candidate of the National Font, and the increasing number of undecided people. N. Dupont-Aignan was candidate in the first round (4.7% of the votes), and would be the future prime minister in the event of election of Marine Le Pen.
I – What do the polls tell us?
On the day after the first round, a survey by the Elabe Institute analysed, for BFMTV and L’Express, the voting intentions of French voters in the second round.
Emmanuel Macron would beat Marine Le Pen by 60% against 40% (nearly 70% of those polled are quite sure to vote). Two ages are very favourable to the former Minister of Economy: the 18-24 year olds (64% in favour of E. Macron, 21% in favour of Mr. Le Pen, 15% of abstention, blank vote or spoiled vote) and those over 65 (59%, 19% and 22% respectively). For people aged 35 and 49, there are as many voters for Mr. Le Pen as for E. Macron (43%%, 14% of abstention, blank or spolied vote).
Voice transfers are also instructive
According to the poll, taken the next day in the first round, 49% of Francois Fillon’s voters would vote for E. Macron, 28% for Mr. Le Pen, and 23% would not vote for any of the candidates. 53% of Jean-Luc Mélenchon’s supporters would vote for E. Macron, 16% for Le Pen and 31% would not vote. 17% of respondents did not make any choice in the survey.
The campaign will be decisive for transfers of votes
A week later, the volatility of the electorate, notably the left-wing electorate, is clearly apparent, according to a poll for the newspaper “Les Echos”. The percentage of voters of Francois Fillon who will vote for E. Macron is stable (44% Monday, 43% Sunday April 30th). The percentage of people who do not wish to vote increases by 10 points, to the detriment of Marine Le Pen, who will only retain 32% of this electorate (38% a week ago). E. Macron lost a lot of ground among the voters of Jean-Luc Mélenchon, going from 55% to 40% in eight days. 45% (compared with 23% previously) of them consider not to choose. Those who chose to vote for Marine Le Pen go from 22% to 15%. The same goes for Benoît Hamon’s electorate: Emmanuel Macron loses 15 points (from 83 to 68%), and the non-winning choice 15 points (from 14 to 29%).
The weakening of E. Macron is visible in the polls, but that does not question his election in the second round
According to the surveys, the only electorate in which Marine Le Pen gains more votes than Macron is that of Nicolas Dupont-Aignan: 37% now wish to vote for Marine Le Pen, 32% for Emmanuel Macron. That seems insufficient to make up the one million votes missing after the first round. Moreover, in order to collect more votes on the side of J.L. Mélenchon, it would lose part of the electorate of F. Fillon (and vice versa), both camps being deeply irreconcilable. This is probably why 75% of French people consider that E. Macron will win the second round of voting (against 21% for M. Le Pen), and that 56% of them wish his victory (35% for M. Le Pen).
The analysis of the qualities of the candidates is also very clear: E. Macron has the preference of the French people
68% of respondents consider that E. Macron is the most capable of forming a majority in the Assembly (23% for Le Pen). 59% of the respondents give E. Macron the qualities necessary to be president, against 32% for M. Le Pen. 58% of respondents are convinced that E. Macron has the best project and is the most honest (33% for Le Pen). The same score for proximity to French ideas and values: 56% for Macron and 35% for Le Pen. E. Macron is also the most able to understand the voters (51% against 39% for M. Le Pen, 10% without opinion). Regarding the desire to really change things, Marine Le Pen won the vote: 47% against 45% for Macron.
The first polls on the legislative elections give the movement "En Marche! of E. Macron big winner
According to an OpinionWay poll - SLPV analytics made for the newspaper "Les Echos", the movement of Emmanuel Macron would be the big winner, totalling between 249 to 286 deputies out of the 535 posts covered by the survey 53% of the seats). The Republican right would obtain between 200 and 210 seats, the National Front of Marine Le Pen would obtain only 15 to 25 seats (consequences of the transfers of votes and the "vitality" of the republican front). The socialist left (between 28 and 43 seats) and the radical left of Jean-Luc Mélenchon (between 6 and 8 seats) would be the other big losers of these elections.
According to this study, there would be between 90 and 116 duels opposing En Marche! and the Front National, 180 duels opposing En Marche! and the right wing party, 46 duels opposing left wing and En Marche!, 154 duels opposing right wing party and Front National, 6 to 32 duel opposing left wing and Front National… and around 30 triangular elections, opposing Front National, En Marche! and France Insoumise.
II – What are the major challenges of France… according to the French?
The surveys conducted with the French highlighted their concerns and their priorities. Employment, social protection and purchasing power are their top three priorities. This is not surprising when one knows the level of unemployment, the attachment to the social model and the loss of purchasing power (all relative, however, compared to countries that have really experienced austerity policies).
Surveys go a little further. They distinguished between the voters of the two candidates in the presidential election and it is very clear that the priorities are different: 1) employment, 2) social protection, 3) purchasing power, 4) education and (5) social inequalities for the electorate of E. Macron, closer to the global concerns of the French; (1) immigration, (2) the fight against terrorism, (3) security, (4) purchasing power, and (5) employment for M. Le Pen’s electorate.
III –Will the new president be able to govern France?
As soon as the new President is elected for France, the question of the ability to govern arose. An important step is on the horizon: the legislative elections. To govern, there must be a majority in the national assembly, which has 577 deputies. This majority (289 deputies) allows the adoption of laws and reforms. In the absence of a majority, a coalition would be needed.
What are the next steps?
- The legislative elections will take place on 11 and 18 June: the purpose of these elections is to choose the 577 deputies of the National Assembly. They will be elected for 5 years and renewed either following the dissolution of the National Assembly (by decision of the President of the Republic) or after the presidential elections.
- Senate elections will take place on 24 September: 174 of the 348 seats will be renewed. Senators are elected for 6 years and 50% of senators are renewed every 3 years.
What should we anticipate for both candidates?
1. E. Macron: towards a parliamentary majority or a coalition
E. Macron is leading in the polls and should, unless surprised to be elected to the supreme magistracy. His program (“both left and right”, and not “neither right nor left”) is a priori likely to federate supporters of all parties, outside the extreme right. However, a few days before the election, there is a certain distrust of the voters, with an increasing number declaring it difficult to choose between the two candidates in the running. The tenors of the policy are declared in favour of E. Macron, but sometimes without great enthusiasm.
The fragmentation of the French political landscape also suggests triangular or even quadrangular in the second round of the legislative elections (at least 12.5% of the vote is required to remain in the second round): on one hand the republican front is less solid than before, and on the other hand, the parties in difficulty (the Republicans on the right, the Socialist Party on the left) will have to seek to favour the largest possible number of deputies. In other words, there will be less (than usual) withdrawals in favour of the candidates of the President, which should allow the candidate of the National Front to have more deputies than in previous elections (for example, in the last legislative elections, the FN had obtained 17% of the votes, but by the play of vote transfers, and due to the attitude of the “republican front”, it had conquered only 2 seats (0.35% of the assembly)
If this scenario proves to be correct, “En marche! “ might obtain the absolute majority. If not, in addition to rallying to the President, we will see coalitions. A government will be formed, but this new “cohabitation” will be managed on a case-by-case basis, which would inevitably complicate the task of the President and his Prime Minister.
2. Le Pen: no parliamentary majority, no coalition, no Frexit
An election of M. Le Pen, unlikely at the time of writing, may run up against three obstacles:
1. The impossibility of obtaining a majority in the National Assembly;
2. The impossibility of forming a coalition government with a majority in the Assembly;
3. Clarifying its program on the euro.
The electoral system and the attitude of the other parties against the FN will not favour M. Le Pen. Both a majority or a majority coalition are very unlikely. We must expect political gridlocks, the impossibility of governing and, no doubt, the dissolution of the Assembly (see box next page).
A possible dissolution of the National Assembly would give no guarantee to Marine Le Pen that her party would obtain a parliamentary majority. There would be more chances of seeing the political situation and the reforms blocked than to see France engaging in the process of a "Frexit". This is Mr. Le Pen’s third hurdle. The clarification of its position on the EU and EMU would also become paramount. Before the elections, the speech fluctuated greatly: initially very hostile towards Europe and the euro, it became more flexible (without denying its point of view), probably to reassure a French electorate rather pro-European. From the end of the first round of the election, the theme of the national currency resurfaced, and with it the "Frexit", implicitly.
To leave the euro (Frexit) or to opt for a national currency linked to the euro are the only two options mentioned by M. Le Pen… Note it impossible for an EMU country to have a parallel currency. “We will have a national currency like all other countries and we will have a common currency together,” she recalled recently. Article 128 of the European Treaty is formal on this point: the European Central Bank alone is empowered to authorize the issue of euro banknotes in the Union. In order to have monetary sovereignty and a fixed parity thereafter, France must first leave the EU and EMU. How to regain monetary, fiscal, political and territorial sovereignty while remaining in the EMU and the EU? The project of the FN comes up against all logic of the European construction and the EMU. “We already know that the European partners will say no, because it amounts to turning back, to return a child to the womb of his mother” (Christian Saint-Etienne).
In any event, the outcome of such a decision would have far-reaching consequences:
- Significant depreciation of the new currency in circulation;
- Loss of purchasing power (impact on inflation and inflation expectations);
- Loss of competitiveness of firms (higher input prices);
- Destruction of jobs and production;
- Outflows of capital (non-residents hold more than 60% of French public debt, a record-high in Europe);
- Higher bond yields and higher bond spreads (+ 150-200 bp against Germany?)
If this turns very bad, and only in this case, you can bet on the establishment of capital controls and, in the worst case, restrictions on cash withdrawals from banks. It is difficult to achieve the Frexit: it is necessary to win the presidential elections, then to win the legislative elections or to dissolve the Assembly and win the second legislative elections, then finally win the referendum on the Frexit (note the French are still pro-European). But there is no doubt that the reactions of the financial markets following an election of Le Pen would be inevitable.
Capital controls: what measures?
Three types of measures are possible:
- Closure of banks (this should not last long, otherwise, paralysis of the economy);
- Cash withdrawals limited: cash withdrawals at ATMs would be limited (example in Greece, it was 60 euros per bank credit card and per person (Greek resident), per day).
- Controlled cash transfers abroad:transfers of money via the internet between French accounts would still be possible, but transfers abroad would be controlled. In Greece, for example, they were examined by a “Banking Validation Commission” attached to the Ministry of Finance, taking into account in particular the “public and social interest” of the transaction, in particular when it turned to ‘Health expenditure’.
VI. Reminder of the programs
Some strong messages to conclude:
- According to the polls, and given the transfers of votes, E. Macron is likely to be the next President of the French Republic;
- Early polls indicate that E. Macron could obtain between 249 and 286 seats of deputies out of the 535 under review, or 53.5% of the seats in the best case (there are actually 577 deputies, with an absolute majority at 289);
- With E. Macron President, France is moving towards a parliamentary majority or, at worst, towards a coalition of government, which should not be difficult to constitute;
- If the polls are as accurate as in the first round, much of the uncertainty is lifted and we can now look at France and the French markets with a much lower risk premium, Concentrating on the fundamentals. The economic situation is improving;
- Risky assets attractive, both in France and in the Eurozone: the specific risk on France and the European systemic risk are in the way to disappear completely (exit Frexit);
- European and French risky assets, both equities (vs. the US) and corporate bonds (vs govies) are still favoured in our asset allocation.