Financial Insights

A French Election without Economic Progress

French voters followed form and Macron placed first with Le Pen taking second, so these two face off in the second round.  Macron should win easily.  The timing is good, since Europe’s economic growth has improved.  However, the improvement is purely cyclical, so it will provide only a temporary respite from the great need for structural reform of France’s labor market.  It remains doubtful Macron will be able to implement the changes needed by France’s economy.

Le Pen’s campaign benefited from the terrorist attack in Paris just a few days before the first round of voting, yet she was unable to parley voter concerns into a first place finish.  If the polls of a few days prior to the election are to be believed, she garnered almost no incremental support.  With much of the right and left likely to fall into line in support of Macron, he should win the second round of voting quite comfortably.  Unfortunately, this is only the first stage of the battle.

One of the key issues in the campaign has been over whether candidates are pro-E.U. or against.  With Macron pro and Le Pen anti, this issue will figure even more prominently in the run-off.  But a win for Macron is not likely to advance his desire to integrate the E.U. even further by adopting an E.U. budget with the ability to issue E.U. debt.  Getting Europe to adopt a unified fiscal policy is just a backdoor way to get the rest of Europe to subsidize French labor practices.  This notion will go over very badly in Germany, which does not think it should help pay for France’s short work week, long vacations, lengthy lunch breaks or early retirement any more than Greece’s similar labor practices.  A French effort to get financial support from the Germans is more likely to create new fissures within the E.U. than improve European solidarity.

Without support from Germany on a unified fiscal policy for Europe, Macron will be forced to focus on structural reform in France, which is needed quite badly.  The French economy is constrained, even ossified, by many stringent rules that are popular with voters and strongly supported by trade unions that readily strike at any suggestion of change.  (Italy might be even less willing to reform.)  Macron understands the need for reform and advocated for looser labor rules in France when he was part of Hollande’s government, but he was overruled.  Now, he will really get to lead that charge on this most important initiative.  But he is sure to ignite vigorous opposition from French unions, as did Hollande.

There is an economic recovery now underway in Europe, but this helps only cyclically.  It does nothing to reform the French labor market.  Macron recognizes the need for reform, but unless and until he can deliver, it is premature to become more optimistic on Europe’s longer term outlook.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.


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