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Emmanuel Macron has outlined an ambitious reform agenda after beating far-right rival Marine Le Pen in the French presidential election. But will he be able to deliver on his promises to revive the French economy and unify Europe?

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On the evening of May 7, the European political establishment breathed a collective sigh of relief. Emmanuel Macron delivered an emphatic victory in the French presidential election, beating the Front National candidate Marine Le Pen with 66 per cent of the vote. In the process he stemmed the tide of populist nationalism that had threatened to sweep the continent.

Macron is leader of En Marche! (“Onward!”), a centrist political party he created in 2016 in a bid to unite elements of the French left and right. A former economy minister in François Hollande’s government, Macron had grown frustrated at the sclerotic political process in France and is a vociferous advocate of reform.

At the core of Macron’s policy agenda is a Nordic-style economic model that combines fiscal discipline with public spending. He wants to make labour laws more flexible, cut 120,000 civil service jobs and trim corporation tax from 33 per cent to 25 per cent. But he also plans to extend the welfare state to support the self-employed and spend more on lifelong education and retraining for workers whose jobs may be vulnerable to automation.[1]

Macron has outlined an ambitious reform programme for Europe. He wants deeper integration of the euro zone and completion of the banking union; under his plans the currency bloc would have its own finance minister and would be able to issue joint bonds.

Will Macron be able to deliver? At home, much will depend on the outcome of the legislative elections in June, where En Marche!, rebranded as La République En Marche!, will field candidates in every one of France’s 577 seats. Abroad, Macron will have to work closely with Germany and to build bridges with southern European countries, particularly Italy, where Eurosceptic sentiment is on the rise.

In this Q&A, Geoffroy Lenoir, Head of Euro Sovereign Rates at Aviva Investors, considers Macron’s prospects.

How have the markets reacted to Macron’s victory?

There were no big movements in the government bond markets, suggesting investors were well positioned regarding the outcome of the election. If anything, the result was even more emphatic than the markets and the polls expected. The French electorate has sent a clear message: It rejects extremist parties and has given Macron a mandate for reform.

Which aspects of Macron’s reform programme will be of most significance to investors?

Macron’s most important policy is labour market reform. At the moment, only workers who are sacked are eligible for unemployment benefit; Macron wants to extend benefits to entrepreneurs and the self-employed. He will also allow companies more leeway to negotiate working hours, which should boost the flexibility and dynamism of the labour market and boost economic growth. Macron also wants to cut corporate tax and reduce France’s budget deficit, measures that will be welcomed by government bond investors.

Will Macron be able to deliver on his reform agenda?

The answer to this question will depend on how La République En Marche! fares at the legislative elections in June. Fresh from his victory in the presidential election, Macron will carry lots of momentum into the parliamentary vote. La République En Marche! will field candidates in every parliamentary seat and the latest polls suggest it will win between 240 and 280, just short of a majority but enough to make it the dominant partner in a coalition. We think this outcome is likely.

Our other core scenario is cohabitation, under which a revitalised Republican party wins a significant number of seats, forcing Macron to choose a centre-right prime minister. But even then Macron would have a good chance of passing reforms because many Republicans share his pro-business outlook. Macron is a conciliatory, pragmatic figure and will be able to build alliances. A third scenario, in which parliament is split between several different parties, would present more obstacles to reform, but this outcome is less likely.

Will citizens take to the streets to oppose pro-business reforms, as has been the case in the past?

There could be civil unrest of the kind François Hollande encountered when trying to enact labour reforms; in fact there have already been trade union demonstrations in Paris since Macron’s victory.[2] But as the economy minister in Hollande’s government, Macron will have learned from his predecessor’s mistakes and will ensure the requisite political support is in place before he starts the process. Macron’s pledges to spend on education and lifelong training programmes for laid-off workers may also sweeten the pill of labour reform.

Macron is staunchly pro-European and wants to foster greater unity in the European Union and the euro zone. What are his chances?

The signs are positive: pretty much every leader in Europe endorsed his candidacy during the presidential elections. Particularly significant is the support he gained from countries in southern Europe: for example, Greece’s leftist former economy minister Yanis Varoufakis endorsed Macron on the basis that he stood up for Greek interests during the tense standoff over the country’s repayment of public debt in 2015.[3] This endorsement is significant because the relationship between northern Europe and southern Europe will be key to the future of the euro zone. Macron could play a big role in fostering greater unity. He already has an established relationship with Angela Merkel, which will also be beneficial, although any progress on reform will have to wait until after the German elections in September.

What are the immediate challenges Macron will face in Europe?

Now that populism has been faced down in France and Holland, the biggest threat to the future of the euro zone is Italy. France and Germany will need to show they can work with Italy to help it build a stronger economy. If Eurosceptic sentiment grows stronger in Italy before the general election next year, the Five Star Movement, which has advocated a referendum on euro zone membership and is currently leading in the polls, could emerge victorious.  

‘Brexit’ is another challenge. Macron is pragmatic and knows a smooth negotiation over the terms of Britain’s exit from the EU is in the best interests of both parties. Nevertheless, he has described Brexit as a “serious mistake” and we expect him to take a firm line that Britain cannot leave the bloc and still derive the benefits of membership.[4] The UK may well lose so-called passporting rights for financial transactions if he maintains this tough stance. Paris is already jostling with other European cities to woo business away from the City of London, although Luxembourg and Frankfurt are probably better positioned to attract financial services companies.

 

[1] https://en-marche.fr/emmanuel-macron/le-programme

[2] http://www.reuters.com/article/us-france-election-morning-reactions-idUSKBN1841GD

[3] https://www.theguardian.com/commentisfree/2017/may/04/macron-greece-french-left-marine-le-pen-yanis-varoufakis

[4] http://news.sky.com/story/how-would-an-emmanuel-macron-presidency-affect-brexit-10849659

Important Information

Unless stated otherwise, any sources and opinions expressed are those of Aviva Investors Global Services Limited (Aviva Investors) as at May 10, 2017. This commentary is not an investment recommendation and should not be viewed as such. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Past performance is not a guide to future returns. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.

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