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COLUMN-After France, risk isn’t that populists govern, it is that nobody does: James Saft
April 24, 2017 / 9:10 PM / in 7 months

COLUMN-After France, risk isn’t that populists govern, it is that nobody does: James Saft

(The opinions expressed here are those of the author, a columnist for Reuters)

By James Saft

April 24 (Reuters) - Marine Le Pen’s likely upcoming defeat in the second round of the French presidential election will bring welcome relief of risk to the euro project, and to global markets.

What comes after will show a risk that markets, in Europe and the U.S., are choosing not to price: governing itself is becoming increasingly difficult.

Le Pen came second in the first round of elections on Sunday, and will run against a heavily favored Emmanuel Macron, an independent centrist whose policies mix further European integration, labor liberalization and strong elements of social insurance.

The election, however is most notable for its rejection of the existing order; no candidate of the main parties of the left or right will advance to the second round for the first time in 60 years. About 46 percent of votes were cast for candidates who either reject the core of the euro project or have flirted with this idea: the nativist Le Pen, hard leftist Jean-Luc Melenchon and nationalist Nicolas Dupont-Aignan. Macron will be president of France, never a simple job, but neither his mandate nor his power are clear or secure.

“The more significant point is that this result essentially implies that the parliamentary elections in June will likely end in a complete stalemate. Macron’s En Marche movement is struggling to find suitable candidates, and obviously lacks a grassroots network, and its candidates will often be pitted against Republican, Socialist and FN candidates who are well established at a local level,” Marc Ostwald, strategist at ADM Investors Services in London, wrote in a note to clients.

This implies that Macron’s program of greater integration with euro zone partners - such as a kind of pan-euro finance minister and integrated military budget - will remain aspirations.

To be sure, Sunday’s result was a welcome relief, a fact underscored by the strong rally afterwards in the euro and global stocks. A Le Pen victory, or even the legitimate threat of one, brings with it the kind of bank funding concerns which can take on a life of their own and end in bank runs and inadvertent disintegration of the common currency.

It is one thing to avoid a rapid falling apart of the euro, avoiding a slow one is another. Even more to the point: French voters are not alone in having an inchoate desire to wipe the existing slate clean.


The U.S. makes an interesting parallel to France. A populist nationalist won in Donald Trump, but has thus far shown himself far from able to advance his, or any other, agenda in an effective way.

Trump’s first 100 days have been marked out as having unusually few achievements. Attempts to reform healthcare law still lie in shambles and the promise of tax reform increasingly lacks credibility. Tax reform may not arrive until next year, and in watered-down fashion.

This is not simply because Trump is a poor administrator out of his depth. It is also because he stands, or slumps, at the head of a party with deep divisions. These divisions, such as over the proper role of the state, aren’t simply the result of Trump’s eccentricities, they reflect very grave disputes among elected officials and the voters who put them there.

While we will probably not have a U.S. government shutdown, as would happen this Friday if a budget is not passed, we will once again be treated to the spectacle of the supposed producer of the world’s safest asset - U.S. debt - coming close to having government come to a standstill.

That the U.S. might cease to function as a government over Trump’s desire to get funding for a wall on the border with Mexico carries a symbolism which investors haven’t quite grasped. It is one thing to be promised tax cuts and reflationary spending, but quite another to deliver them. The UK, where the ruling Conservatives are about to capture a stronger mandate in upcoming elections, is a notable exception. There too, winning seats in parliament will prove easier than negotiating advantageous terms for leaving the European Union.

There are two broad implications to the political situation on the U.S. and France: For better or worse, central banks remain the “adults in the room” on which the stability of markets depends, but ECB and Federal Reserve efforts to return monetary policy to a more normal stance are threatened.

After the relief in France and euphoria in the U.S. wear off, equity markets may eventually impose a lasting discount on valuations to compensate for political dysfunction. (Editing by James Dalgleish) )

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