Macron win means no “Frexit”

05.08.17

Emmanuel Macron's victory over Marine Le Pen in the French presidential election on May 7 largely confirmed what most investors had expected. Macron cruised to the presidency, securing at least 65% of the vote.

However, we believe markets still will get an immediate positive impact from the removal of the risk of a “Frexit” – or France leaving the European Union (EU) – for the next five years. In general, we believe this reassurance is likely to make Europe overall more attractive to investors, especially since Europe’s economy has been performing better this year. We forecast eurozone gross domestic product growth will average just less than 2% in 2017.

Macron made his support of the EU clear during his campaign. He now is expected to push for a tough deal with the U.K., which voted last year to leave the EU. That may mean tougher terms for the U.K. as it negotiates trade and other deals for its exit in about two years.

A Le Pen victory would have raised questions about France's future in the EU and the eurozone. Many had feared the anti-immigration, protectionist and isolationist views that were part of the U.S. presidential election and U.K. “Brexit” referendum would spread to mainland Europe.

With about 500 million consumers, the EU is a massive market for U.S. goods and remains the biggest single U.S. trading partner. For now, it appears the U.S. can continue to rely on the EU for trade and mutual defense.

Macron appeared recently at an event with outgoing President Francois Hollande and now inherits the problems that undermined Hollande: France's stagnant economy, a 10% unemployment rate and growing concerns about terrorism.

Given Macron’s reformist agenda, we think the election result is likely to be seen as market friendly, especially if follow-up elections in June produce a reform-minded parliament. His ability to push reforms and his legislative agenda will depend on how well his party does those elections, as well as whether he can partner with others if his party does not have a majority. Those reforms mostly deal with labor flexibility and reducing the corporate tax rate to 25% from 33% by 2022.

Sources: Additional information from CBS News and Bloomberg.com


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