Credit Impulse Update: France’s best days are already behind us

Guide to the French Presidential Election

Macro
CD
Christopher Dembik

Head of Macroeconomic Research

Summary:  We see a 70% chance that President Emmanuel Macron will be re-elected in April 2022 for a second five-year term after defeating National Rally's leader Marine Le Pen one more time. Since Le Pen has dropped her controversial proposal to exit the euro, we think the French election risk will only build modestly in the bond market next year relative to 2017. We expect the OAT-bund spreads to widen by 30-35 basis points in early 2022 but to remain far from levels reached during the previous presidential election (up to 80 basis points).


The 2022 French election campaign will really kick off in September. But all the declared and expected candidates are already on the road to convince voters. France’s regional elections of June 2021 marked a form of failure for President Emmanuel Macron’s LREM and Marine Le Pen’s far-right National Rally. The vote as a whole was also impacted by a record high abstention rate (66.7% in the first round and 65.7% in the second round). Both parties failed to win in any of France’s thirteen regions. This was no surprise for LREM which has faced an important hurdle to gain a foothold in rural France. But it was surprising for the National Rally which was expected to win one or two regions according to most polls. In France, regional elections don’t usually offer pointers to the presidential race. Though Macron and Le Pen were defeated, they are still seen as front-runners for the 2022 April presidential election.

MEET FRANCE’S NEXT PRESIDENT:

We see a 70% chance that Macron will be re-elected for a second five-year term after defeating Le Pen one more time. If France’s economic recovery continues into 2022 fueled by pent up demand and excess household savings, Macron will run in a very favorable macroeconomic environment. This is our base case. Macron is making sure that the rebound will not lose momentum by increasing the spending of ministries to a new annual record of €11bn next year against €3bn prior to the 2017 presidential election. If the economic recovery is shallower and unemployment rises along with economic inequality, Le Pen would run in better position than Macron.

There are already more than a dozen declared candidates and certainly a dozen more to come in the next months. But few will be able to be listed on the first-round ballot. Candidates need to secure a minimum of 500 sponsorships from national or local elected officials from at least 30 different departments or overseas collectivities, with no more than a tenth of these signatories from any single department. This system automatically favors candidates from major parties which count among their own ranks a lot of elected officials in the Parliament and in local governments. It will be more difficult for Hélène Thouy, candidate of the Animalist Party which aims to make visible the animal cause during the campaign, to get the required sponsorships, for instance. Her party can count on a handful of elected officials. Between eight and ten candidates should finally be able to be listed on election day.

In our view, former Sarkozy minister, Xavier Bertrand, is the only candidate who could pose a serious threat to Macron and Le Pen. He is a former member of the centre-right Les Républicains (LR). He now leads the Hauts-de-France region in northern France. He is not a new face of French politics. He held ministerial position for 9 years and was member of the National Assembly for 12 years. But he was relatively unknown to the general public until recently. In June regional elections, he beat with 52% of support the candidates of the far-right and of Macron’s ruling party LREM. At the moment he is the best placed among potential right-wing candidates in the first round of the presidential election.

Unless the Left’s fortunes revive unexpectedly, the Socialist Party, the Green Party and Jean Luc Mélenchon’s far-left France Insoumise will not play a decisive role in the campaign. They will not make it to the second round.

Presidential

THE MESSAGE OF THE POLLS:

A replay of 2017: An elabe poll published after the regional elections of 27 June shows Macron and Le Pen are still miles ahead of the pack in next year’s presidential first round, at 29% and 25% respectively. Bertrand is far behind, scoring at only 14%. It confirms our view it is still likely to be a Macron-Le Pen runoff in 2022. According to most recent polls, Le Pen would lose against Macron and any of the potential centre-right candidates (including Bertrand). She remains in an electoral no-man’s land – able to assemble the 20-odd % needed to reach the run-off – but not the 50% needed to win the presidency. According to some polls but not all, the only scenario where Le Pen could become France’s next president is if she is opposed to a centre-left or far-left candidate in the second round. The probability it happens is close to zero, in our view.

The « third man »: Bertrand climbed to be the « third man » of the moment. But there is still a long and tenuous road ahead. We see three main hurdles which could prevent Bertrand from making it to the second round: 1) lack of support within the working classes; 2) fundraising struggles; and 3) lack of charisma.

  1. Bertrand is no longer officially member of LR. But he still enjoys strong support from centre-right voters (above 70% according to recent polls). On the downside, his support within the working classes is practically non-existent (around 10%). In the coming months, he will try to seduce disaffected centre-left voters. But this is not without risks. He could lose support from conservatives who voted for the socially liberal and fiscally conservative candidate of LR, François Fillon, in 2017.

     

  2. Bertrand encounters difficulties to raise money from individuals to finance its electoral campaign (donations from companies are prohibited in France). But it is still early days. If he stays high in polls, contributions are likely to increase over time.

     

  3. Bertrand’s “boomer-level lack of charisma” is his main weakness in our view. Charisma is a quality that can be hardly developed, taught and acquired through training like any other skill. In that respect, Bertrand can not compete with Macron’s wit, charm and good looks and Le Pen’s self-confidence, energy and determination.

The rise of a populist outsider: Much can happen until April 2022, possibly including the emergence of a populist outsider as in the 1981 presidential election when a famous comedian, Coluche, gathered up to 15% of voting intentions, before ultimately dropping out of the race. Eric Zemmour, a xenophobic TV columnist repeatedly convicted of incitement to hatred, or Jean Marie Bigard, a well-known comedian who supported the Yellow Vest Movement, are often mentioned as potential populist outsiders. Unless the economic situation deteriorates sharply between now and the first round, we don’t think this is a credible risk.

At the moment, with no serious rival who could reshuffle all the cards of the presidential campaign, Macron and Le Pen look set to duel for the presidency for the second time.  Polls suggest that a chunk of the French left would righteously abstain if this were to happen. We doubt it would be enough for a Le Pen victory. But it will be a much narrower race than in 2017.

WHAT THE MAIN CANDIDATES ARE UP TO

Macron: « Republican patriotism », social solidarity and low-carbon economy

Macron knows he must re-invent himself if he is to win a second term in 2022. After serious progress from 2017 to 2019, the reform momentum has slowed down. Due to the pandemic, he had to put his signature pension reform on hold. He is now seeking new élan by promoting a new political formula combining what he calls “Republican patriotism”, social solidarity and a commitment to a low-carbon economic recovery. This should cater to the motley crew of supporters he will need to secure a second term: centre-left and centre-right voters with a mind for green issues. But it is unclear which reforms he will want to push forward. He is likely to unveil the main thrusts of his program at the last moment – which is a common habit of outgoing French president running for a second term. 

Le Pen: a complete volte face on the euro

Three months after the 2017 presidential election, Le Pen dropped the controversial proposal to exit the euro which has cost her votes after the final debate with Macron. More recently, Le Pen has also softened criticism of the EU. She no longer urges to end the Schengen agreement on open borders and now defends the free movement of people within the EU – but limited to EU citizens, which is probably unenforceable. All of these represent decisive steps to transform the National Rally from perennial outsider to less toxic participant in French politics. But much more needs to be done to win the presidential race. The closer the polls put Le Pen to the French presidency, the more her competence will come under scrutiny. Here, she remains vulnerable. She lacks basic understanding of economics and she has failed until now to attract talents who can build a reasonable and pragmatic economic program. Her proposals are often economically unrealistic and vague. She wants to lower the official retirement age currently at 62, one of the lowest in the OECD countries, to 60. We estimate Le Pen’s plan would almost double the pension system’s deficit to €37bn by 2025. This would seriously put the level of pension benefits of future retirees at risk in the long run. She also wants to increase public investment expenditure to invest into new technologies. But it is unclear how these expenditures will be financed.

Since Le Pen has dropped her controversial proposal to hold Frexit referendum if elected president, we think the French election risk will only build modestly in the bond market next year relative to 2017. We expect the OAT-bund spreads will widen by 30-35 basis points ahead of the 2022 presidential election. This is far from the levels reached in 2017 when the spread peaked at around 80 basis points.

Bertrand : governing partly by referenda

Bertrand pledges to govern partly by referenda, thus borrowing one of the demands of the Yellow Vest Movement. This is a popular idea among French politicians when they are campaigning. But as soon as they are elected, they often drop it. On the surface, referenda are the most formidable tool of democracy. In practice, citizens tend to see referenda as a vote on the government rather than on the issue under discussion. The outcome is often determined by the popularity of the president at the time – see the No vote to the EU Constitution in 2005. If elected president, Bertrand will certainly fail to fulfil this promise.

As we are still in early stages of the race, Bertrand has not unveiled all his program yet. The main thrust of his economic platform is to further cut taxes on production. As part of France’s recovery plan detailed in September 2020, the French government is cutting taxes on production by €10bn each year in 2021 and in 2022. Bertrand wants to go beyond that and cut taxes on production by half (~33bn per year). This would increase business profitability and reduce the competitiveness gap between France and Germany in terms of taxes on production by two-third, according to our estimates.

FRENCH DEMOCRACY IS SICK

Our baseline is that Macron will be re-elected. Like in 2017, better paid voters with more education will vote for Macron in the first round while low paid voters with little or no education will vote for Le Pen. In the second round, the anti-Le Pen rally will hand Macron the Presidency one more time until 2027. But his legitimacy may be questioned. He will certainly face strong opposition to his reforms. This is what the Yellow Vest protests in 2018, the massive strikes against the pension reform in 2019 and the anti-vax movement in 2021 exposed. In this configuration, we don’t see Macron’s expected victory as the triumph of reformism but instead as the symbol of a severe crisis of the French democracy. This would be the fourth time in twenty years that the French use their vote to vote against someone and not for someone at the presidential election (Chirac-Le Pen 2002, Sarkozy-Hollande 2012, Macron-Le Pen 2017).

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