Macron Set To Become France's Next President - But Then What?

|
Includes: ADRU, DBEU, DBEZ, DEZU, EEA, EPV, EURL, EZU, FEEU, FEP, FEU, FEUZ, FEZ, FIEE, FIEU, GSEU, HEDJ, HEZU, HFEZ, HFXE, HGEU, IEUR, IEV, PTEU, RFEU, SBEU, UPV, VGK
by: Zoltan Ban

Summary

Unless a dramatic event will shift the current electoral trend, Emmanuel Macron will become France's next president after next month's second round election.

Macron was the system's last card. If he will fail to resolve most of France's and to some extent EU's deep problems, this will be a defeat of the EU.

France's problems run particularly deep, with youth unemployment rate of 26%, deficits above EU treaty limits, its important tourism industry hurt by recent terrorist attacks. Macron's platform is not adequate.

The media headline-grabbing storyline in regards to elections in a number of key EU countries was that of whether the right-of-center, anti-globalization movement is set to sweep Europe, after arguably it led to the Brexit vote and to the election of Donald Trump for US president. I personally never believed that these movements ever had a chance in the Netherlands, Germany or France in this year's national elections. The Netherlands election handed Geert Wilders and his right-of-center party a significant gain compared with the previous election, increasing his party's seats in parliament from 15 seats to 20 seats, out of a total of 150. Not exactly the right wing sweep that most of the media and political elites dreaded. In France, based on the results we saw in the first round, we can now be reasonably confident that Marine Le Pen will not be elected president of France in 2017, when the second round will be held in May. Global markets already reacted to the news by staging a massive rally. As for Germany, between it being by far the biggest economic beneficiary of the euro and its historical past which makes most Germans opposed to any movement that is right of center, there was really never any doubt about this year's elections, despite the horrific attacks on about 1,200 women on New Year's Eve 2015-16 and a number of terrorist attacks in the past few years. Such events would have turned the electorate against the government and system in most other countries in the EU. Those who expected it to happen in Germany, do not understand Germany in my view.

While I never believed in the sensationalistic narrative offered by the media and a number of analysts who were given a platform on this issue in regards to the perceived threat of the current ideological and political order being turned over through a ballot box revolt in Europe, I find the current narrative being sold, of a call to complacency in the aftermath of this perceived defeat of the political bogey lady called Le Pen, to be outright absurd. The reality is that while Macron will become France's next president this year, unless some dramatic event will create a massive electoral shift, there is nothing in his platform which would suggest that he will manage to tackle France's economic problems, or help in any way with producing some much-needed EU reforms. The two main problems, namely the economy and immigration will continue to produce mass-dissatisfaction with the current elites in power in France and in the EU.

Macron's platform.

One of France's main problems happens to be a very high rate of unemployment, especially among young people.

Data source: Eurostat.

Emanuel Macron is currently proposing as part of his platform actions such as deregulating the labor force in order to make it more flexible. Putting aside the fact that it would likely have a very limited effect on unemployment in the face of challenges to labor coming from outsourcing and automation, there is also the fact that France's current president already tried to pass such reforms and failed to produce a significant improvement as a result.

In regards to the budget deficit, Macron pledged to meet the EU treaty maximum threshold of 3%.

Data source: EC.

As we can see, it has been nine years since France managed to keep its deficits under 3%. For this year there is a decent chance of achieving that goal, but then it will take some cuts or increase in revenue in order to maintain that 3% or less level starting next year. Neither one of those policies is likely to help much with the unemployment situation.

There are a number of other policy proposals, including an increase in defense spending, reducing the number of government employees by 120,000 people. None of these measures are likely to greatly improve France's employment situation or the overall economic trend, mainly characterized by stagnation. After all, reducing the government workforce by 120,000 will result in a cut in opportunities for young people by that much. If somehow this would lead to a great deal of improvement in private sector job creation, it would indeed be helpful, but in reality it will not. In the end, the savings will go to keeping the budget deficit under 3%, with not much left to invest in growing France's economy.

Fact is that France like most EU and other developed countries is facing some grave challenges. Outsourcing of manufacturing and some services to countries where wages are much lower is going to continue, regardless of any initiative meant to make France more business friendly. The gap in wages is simply too high to make up through lowering costs by cutting taxes and regulations. Besides, the need to keep to the 3% deficit will make it very hard to engage in significant tax cuts or investments in improving competitiveness.

Another fact that is likely to go against the French economy is that terrorism is now officially an economic issue, given the damage it did to its tourism industry last year. Tourism makes up about 9% of its GDP and last year there has been a decline in foreign visitor nights spent of 8.7% according to Eurostat. The decline in France was by far the most significant among all EU members, with only a few other countries seeing any decline at all, which coincides with the fact that France suffered more deaths from terrorist attacks in the past three years than any other European country. In fact, it was more than all EU countries combined. In effect, it means that there were 24 million fewer nights spent by foreigners in France compared with the previous year. If this trend continues, it will most likely lead to hundreds of thousands of job losses in coming years.

We have no way of knowing what will happen in coming years in regards to any more coordinated and planned attacks in France, or perhaps some more of these lone-wolf attacks we have seen lately. One thing that is for sure is that if these attacks will continue, so will the decline in willingness of foreigners to visit France. It seems for instance that the concept of the safer Central-Eastern Europe destination is starting to spread. The smallest increase in nights spent by foreigners in former communist EU members was recorded in Latvia, where they saw an increase of 5.8%. The highest increase was recorded in Bulgaria at 21%. In other words, every single former communist country in the EU saw an increase in foreign tourists that was larger than the EU average of 3.6%. The combination of a perception of a higher degree of safety, which only a few years ago was the opposite, as well as more competitive pricing seems to be winning over tourists, while the perceived deterioration of safety in Western Europe is leading to foreign tourists turning away.

Given France's high exposure to the tourism industry, its next president will have to do much better than the current administration in countering this potential threat. On this issue Emanuel Macron seems to be finding himself on the wrong side of the argument, having praised Angela Merkel's policy of welcoming migrants as they streamed into Europe, without any significant oversight in regards to who they were, with only the ability to make it into Europe as the main criteria for accepting them. Given his position on this increasingly important political issue in Europe, a number of terrorist attacks during his presidency would not only damage France's tourism industry but also his presidency.

There are of course a few potentially positive and constructive proposals to be found within his platform. One of the most important ones addresses the current dysfunction of the Euro currency. It proposes a Euro zone central budget, in other words federalization of the Euro zone. This would in effect act as an imbalance correcting mechanism, just as it is happening in the United States, with the federal government transferring money from states with a higher GDP, which might be doing well, to states that are doing less well. In the case of the Euro zone, it would mean that Germany's free ride of the weaker Euro, which is making its global brands more competitive would be over. It would have to start transferring significant amounts of the wealth it is gaining to states that are currently struggling, such as Greece, Italy, Portugal and even countries like France perhaps. That is why I don't believe that Germany would ever go for such a scheme.

To make matters worse, the global economic cycle suggests that we are likely to see another global downturn within the next five years. The average economic cycle lasts about a decade and we are now a decade into this one, when measured from the beginning of the last economic crisis. There is of course no law that mandates decade-long economic cycles. Fact is however that odds of a new economic downturn are getting higher with every year that passes as a number of factors such as debt accumulation, business cycles, stock market pricing as well as other trends tend to converge after a while and will cause the economy to sputter. I personally think the trigger of the next recession will be an oil price spike, which should happen within the next few years. I am especially focused on the fact that outside of US shale and perhaps continued growth in Canadian oil sands, there is not much out there in terms of potential sources of supply growth beyond the levels we saw in November, 2016 before the OPEC cuts. Those unconventional sources alone cannot keep up with continued demand growth in the 1.5%/year range. If this will happen during Macron's presidency, he will own the misery, regardless of the fact that it may not have much to do with him and his policies.

The headlines in the aftermath of the relatively poor showing Marine Le Pen has had in the first round were as follows: "French Elections: Wall Street joins European relief rally", "After French Vote, Mainstream Europe Breathes a Sigh of Relief". The reality is much different. The impending victory of Macron next month will be the last chance for the system to fix itself. That is hard to do however when the system will feel that its positions were vindicated at the ballot box. The markets may be right to react with relief in the short run, but we also have to be aware of the fact that after Macron, the system will have nothing left to offer if it does not redeem itself. There is a reason after all that neither one of the two traditional parties managed to get their candidate into the second round, for the first time since the end of WW2. Macron was offered up to the electorate as the mainstream alternative to the already discredited mainstream parties. If he fails, it is the mainstream itself which will become discredited and what lies beyond is a complete rejection of the EU, as well as many of France's own current national positions, institutions and policies. For this reason, the markets should not fall into complacency when it comes to longer-term considerations. For instance, we can expect the Euro to drop more or less together with Macron's popularity if he fails to deliver and it will get worse towards the end of his mandate.

Macron will win unless something dramatic will greatly shift the electorate in the next two weeks. That is when the nightmare of trying to reverse decades of bad French and EU management of the economy and other issues and show tangible results will start. The French economy will have to be restored to health, in the face of many challenges. The migrant crisis will have to be resolved, without the EU moving to impose migrant quotas on national governments, which most often represent distinct ethno-cultural majority electorates, therefore it is causing much hostility to the EU as an institution lately. On these issues and more, Emanuel Macron and the EU overall will have to show tangible results before the next French election. If he will fail, when they will be celebrating the currently expected electoral victory, they will in fact be celebrating the self-defeat of their desire to preserve the European Union.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.