Why Frexit is unlikely regardless of French election outcome

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Even if National Front leader Marine Le Pen wins the French presidential elections she will struggle to lead the country out of the European Union or the euro, fund managers argue as most remain positive on Europe.

The French head to the polls on Sunday for the first round in elections with many nervous that the country could follow in the footsteps of the Brexit referendum or the US presidential elections by favouring a populist far-right movement.

The two leading candidates in the first round, currently predicted to be Le Pen and centre-left Emmanuel Macron, will then go to a second round of voting on 8 May.

Macron is currently expected to win that round in a overwhelming majority with 65 per cent to Le Pen’s 35 per cent, according to an Elabe poll for BFM TV and L’Express released this morning, but news headlines and markets have been focussed on the threat of a Le Pen win regardless.

Despite fears over what a Le Pen would mean for the EU or the euro, head of global asset allocation at Pioneer Investments Monica Defend says a referendum for Frexit is not easy to call.

“Euro and EU membership in France are written into the Constitution; hence the procedure should involve the Prime Minister or some members of the Parliament proposing the constitutional referendum,” Defend says.

This would involve the triggering of Article 89 requiring a majority in both houses of parliament, which Le Pen would be unlikely to receive.

The ECB would step in to avoid major disruption from a Le Pen win, Defend says, although it would still be a shock for the eurozone and trigger a deposit flight from France, and sharp volatility in bond and equity markets.

“We could see a phase of de-risking from European assets, hitting European corporates, which have been so far resilient to the increased political uncertainty.”

Speaking to the late surge in the polls for the far-left candidate, Fidelity International multi asset portfolio manager Nick Peters says Jean-Luc Mélenchon still polls consistently behind Le Pen and Macron.

“Furthermore, Mélenchon and Le Pen would face severe political and constitutional hurdles to implementing their anti EU stance if they did get into power. While we would likely see significant volatility if either won, the absolute downside could be limited by this.” 

However, Peters says a Macron win is the likely outcome, which would result in a rallying euro and the spread on French over German bonds likely to fall.

“French bonds have taken the majority of the impact from market nerves thus far, with French equities (CAC 40) reflecting the improving economic picture and actually up by around 10 per cent over the year to date.”

However, markets might still see a further upwards move in European equities as they re-price perceived political risks.

Chief investment strategist for Lombard Odier Investment Management Salman Ahmed says investors appear to be penalising Europe based on a perception that its “politics are a mess and its economy is mired in a fundamental economic malaise with little hope for improvement”.

We think it is time to rethink that perception – not least because the data is already refuting it.”

Ahmed points to real growth in the eurozone nearing 2 per cent, PMIs at their highest levels in six years, unemployment falling in peripheral economies, business confidence is up, while subdued core inflation enables the ECB to maintain its accommodative stance.

Regarding whether the French electorate would vote for a French exit from the euro or EU, Ahmed points out persuading a nation of savers to ditch the euro and redenominate their pension funds in risky new francs would be a difficult task.