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French Election: Round Two

3 May 2017PoliticsEconomicsEurope

The turnout was high for the first round of the French presidential election which saw Macron (23.5%) taking the lead ahead of Le Pen 22.1%, Fillon, 19.6%, Melenchon 19.3% and Hamon 7%.

The two contenders progressing into the second round have different views. Macron aims to restore French influence in Europe, adapt France to a globalized world, cut corporation tax, strengthen the relationship with Germany, and create a taskforce to fight terrorism. Le Pen is anti-EU, anti-Eurozone, anti-immigration, ultra-protectionist, and wants to reduce the retirement age to 60.

Uncertainty is likely to linger in the days leading up to round 2 of the election, and also after the winner is announced. There are a few key points to look out for:

French polls have proven to be reasonably robust and the polls leading to the second round vote on 7th May will be closely watched. The most recent poll showed Macron leading with 62% versus Le Pen at 38%. Expect the polls to narrow. While Macron has been immediately endorsed by Fillon, Hamon, and Juncker (President of the European Commission), Macron now needs to elaborate on his beliefs, and will be tested in the live debate with Le Pen on 3rd May. The two big variables could be how many of Melenchon's blue-collar supporters turn to Le Pen and which way the 6.2 million undecided voters cast their vote.

Beyond the election, whoever wins is likely to face big challenges in building a majority in the Legislative Elections (11th and 18th of June). As such, Le Pen may find it difficult to implement her extreme views. Likewise, the need to build coalitions to pass legislation could compromise Macron's proposed reforms.

The European Central Bank maintained its policy stance last week. A probable Macron win on 7th May is likely to keep it focused on the firming European economic data, and a gradual exit from its quantitative easing programme.

The French first round result lowers French and European political risk. Citi analysts believe that European assets might face less immediate downside risk and their relative attractiveness could increase slightly. Nevertheless some European political risk would remain, with elections in the UK, Germany, and probably Italy to navigate in the next ten months, as well as the Brexit negotiations intensifying

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