Global Weekly: Vive la France!

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Investors applauded the outcome of the first round of presidential elections in France.

Equity markets moved higher this week, while the spread between 10-year French and German government bond yields narrowed. There is good news and bad news following the market-friendly outcome of the first round of the French presidential elections.

The good news is that the nightmare scenario for markets Рa run-off between Marine Le Pen and Jean-Luc M̩lenchon Рhas been avoided, with the Frexit tail risk diminishing further. Financial markets responded by pricing out the Frexit risk premium, leading to a rise in the euro and higher French government bonds. Emmanuel Macron will very likely win the second round and he has a positive economic agenda. The bad news is that he will face serious obstacles in implementing that agenda.

Even presidents with the best intentions have struggled to pass reforms in France. They have been blocked by vested interests, street protests and strikes in the past. Macron will likely also face the obstacle of not having a parliamentary majority. Under France’s semi-presidential political system, if a president’s party is different to that of the majority of members in parliament, the government is divided – this is called ‘cohabitation’. When this happens, the president can become a marginal figure in national politics.

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