Financial markets celebrated the French election performance of centrist candidate Emmanuel Macron as if he'd already been handed the keys to the Élysée Palace, but if he becomes president he may face a parliament minded to block his growth-driving spending plans even as it backs proposals for slashing tax, regulation and public-sector jobs.
Macron, a 39-year-old former economy minister and Rothschild banker, heads into the May 7 runoff vote as the overwhelming favorite against anti-euro far-right candidate Marine Le Pen, but France's system of separation of powers allots much influence to the National Assembly, which holds its own elections in June, when its 577 seats are expected to be spread between more parties than usual.
French economic growth could be between 0.5 and 1.2 percentage points higher than otherwise by 2022 if Macron were to implement his entire program, according to Oxford Economics. While vague in parts, this includes a reduction in corporation tax to 25% from 33.3%, a cut of 120,000 public-sector jobs over five years, and a €50 billion investment program focused on training to tackle unemployment, as well as other labor market reforms.
But success could hinge on Macron's relationship with the conservative party, Les Républicains, which is expected to hold a large number of seats and perhaps elect the prime minister, despite a scandal that dogged the campaign of its presidential candidate François Fillon, said Marion Amiot, a eurozone economist at Oxford Economics.
In particular, Macron's spending plan could face opposition, she said.
"I'm not sure his investment program will get support, as the Republicans are focused on a lower debt level," she said.
"Some of the discourse we heard from them after the first round results on Sunday [April 23] suggested they weren't willing to work with Macron on all of his program."
Fillon friend and foe
Where Macron may have most success is on corporation tax cuts, which Fillon agrees with, and his labor market proposals, which the Républicains have argued do not go far enough.
Support for Macron's new movement, En Marche!, was at 24% in early April, up from 16% in January, while the Républicains had dropped to 22% from 26%, according to an Ipsos poll ahead of the parliamentary vote. The Socialists were at 20% and Le Pen's Front National at 23%, but Amiot told S&P Global Market Intelligence that the two-round voting system meant the far right was unlikely to gain enough seats to influence votes. Supporters of leftist Jean-Luc Mélenchon, who came fourth in the first-round presidential election just behind Fillon, could do well, she said.
"I am doubtful that Macron will get a majority," Amiot said. "The [presidential] results show there is a big political divide in France."
The spread between 10-year French and German government bonds tightened 18 basis points to just 47 basis points on the morning of April 24, the smallest gap since January, after Macron won the first round with 23.8% of the vote to 21.5% for Le Pen, who wants France to pull out of the euro. As the first-round result was right in line with the latest polling, investors are confident that polls for the runoff May 7 showing Macron winning by up to 30 percentage points will hold true.
"In terms of the OAT-Bund spread we have completely unwound the widening we have seen since the start of the year," said Tim Graf, head of macro strategy research at State Street Global Markets.
"The next target will be 30 basis points, 35 basis points, as that was the level pre-U.S. election in November, when political risk began being priced into French bonds."
Needs to be bold
Macron has pitched himself as an outsider prepared to shake up an over-regulated economy, and analysts have said he will need to act boldly if he is to stem the discontent which has fueled the rise of Le Pen's Front National from pariahs to a powerful political force that could pose a renewed threat in 2022.
"The hopeful scenario is that the Socialists and Republicans will be willing to work with him, and there is relatively broad support for policies such as corporate tax cuts and labor market reforms," Graf said.
Yet Macron is not a genuine reformer, according to Commerzbank chief economist Jörg Krämer.
"His policies will at best ease the problem of oppressively high unemployment, not solve it," he said in an April 24 note. "For example, Macron plans to increase the 'activity premium' by a net €100 per month for unemployed workers who find a job. But he won’t make it harder to gain access to unemployment benefit, which reduces the incentive to work."
Macron also differs from Fillon in standing by the 35-hour work week, Krämer noted.
"France will remain stuck with a minimum wage that is high by international standards; these levels discourage companies from hiring young, less-productive workers.”
For the moment, though, these challenges remain in the future, and financial markets are concentrating on May 7. All the major candidates, bar Mélenchon, joined in a call to back Macron against Le Pen. So did the unpopular sitting Socialist President François Hollande, recalling the alliance spanning the left to center-right which crushed Marine's father Jean-Marie Le Pen when he made the second-round presidential vote in 2002.
The difficult task for Macron will begin if he is elected president, and struggles to deal with parliament.
"What he will have to do is effectively run a campaign against Le Pen while he is in government. There is clearly a disillusionment with the mainstream parties and Le Pen is only 48 – she is not going away," said Graf.