Le Pen still worries markets more than the 90% taxman

LONDON, April 20, (RTRS): JeanLuc Melenchon, the far-left taxand-spend candidate in France’s presidential election, has surged in opinion polls before Sunday’s first round vote and yet he isn’t the main reason for growing nervousness on financial markets.

Reflecting the topsy-turvy state of politics and financial markets today, it is far-right candidate Marine Le Pen who investors still regard as the greater risk.

In more normal times Melenchon would be their obvious bete noire, proposing a 90 percent income tax band on the country’s top earners and expressing openness to taking France out of the European Union.

He has climbed to as much as 20 percent in recent polls from below 15 percent last month, closing in on Le Pen in what has become a tight four-horse race to choose the two contenders who will go through to the run-off on May 7.

That has set off a wave of market volatility. One-week implied volatility in the euro/dollar exchange rate this week is on course for its biggest jump since the euro’s launch in 1999.

Compared with the two more centrist candidates, Francois Fillon and Emmanuel Macron, Melenchon is an isolationist; he has promised a referendum on a French exit from the EU if his demands to renegotiate its position within the bloc aren’t met.

Control

His manifesto also calls for withdrawal from the NATO military alliance and the International Monetary Fund, vetoing of international free-trade accords, ending the European Central Bank’s independence and taking control of Bank of France.

Risky though this may sound for investors, whose confidence is built on the certainty of the single European market and common currency, he is sill not as risky as Le Pen; the National Front candidate is campaigning on a platform of ‘Frexit’ — taking France not only out of the EU but out of the euro too.

Le Pen has also left open the option for EU renegotiation but on terms that other member states would find hard to accept. Within six months she would want to turn the bloc into a loose cooperative of countries without the euro, a border-free area, budget rules or the pre-eminence of EU law.

Given such demands, markets sense Le Pen holds a much deeper ideological hostility to the EU than Melenchon, whose principal objection is to the bloc’s insistence on austerity policies - a view shared by many more centrist voters.

“Melenchon’s ‘plan B’ would be getting out of the EU and maybe out of the euro zone. That’s more or less ‘plan A’ for Le Pen,” said Florian Hense, European economist at Berenberg Bank in London. “Le Pen would still be the more nuclear option.”

While Le Pen has led the polls or been a close second for months, most still put Melenchon in fourth place.

Scenario

However, they also show Le Pen losing in the run-off whoever she faces, as many voters would rally behind her opponent simply to keep the far-right out of the presidency. Melenchon, by contrast, could beat Fillon as well as Le Pen, according to the few surveys that have mapped such a scenario.

Still, Hense puts only a 10 percent chance of either Le Pen or Melenchon becoming president. Many obstacles lie in their path, and even if elected they would have difficulty in securing a parliamentary majority to push through their programmes. Macron, a centrist independent, or the conservative Fillon would be clear favourites if they faced Le Pen in the second round.

“The politics of separation is the greatest risk for the euro,” said Lena Komileva, managing director at G+ Economics. “That it is no longer just a Le Pen risk is a grave concern.”

Societe Generale currency strategists said the risk of a run-off between the two anti-establishment candidates “is getting slightly less likely”, noting Melenchon’s poll ranking had failed to break above 20 percent despite the surge.