Europe at a crossroads
Fallout from the French Presidential election could hit investments, writes Sheldon Slabbert.
The 23rd of April will see the first round of the French Presidential elections begin, with the run-off between the top two candidates on the 7th of May. So, what makes the election of the 25th President so important this time around?
The view is that we will likely be left with two final presidential candidates that hold very different views and could take France and the European Union (EU) down very divergent paths. It could even lead to the breakup of the EU.
With the formation of the EU under a single currency, it meant member states like Greece, Spain, Italy and Ireland - that historically had to borrow money at higher interest rates - were able to borrow money at low interest rates, normally reserved for more fiscally responsible countries with stronger economies, such as Germany and France.
German and French banks acted as conduits for these loans, and this saw a period of what seemed like prosperity. However, these countries then overextended themselves and ran up debt to GDP ratios of 230 per cent, and eventually tipped over into a deep recession.
States like Germany have since been able to recover, while other countries such as Greece have not, and in fact their circumstances have deteriorated further with rising debt, youth unemployment and inequality.
We since had interventions by the European Central Bank (ECB), even driving negative interest rates, but the underlying issues have not been addressed, and many countries still remain very highly leveraged, while economic growth has been lethargic.
European citizens are unable to effect change on the Brussels bureaucracy as it is an unelected body, but they are able to change their leaders and demand an exit from the union as we saw with Brexit.
This is why supporters of the Union are holding their collective breath, as the forthcoming elections could have dramatic outcomes. Two likely candidates will be Le Pen and Fillon/Macron. Francois Fillon and Emmanuel Macron are both centrist candidates and supportive of the Union and the status quo. In contrast, Marie Le Pen from the National Front is not. Much like Brexiteers, she wants the French people to regain control. Her father was the long-time leader of the National Front party and she has been against adopting the single currency and creation of the European Union since its inception.
The question the financial markets have to evaluate is the likelihood of a Le Pen victory, as it will be seen as a source of volatility for the Euro currency. Just look at the UK, it experienced a 20 per cent drop in the Pound following Brexit.
European equity markets could sell off as capital seeks stability elsewhere, and we could also see flows into traditional safety trades such as US Government Bonds, gold and the US Dollar. Much of the reverse holds true. Should a centrist candidate win, we could see a relief rally in the Euro, with equities running higher, while bonds sell off and gold moves lower.
Some of the ramifications of a Le Pen victory could be overblown, because even if she wins she still needs to call a referendum, and the majority may still vote to remain under Le Pen. The UK has also not experienced the Armageddon many predicted after Brexit.
The French elections have all the intrigue of a good Netflix series, but this is real life and the stakes are big.
Globally, investors and business will be paying close attention over coming weeks. Sheldon Slabbert is Sales Trader at CMC Markets.
European equity markets could sell off as capital seeks stability elsewhere.