Both of these inferences are wrong. The risk of a President Le Pen is far lower than the ex ante risk of Brexit or President Trump was last year, but the consequence of her winning would be far worse. This time, the “experts” are not exaggerating how bad it could be for markets.
Why is Marine Le Pen unlikely to win the French Presidency, when she is in the lead in the first round of the contest, according to many recent polls? The answer is fairly obvious. Although she may win a small plurality over her several opponents in the first round, the anti Le Pen vote should coalesce in the second round, so she will lose to any likely alternative candidate in the run off. While about a quarter of the electorate make her their first choice for the Presidency, about 60-65 per cent prefer anyone else but her in the second round. Under the French two-round voting system, the 35-40 per cent ceiling on her likely vote will stop her winning. If that is so obvious, why did the markets have a brief panic last Monday? The proximate cause was the setback to the campaign of the former Prime Minister Francois Fillon, who has lost his status as front runner since facing allegations of embezzlement of public funds.
If he now limps into the run off as a weakened candidate, Ms Le Pen might be slightly more likely to win. Others have seen a different risk. At present, there are two fairly extreme candidates from the left, Benoit Hamon and Jean-Luc Melenchon, polling around 15 per cent and 11 per cent respectively. While they are splitting the left vote, neither is likely to reach the second round. However, if one of them stands aside in favour of the other, it is just about possible that one of them might beat Mr Fillon and centre left Emmanuel Macron, currently the favourite to win, into the second round. Ms Le Pen might then stand a better chance to win the run off against an opponent from outside the political centre. An unlikely series of events, but perhaps conceivable.
The only outcome that would genuinely trouble the global markets is a victory for Le Pen. Matthieu Walterspiler, the French strategist at Fulcrum, reckons there is still only a 10-15 per cent chance of that happening. That is a far lower risk than the likelihood of votes for Brexit or President Trump in 2016, both of which appeared only mildly improbable ahead of the event. Therefore, the shock would be much larger. Now let us enter the very unlikely territory where Ms Le Pen is triumphant. Would this be like Brexit, a much feared event that had little immediate effect on markets (other than sterling) when it happened? I think not.
Marine Le Pen would ascend to the Presidency within a week, perhaps giving the National Front enough momentum to win a majority in the National Assembly elections on 18 June. She would need that majority to call a referendum on French membership of the EU, including the euro, possibly in the autumn. Polls have traditionally suggested that France would vote about 55-45 in favour of staying in the EU but, in these political circumstances, who knows?
The markets would obviously need to price in a non negligible risk that France would exit the euro, possibly taking many or all other members with it. This fear would generate substantial capital outflows from France, anticipating a currency devaluation. While the ECB could, in theory, keep the euro intact by allowing Target 2 imbalances to rocket, it is far from clear that Germany would allow this to happen. In a break up of the euro, these imbalances would amount to large loans from the Bundesbank to the European monetary system, loans that might not be fully repaid by exiting countries. The political pressure inside Germany to take the initiative by re-establishing the Deutsche mark, would intensify. Le Pen has taken a more optimistic view, claiming that France could leave the euro without much disruption. In a different political universe that might be possible. What would that universe look like?
The French franc could be restored in the domestic economy, and could then be devalued in the same way that sterling adjusted downwards last year. The Bank of France could be given an inflation objective, and told to set interest rates independently to achieve it
Or either tbh imo.
