Earlier this month, far-right leader Marine Le Pen officially launched her presidential campaign in France with a pledge that if elected she would hold a referendum on the European Union (EU) and urge France to exit the Eurozone as well as follow the widening trend to cut immigration. With polls showing growing support for the Front National leader, investors are beginning to worry about the potential of another Brexit now dubbed a ‘Frexit’ which would possibly carry implications to the financial system.
With Brexit still fresh in their minds, financial market participants say a more nationalist French Republic may create a more volatile investing climate. Uncertainty about the election, which occurs in two rounds on April 23 and May 7, has driven French bond yields to their highest over Germany since 2012. The gap between French and German government bond yields soared to 78 basis points last week, as investors entered low-risk German government bonds to safeguard against risk. Analysts note that bets against French bonds have surged in the wake of Donald Trump’s election victory on November 8.
“The market is pricing in the tail risk of Le Pen winning the presidential elections,” DZ Bank strategist Daniel Lenz told Reuters last week. The phrase “tail risk” suggests investors believe Le Pen is unlikely to prevail, but are taking measures to safeguard against such a potentially disruptive outcome.
French finance minister and political veteran Michel Sapin also believes Le Pen can’t win, claiming she would get crushed in the runoff election. Although polls show the nationalist leader will reach the second round of the election, the same surveys indicate she will be soundly beaten by her opponent. Currently, independent centrist Emmanuel Macron is the favourite to win.
“Those who, in good faith or by speculation, bet against France ease they think Le Pen can win are not only wrong, but I’ll be frank: they all lose a lot of money,” Sapin said.
However, given the rise of populism throughout the region, it would be premature to count out Le Pen based on election polls. After all, similar polls predicted a sweeping victory for the Remain camp in the United Kingdom’s June 23 referendum on European Union membership. Remain lost the vote with 52% of Britons electing to exit the EU. The result triggered the biggest two-day exodus from global stocks on record and sent the British pound to 31-year lows. A few days later, the global financial markets had booked $3 trillion in paper losses. Some investors fear a similar outcome may be in store if the markets discount Le Pen’s chances.
A victory by Le Pen and a push for a Frexit would undermine what little is left of pan-European integration as it will be the next big attempt to exit the union and could set an example for other smaller countries which have already expressed interest in exiting. It may also empower other nationalist leaders throughout the region to push for similar platforms centred on restricting immigration and ditching Brussels. Like Brexit before it, the so-called ‘Frexit’ may have far-reaching consequences on the financial markets. The euro could be the biggest casualty in the short term considering it is the shared currency of the region. The potential of losing France may also compel the European Central Bank (ECB) to expand its stimulus measures to promote growth and stability in a region which has seen little of both since the financial crisis.
Eurozone gross domestic product (GDP) is forecast to grow just 1.6% this year, according to the International Monetary Fund (IMF). The French Republic is forecast to expand at a slower 1.3% rate. By comparison, advanced nations as a collective are expected to grow 1.9%.
France isn’t the only country holding an election this year. Germany and the Netherlands also head to the polls in 2017. Both countries are witnessing a growing tide of Euro-skepticism.
Italy is also headed for elections next year. The Eurozone’s third-largest economy may be the most likely to exit the currency bloc after Prime Minister Matteo Renzi failed to reform the constitution in a December referendum, which led to his resignation. Italy’s Five-Star Movement has a good chance of winning any upcoming election. Like Le Pen, Five-Star has vowed to bring the question of euro membership to the people in a Brexit-style referendum. The European exit trend is expanding, what will this mean to financial markets? We will keep you posted.
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 Abhinav Ramnarayan (February 7, 2017). “UPDATE 4-Election nerves push French bond yields to highest over Germany since 2012.” Reuters.
 Michael rose (February 7, 2017). “Markets wrong to think Le Pen will win and they will lose money – Sapin.” Reuters.
 Matthew J. Belvedere (June 28, 2016l. “After $3 trillion in post-Brexit paper loss, global markets bounce.” CNBC.
 International Monetary Fund (January 2017). World Economic Outlook Update: A Shifting Global Economic Landscape.