why you should care about the french election

The second most-documented Bill Clinton quote is the one he used as his campaign slogan to defeat the incumbent President George Bush in the 1992 Presidential election: “It’s the economy, stupid”

why you should care about the french election


No points for guessing the first most-documented…

In comparison, the French voters have little need for a reminder on what should be uppermost in their minds come polling day in two weeks’ time.

As the fifth-largest economy in the world France is floundering, with one in 10 workers unemployed and a fiscal background causing more and more concern among markets.

Looking at the performance of markets so far today, however, it is hard to tell where traders’ preferences lie in terms of the election outcome.

Have markets across Europe plunged because traders think Francois Hollande is a shoe-in and so the austerity drive and eurozone negotiations will likely come to a halt? Or are they down because pundits assume Marine Le Pen’s far right share of the vote (18.6%) will switch to Nicolas Sarkozy in the second round and so more of the same will ensue?

Either way, the fragile confidence built around the eurozone’s steps towards a more consolidated and stable state since the start of the year has been dealt another blow. (Last week it had to contend with widening Spanish and Italian bond yields.)

It’s all too easy to think the elections in a sovereign state other than your own have little importance or impact on your life.

But when it comes to the performance of investments it is not hard to make a case for the effect politics has had on market volatility in recent years.

So it would be naive to discount what is going on in France at the moment as far away and irrelevant.

As David Miller, partner at Cheviot Asset Management, predicts: "We’ll see muddled markets until the final result is declared".

What’s at risk?

The Socialist Party nominee Francios Hollande, who received 28.2% of the vote, is campaigning on a policy of growth rather than austerity as a way to get the eurozone out of its lacklustre economic state.

He wants to tax corporations and high earners more and decrease the French retirement age from 62 to 60 for some state workers. This could have a knock-on effect on French bond yields as (largely domestic) investors look for higher yields to take on what they deem to be greater risks.

National policies aside, the biggest risk is that Hollande could de-rail the eurozone negotiations by demanding another look at the budget spearheaded by Sarkozy and German Chancellor Angela Merkel.

The fact coalition talks on the euro budget in the Netherlands also collapsed this weekend is only adding to the nervousness, while weak manufacturing data from Europe’s powerhouse, Germany, was the final straw.

Need he forget this will also serve as a reminder to US President Barack Obama that the economy is paramount to his re-election as well.

With the pick-up seen in US data during the first quarter he is unlikely to face much of a challenge from Republican candidate Mitt Romney, as it stands.

But a lot can change between now and November and further uncertainty in the eurozone would undoubtedly have a knock-on effect on the American economy.

So I wonder who Obama is rooting for: co-incumbent Sarkozy or co-lefty Hollande?



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