The French voter is also different. Her Maslow pyramid for economic policies is mad of 3Rs: Rebalancing (turning savings into investment, generating yields), Reflation (increasing prices and salaries) and Retrenchment (from Europe). The four front-runners in the polls - Marine Le Pen (Front National), Emmanuel Macron (En Marche), François Fillon (Les Républicains), and Benoit Hamon (Parti Socialiste) – are addressing them quite openly, sometimes with disruptive ideas; hence the uncertain political outcome.
In the meantime, investors have sanctioned the uncertainty surrounding the French elections by increasing the cost of financing for France by +30 basis points since the beginning of the year, according to our estimates. If this markup persists, it also means the expectations are those of a minority government.
Beyond the presidential race, the legislative elections do matter and so does the risk of cohabitation between the executive and the legislature. We defined four market scenarios with varying impact on financial markets and economic variables. Two of them are of importance: First, a Le Pen win would trigger a confidence shock, in part because of the Frexit rhetoric. As a result, the spread between the German 10-year Bund and the French 10-year OAT could increase by +100bps with no majority in the Parliament and up to +300 bps with a parliamentary majority for the Front National; second, the risk of a minority government or the absence of a majority in Parliament would cost +30 bps to the spread because of the partial governability of the country and the limited efficacy to unleash growth. This risk is the one priced in today.
As for growth, deficit, and debt, based on available programs, only Macron would reduce the deficit under 3% of GDP and stabilize the debt by 2018. As for GDP growth, Macron, Fillon and Hamon have identical results by 2018 (+1.5%); only Le Pen would result in a massive deceleration to +0.5% by 2018, assuming a mild defiance shock.
In brief, the good news is that France will have a second wind after the election: a mechanical post-uncertainty boost. The bad news is that it could be short-lived if the winning candidate has to fight for a majority in Parliament to pass every bill and every reform.