The French Presidential Election – After the first round

Emmanuel Macron and Marine Le Pen will be the two runners up of the French Presidential Election. This result is consistent with polls as it is shown below.
Presidential election-first round
Some remarks
1 – The conservative party, Les Républicains, and le Parti Socialiste dropped dramatically in  this election. Their number of voters is just 26% this year while it was 63% in 1995, 36% in 2002, 57% in 2007 and 56% in 2012. There is, as in many European countries, a deep political recomposition which is done out of the traditional parties.
2 – The abstention rate is 21.5% while it was 20.52% in 2012.
3 – Following polls, Emmanuel Macron is expected to be the next French President (May the 7th) Continue reading

New currency in France – Uncertainties and Instability

Here is my weekly column for Forbes in France. My column is available here in French

Europe is a key factor in the presidential campaign, even though this theme gained minimal coverage during the two televised debates. Europe is a key differentiating factor for the four candidates who are leading in the polls, and so it must be the main decisive factor in the elector’s choice between the candidates. 

The aim for two of them, Emmanuel Macron and François Fillon, is to intensify existing institutions although the exact ways to achieve this are not the same for them both. But neither wants to leave the Eurozone.
However, for the two other candidates in the top 4, Marine Le Pen and Jean-Luc Mélenchon, Europe marks a clear area of watershed as regards’ France’s position on the European institutions. They both intend to start negotiations with Europe to change the relationship and give France back its decision-making power. In the event of the likely breakdown of these talks (the remaining European Member States would not necessarily want to change the existing framework), both intend to take France out of Europe, backed by a referendum.

In both cases, currency would be at the very crux of the new framework that France would need to set up.
In Le Pen’s opinion, a national French currency is the key to ensuring independence for the country. Meanwhile, under Mélenchon, the euro would become a common currency and no longer a single currency, which would imply the creation of a new currency for France. As the other members of the Eurozone would probably not be favorable to this new framework for the euro, this would be tantamount to France leaving the Eurozone and creating a French currency.

Looking beyond these factors, neither program explicitly outlines the currency framework the candidates would set up. What we do know is that in both scenarios, the central bank would lose its independence and would be used as an instrument to finance state spending. In other words, the state would have the wherewithal to create its own currency to finance its own spending: economic history tells us that this type of situation triggers inflation and fuels macroeconomic, financial and monetary instability. French savers would be directly hit. Continue reading

The new French president and growth at 1%

This is my weekly column for Forbes.fr. The French version is available here

The new French president will have to deal with an economy that is growing at a spontaneous rate of close to 1%, which is the average figure observed since the start of 2013. The new leader’s challenge will be to break with this trend on a sustainable basis, in order to create enough jobs to cut back unemployment and generate additional revenues to finance the social welfare system more effectively and more comprehensively.

Each candidate is of course fairly optimistic on the projected growth profile, expecting the average figure to be slightly under 2% in 2021/2022: in the space of five years, the new president therefore thinks that he/she could almost double the French economy’s growth rate. This is highly ambitious.
Judging by the growth profiles expected by the various candidates, the financial crisis, which has been going on for almost 10 years, will only have had a temporary impact as the economy could converge towards its pre-crisis trend by the end of the president’s forthcoming five-year term. This analysis is mistaken: the French economy has been permanently marked by this crisis. Like most western economies, it has suffered severe and persistent shocks that hampered its growth momentum. The US, the UK and other countries are witnessing a similar situation. Sluggish growth is not an exclusively French phenomenon and other countries are also taking a long time to find a way to return to pre-crisis growth levels.

France-2016-Q4-GDPLevel
In view of French economic figures, candidates’ projections display considerable determination on their part, as the economy is not spontaneously converging towards 2%. Continue reading

President Trump (POTUS) at the White House

The results of the US elections at 7.37am CET this morning were favorable to Donald Trump. The NY Times rates the probably of a Trump victory at 95%, while for CNN the likelihood of a Clinton victory is rapidly waning.
Trump’s victory in swing states such as Florida, Ohio and North Carolina seems to indicate that the Republican candidate will be the next resident of the White House.

The markets have spontaneously adjusted very dramatically, with the Mexican peso plummeting and gold rallying. The equity markets are down across the board, and the 10 year US rate is falling sharply.

 Trump’s likely victory drastically alters the world economic scenario.

The main risk is that the country will turn in on itself, undoing the effects of 40 years of globalization. At the start of the 1980s, the simultaneous arrival of Reagan and Thatcher to power heralded the start of a long phase of globalization, driven by the logic that it cuts back local restrictions and allows for more lasting growth. Victory for the Brexit camp in the UK followed by the possible Trump victory reverse this trend.

The change on this issue is drastic as all of a sudden, globalization is no longer the standard framework (read here). The 1980s went fairly well in the end due to liberalization measures implemented, particularly on the capital markets, which reduced restrictions that weighed on the economy.

This time, there will be trade restrictions.

The Trump campaign was broadly based on the idea that the rest of the world is responsible for the deterioration in the situation in the US. We should therefore expect a strategy that is primary American-centric. This will involve reconsideration of treaties to which the US is a signatory and in this respect the US president has considerable leeway as he can act without Congressional approval. This means that things can move very quickly. Although in view of the elections currently taking place in Congress, the Republican president will be able to rely on a majority there anyway, which will increase the impact of any steps he takes.

We note the following points:

1 – the US may opt out of existing treaties, even going so far as taking the country out of the World Trade Organization (WTO). This would enable the US to set its own rules with no counterbalancing force.

This would lead to two situations:
Firstly, the US would have freedom of action in trade without being bound by past pledges, particularly on commitments to Mexico via NAFTA.
Secondly, the exit from or the threat of the exit from the WTO will enable the US to freely set customs duties. This will particularly affect China.

2 – Current negotiations on trade treaties with Asia excluding China (TPP) and with Europe (TIPP) have little chance of being finalized.

3 – The US wants to scale back its political commitments with the rest of the world. The Republican candidate thinks that defense of the western world’s freedom is a public benefit that carries a high price tag for the US. Reduced involvement in world affairs could be a cause for concern for Europe as the political balance could shift, particularly in light of Putin’s offensives.

In all countries across the world where the US intervenes, this could trigger instability and uncertainty.

The consequence is the risk of a severe and persistent shock on world trade. This will affect the entre world, not just countries that are specifically targeted by Republicans. We can expect retaliatory measures from countries that are targeted explicitly, and there is a risk of breakdown for the entire global economy. The risk of a world recession is substantial.

From a US domestic standpoint, pledged tax cuts will be implemented, leading to a significant increase in imports. The aim of this move is to boost Americans’ income and drive spending. However, the US is dependent on supply from the rest of the world for a large proportion of its manufacturing sector.

This will set the scene for some interesting situations as the divergence between the two points above will have to be resolved: imports are set to increase to meet domestic demand, while world trade will be hit by the aforementioned shock and imports will suffer higher customs duties. This contradiction increases the risk of a recession by heightening the imbalance between domestic policy and the shock on world trade momentum.

The world was not in great shape and is set to get even riskier, and this is a bad sign for all risky assets, which fell this morning. Meanwhile, long-term rates are on a downtrend.

Other points to note
The contradiction between domestic momentum and the restrictions resulting from the shock on world trade and the increase in customs duties will trigger more inflation in the US, as domestic production will not immediately be able to meet rising demand, thereby creating upward pricing pressure. The increase in customs duties will heighten this trend.

Meanwhile, the Fed is in a risky situation. The likelihood of a rate hike in December is decreasing sharply, and looking beyond this point, the institution’s very independence is set to be questioned
There is also doubt over the signature of the climate change agreement (COP 21).

These various factors are worrying and negative signs for both the US economy and the world economy as a whole. The context is shifting dramatically, but we do not know to expect from the new world order. We cannot believe that this inward-looking strategy is the right approach as it reflects a non-cooperative and uncoordinated attitude.

Not to mention issues on abortion, arms, immigrants, the wall with Mexico…..