By Stansberry Churchouse Research. Originally published at ValueWalk.
The curtains open on the next act of Europe’s political drama this Sunday. France’s presidential elections will be the next piece of the puzzle – or nail in the coffin – of the future of the European Union. And Asia has a lot at stake in what happens next.
The last time I talked about Europe, in mid-March, the Netherlands decided to let the EU live another day when it gave the pro-EU People’s Party for Freedom and Democracy the majority vote.
Much like Brexit and the Dutch election, the focus of France’s presidential election is on the battle between globalisation and national populism. France is a founding member of the EU and has long been a cheerleader for European integration. But with a wave of anti-globalist sentiment sweeping across the continent, it’s not a foregone conclusion that France will vote for a candidate who supports the EU project.
I know that a lot of people – including many readers of the Asia Wealth Investment Daily – are not fans of the EU or, more broadly, of the heavy hand of government. But as we’ve previously highlighted, a less integrated world (a medium-term consequence of the dissolution of the EU) would be bad for Asian markets. China is the EU’s second biggest trading partner after the U.S.; and Asia is the EU’s biggest regional trade partner. Also, in the short term, a shift towards a “Frexit” could trigger a flight of investors from emerging markets. (Ironically, it’s developed markets – like Europe – that are posing the greatest risks to the global economy).
The French contenders
Under French electoral rules, the candidate who wins more than half of the vote becomes president. But polls strongly suggest that there will be no outright winner. In this case, a second round of voting will take place on May 7 between the two first-round candidates who received the most votes. Whoever gets over 50 percent of the vote during the second round will take office.
Of the 11 candidates in the presidential race, four have a fighting chance of making the second round. The current favourite is Emmanuel Macron, an independent centrist candidate. Macron is pro-EU, and calls himself a “convinced European”.
Marine Le Pen poses the gravest threat to the future of the EU. The leader of the right-wing Front National party had led the polls during much of the campaign, but is now running slightly behind Macron. She wants France to follow the UK’s example by holding a referendum on France’s EU membership. She also wants to leave the euro, and take France back to its previous currency, the franc.
Francois Fillon is the former French prime minister and centre-right candidate. Fillon has been highly critical of the EU in the past. But rather than leave the EU, Fillon says he would prefer to reform it from within, citing a need for stronger “collective security, defence, innovation and the re-tightening of the eurozone”. He is currently third in the polls, and still in the race despite being investigated over alleged misuse of public funds.
Far-left candidate Jean-Luc Mélenchon has seen his poll numbers surge lately. And he is now also in contention to make the second round. Mélenchon has criticised the EU for what he describes as “economic liberalism”. If he fails to achieve the reforms he wants, he will also hold a nationwide referendum to determine France’s future EU membership.
How likely is a Frexit?
The most likely scenario at this point is that Macron and Le Pen go through to the second round. Current polls suggest that if that happens, Macron will win, as he is likely to scoop up more voters who backed Fillon and Mélenchon in the first round. And because Macron is a globalist who is keen on maintaining France’s EU membership, a Frexit would be a lot less likely.
The most concerning result for Asia – and for advocates of the EU – would be Le Pen vs Mélenchon in the second round. Of the four initial contenders, these two are the most anti-EU. Le Pen has been clear about wanting to leave the political union. And a Frexit may also surface under Mélenchon, although it would be less likely. (Given that just five percentage points separate the four candidates, it’s anyone’s race to win in the first round.)
A Frexit would likely be a death blow to the EU. Its departure would mean that two of the bloc’s biggest economies decided to leave within the time span of less than a year. Germany would be the sole remaining anchor, with eternally wobbly Italy a weak partner to support the EU experiment. And a Le Pen victory could spark further nationalist sentiment in Europe, which could ultimately trigger a domino effect across the continent.
Much like the UK now, in the event of a Frexit, under World Trade Organisation rules France would have to negotiate trading agreements with countries like China and Japan which have no special trading accords with the EU. Putting such arrangements in place would take time, and trading volumes for Asian countries would be hurt in the meantime.
Frexit won’t go away – regardless
Even if France remains in the EU, a lot of people in France are unhappy with the EU – and, more broadly, with their lot resulting from globalisation. A study by German think tank the Bertelsmann Foundation found that 54 percent of French citizens consider globalisation a threat. That’s more than every other EU country except for Austria. And a separate poll by YouGov showed that French respondents were least likely to consider globalisation a force for good.
Whoever wins the presidential race, these figures are bound to have an impact on France’s approach to the EU and globalisation in the future. Indeed, even the two candidates most supportive of the EU have tempered their more globalist impulses. Fillon has talked of “a Europe able to defend its industries and jobs against China and the U.S.” And Macron has been particularly active against China’s steel dumping practices, stating that “the Chinese are selling their products at a loss and we cannot accept this”.
If there’s one thing we learned from Brexit and the U.S. presidential election, it’s that polls can be wide of the mark. So while Macron may be the favourite right now, his victory is far from certain. And as such, Asia should be closely watching the events in France over the next few weeks.
The post This is why Asia should be watching France’s presidential elections appeared first on ValueWalk.
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