Comment: What are the chances for Marine Le Pen's Frexit plan for France?
By Ipek Ozkardeskaya, senior market analyst at London Capital Group.
Less than two month away from the first round of the French presidential election and the race remains intense as far-right, anti-European Union candidate Marine Le Pen leads with centrist Emmanuel Macron making gains and centre-right candidate François Fillon continuing to fight back after a scandal.
An Opinionway poll on Monday found for the 23 April round-one vote had Le Pen in the lead with 26%, Macron up one point to 24% and Fillon still on 21%.
For the second round the Macron-Le Pen share moved to 62%-versus-38% from 61%/39% while the Fillon/Le Pen option remained unchanged at 58%/42%.
The recent scandal, where it was claimed Fillon’s wife had received some half a million euros over the last eight years as parliamentary attaché without ever being seen in Parliament, had shaken the hitherto frontrunner's position a couple of weeks ago.
Nevertheless, Fillon decided to carry on with his election campaign and has managed to partially recover his esteem but seen independent candidate Macron put on speed last week after receiving the support of François Bayrou, a centrist, well-respected politician who has run for presidency over the last three elections, François de Rugy, a former lawmaker at the Green Party and Christophe Caresche, a member of the Socialist Party.
As it stands today, the French political situation is puzzling and the outcome of the first round is still very hard to predict.
There are mounting odds that Marine Le Pen could indeed come out victorious at the first round.
For the second round however, the polls are positive that either François Fillon or Emmanuel Macron would beat Le Pen.
We are reminded that the polls have been somewhat unsuccessful last year in predicting the results of the Britain’s critical Brexit referendum and Donald Trump’s victory.
But still, they are the only indications regarding the potential outcome of elections; hence have the potential to shake up probabilities and market pricings.
Le Pen victory is the major risk
An eventual Le Pen victory is a major risk for the integrity of the European Union, given that France under Le Pen's presidency would be given the choice to leave the EU, a situation inevitably becoming referred to as 'Frexit'.
It is straightforward that the probability of Frexit following a potential Le Pen victory would be considerable high. In fact, over the past two years, two countries voted to leave the European Union: Greece and the UK. Both said ‘yes’, even though Greece was not allowed to proceed with the implementation of its decision.
Yet the rise in the anti-European feeling is a reality today. In continuation of this trend, an eventual Frexit could be the last nail in the coffin. If France, one of the union’s strongest building blocks, decided to walk out on its turn, the European Union would face a potential collapse.
Therefore, the uncertainty vis-à-vis the French elections are fairly justified and the French worries are reflected in the euro’s pricing and the Eurozone’s sovereign bond markets.
The risk is even more tangible, as the major financial empires such as UBS, BlackRock and Barclays, met Le Pen’s aides in order to get a better insight into what may really happen if Le Pen won the election in France.
It is not unusual for major financial influencers to meet with the leading political parties to understand and manage opportunities and risks behind the political agendas. Still, Le Pen’s Front National party has ever been considered as ‘leading’ until last week.
After the meeting, strategists and economists described the FN views as highly ideological.
In fact, Le Pen defends the idea of monetary sovereignty and would not hesitate to abandon the euro if she was given the opportunity to do so.
As such, France would be the third country to prefer leaving the European Union and unlike Greece, France would have enough power to walk out the Eurozone as well, and cause a morbid shake-up at the heart of the monetary union.
Euro volatility in the air
The euro appetite is largely impacted by the French election talks. The French related volatility in the euro markets is here to stay for the upcoming weeks.
Le Pen is of course the major highlight, as her victory would be a game changer for France, and potentially for the EU and the European Central Bank.
Given the rising French risks, the euro buyers will certainly lack appetite and conviction to stay seated on euros, or French sovereign bonds into the election.
A wider divergence between the Franco-German yield curves is expected to further weigh on the single currency for an eventual retracement toward the 1.0400/1.0350 area.
While the gap between French and German 10-year bond yields fell below 69 basis points on Monday for the first times in 10 days, the most recent signs that the political spectrum could shape in disfavour of Le Pen keeps the selling pressure on the euro contained. Parity is not on the cards for the moment.