What Could the April 22 French Election Mean to the Euro?

Published April 17th, 2007 - 02:25 GMT
French voters will head to the polls on Sunday, April 22nd for the first round of the national presidential election. Officially, there are three candidates in the running for the top spot: Nicolas Sarkozy, Ségolène Royal and Francois Bayrou. According to recent news polls, the first two have dominated the political landscape and are therefore expected to either advance to the second round on May 6th or otherwise win the position on the first round of voting.

For France, this election could bring about considerable changes in employment policy, taxes and EU relationships.  However, the consequences of this vote will not be isolated to France alone. As a vocal critic of the ECBs policies, Nicolas Sarkozy, the leading contender has been calling for the ECB to weaken Euro to boost growth.  Although he is the more business friendly candidate, for this reason, a win by Sarkozy may not be initially taken as Euro positive.  In the past decade, the EU community has grown increasingly interconnected so societal and economic issues have taken on greater meaning for the overall region. Considering the international importance of this vote, it is only natural for Euro traders to take an interest, especially as the currency hovers near multi-decade highs against the US dollar, Japanese yen and Swiss franc.  

The Top Contenders

                                 

                                       
 

 

Ségolène Royal






Nicolas Sarkozy

               Euro Positive Short Term / Bearish Long Term

·          Respects the ECBs independence only wants to see the ECB to focus more on economic growth, employment and social progress, instead of just inflation

·          Has Expressed No Opinion on Euro Strength

·          Policies Focused on Improving Labor Market and Raising Wages

               Euro Bearish Short Term / Bullish Long Term

·          Blames ECB for Lack of Growth, Wants to See them Weaken Euro

·          Calls to Withdraw ECB Independence

·          Protectionist Leanings

·          Wants to Clamp down on Immigration

Details:

Ms. Royals respect for the ECBs independence suggests that she will not stop the central bank from doing what they think is best for the Eurozone economy.  Compared to Sarkozys harsh criticism of the ECB, her win should be taken as Euro positive in the short term.  However while she has outlined lofty goals to achieve as Frances first female President, she has done little to describe exactly how her socialist policies will be paid for. Even though her proposed reforms are aimed at helping to boost spending, they are also unfriendly to businesses.

Details:

Even though Mr. Sarkozy is considered the business friendly candidate, his protectionist leanings and vocal criticism of the ECB could make an initial win by him Euro negative.  He has accused the ECB of focusing too much on inflation and not enough on growth, to the detriment of France.  Has also suggested that the ECB should work to lower the value of the euro, since the currency appreciated nearly 30% in the past 5 years, in order to increase competitiveness.  However as the market realizes that his words have more bark than bite and that the ECB will not be succumb to pressure by politicians so easily, the focus will return to his generous tax breaks for both the private and corporate sector. 

Background

·          Member of the Socialist Party, 53

·          Currently a regional premier of Poitou-Charentes

·          Outlined 100 goals to accomplish if elected France's first female President.

·          Criticized for having little government experience and for perceived foreign policy gaffes.

Background

·          Leader of the center-right UMP, 52

·          Has acted as both the Interior Minister and Finance Minister under current President Jacques Chirac.

·          Considered the business friendly candidate.

·          Received Chiracs endorsement.

·          Involved in politics since the age of 22.

How Do they Currently Stand? - Opinion Polling Ratings

First Round   (April 22)                     Second Round (May 6)

·          CSA            25%                    CSA            48%

·          Ipsos           24%                   Ipsos         46.5%

·          BVA            24%                     BVA            45%

How Do they Currently Stand? - Opinion Polling Ratings

First Round   (April 22)                       Second Round (May 6)

·          CSA            27%                         CSA           52%

·          Ipsos           29.5%                     Ipsos          53.5%

·          BVA             28%                         BVA            55%

Key EU Goals

·          Wants a referendum on EU treaty that takes the original text and adds a protocol emphasizing Europe's social ambitions.

·          Create a Euro-zone government that promotes economic growth and common tax levels.

·          Wants to pursue a new EU-led Middle East peace initiative.

Key EU Goals

·          Seeks to cull illegal immigration and in turn integrate skilled foreign workers into French society.

·          Has shown a penchant for protectionism when he used state funds to bail out French-firm Alstrom.

·          Mr. Sarkozy has been quoted as saying that EU members that have lower tax rates than the old European nations should not be eligible for EU subsidies.

Domestic Policies

Pro Business

·          Wants to Increase Tax on Corporate Dividends and Capital Gains Basing it on Reinvested versus Paid out Profits

·          No Increase in General Taxes for the Population

Anti Business

·          Raise Minimum Wage

·          Companies to Provide Severance of 90% of Salary for 1 year after Job Cuts

·          Extend 35 Hour Work Week to All Sectors

Domestic Policies

Pro Business

·          Aims to Reduce Personal Tax Rate from 60 to 50 Percent

·          No Unemployment Benefits for People Rejecting Job Offers

·          Tax Breaks for Corporations

·          Right to Work More than 35 Hours a Week Any Hours Worked Past 35 Hour Mark will be Free of Income Tax and Payroll Changes

Anti Business

·          Workers Retire When they Want

·          Wants to Integrate More Skilled Workers into French Society

·          In 2004, He Pushed Supermarket Chains to Lower Prices to Boost Spending


 

Conclusion


The campaigns of both Ségolène Royal and Nicolas Sarkozy differ as night and day.  A win by Sarkozy, the more experienced contender could lead to short term Euro pain, but long term Euro gain.  Previously entrusted with the goal of jumpstarting the French economy by President Chirac, Sarkozy has proven that he could deliver.   A win by Segolene Royal on the other hand could lead to short term Euro gain but long term Euro pain.  As proponent of raising the minimum wage and forcing companies to pay 90% of salary as severance, she could boost the well fare of French citizens at the expense of making businesses more efficient.  Furthermore, since Ms. Royal's socialist policies would not be made with the intention of helping corporations, Mr. Sarkozy's business-friendly propositions are anticipated to send French equity markets higher, which may eventually help to boost the Euro as well.  This will only come of course when traders have the confidence that Mr. Sarkozy will not endanger the independence of the ECB or if the ECB simply refuses to let them.  Initially a vote for Sarkozy should send Euro lower, but given the more financially-responsible nature of his policy reforms, the sell-off will likely be brief.

There is one more contender of note in the running: Francois Bayrou. While opinion polls have his chances pinned at less than 20 percent, the center-right UDF leader has increasingly gained support as voters are drawn to his fresher ideas. Hoping to cut the public deficit, simplify the tax system, keep the 35-hour work week and pay overtime, it's easy to see how Mr. Bayrou has become more popular. Moreover, French voters have proved they are quick to shift gears: In 2002 Jean-Marie Le Pen, who has been convicted of racist and anti-Semitic statements, reached second place in the first round of voting but was later trounced by incumbent Jacques Chirac. As a result, traders around the globe will have their eyes on the polls, as the ultimate selection of Mr. Bayrou could lend Euro the greatest boost of all.

You may also like