France is one of the largest and most significant economies in the European Union. As one of the founding members of the EU, France is also a central player in European politics, strongly influencing the region's economic and social policy decisions. Given its significant weight, a change in the country's presidency in the 2017 election will no doubt have a strong impact on the euro, influencing whether it continues its long-running weakening trend or whether it stages a reversal toward greater strength in the coming years.
France Within The EU
The French economy represents approximately 15% of the European GDP. Foreign direct investment in France in 2015 was US$44 million (down from US$55 million in 2012), compared to US$532 million in Europe as a whole.
Politically, France remains an important decision maker in Europe. The nation elects 74 of 751 seats in the European parliament, or close to 10%. Some parliamentary decisions require a simple majority and others require an absolute majority. France has 29 of the 352 votes on the EU Council of Ministers, and 260 votes are needed on the council for a majority. The council of ministers, whose members are appointed by the respective EU governments, shares legislative responsibility with members of parliament, who are elected directly by EU citizens.
European Policy, France And The Euro
While Europe is a large market with nearly 500 million consumers, it has been dogged by chronic fiscal woes brought about by its political structure that have weighed against the region's single currency. A financial crisis in Greece and the threat of crises in other fiscally weak eurozone countries, combined with slow demand in the economy, have forced the European Central Bank to lower interest rates and institute a quantitative easing program that have discouraged the flow of capital into the region.
Under the influence of austerity measures, the euro area has managed to reduce its budget deficit in the last five years to 2.1% of GDP, from 3.7% of GDP previously. Despite this and a long period of loose monetary policy at the European Central Bank, growth has remained tepid (less than 2%). With sluggish trade and incoming investment, the euro has made a dramatic decline, weakening from more than 1.30 to the dollar to near parity.
The Socialist administration in France has been perceived as ineffective in managing the economy. Growth in France has averaged less than 1% for much of the time since François Hollande was elected president in 2012. At the same time, French unemployment has run at over 10%. This compares to unemployment rates of around 4% in other major European economies such as the U.K. and Germany.
Key issues in France's next election will be varied, including how to tackle the country's high unemployment rate as well as the nation's relationship with (and role within) the EU. Other matters include the strength of social support for the country's welfare system, immigration, defense and industrial policy.
Presidential Election 2017: The Candidates
Incumbent French President François Hollande, of the Socialist party, has decided not to run for a second term. A number of candidates have stepped forward to run for the French presidency in April 2017. While elections are often unpredictable, French opinion polls so far have indicated some of the possible frontrunners.
One poll leader has been François Fillon, of the Republican Party. He has taken the place of former French President Nicolas Sarkozy, whom he defeated in the party's primaries.
Fillon is perceived as a centrist, or center-right candidate. Having served as Economy Minister in Sarkozy's administration, Fillon is familiar with the workings of the country's finances. During his tenure in government, he gained a reputation for austerity, cutting budgets and government spending.
As part of his campaign, Fillon has pledged to:
- Reform French and European labor codes with the increase to the 35-hour work week
- Cut more than €100 billion from the budget while slashing the federal payroll by 500,000 government employees
- Improve the employment rate and cap unemployment benefits
- Institute greater immigration controls
- Raise the retirement age to 65
- Cut taxes on companies and the wealthy, along with taxes on the middle class over a period of five years
- Raise security and defense spending as a response to growing security threats
- Diminish the size of the state
Nevertheless, the recent scandals that run on an alleged employment of his wife have strongly impacted his supporters, causing him to fall in the most recent polls.
The election of an austerity hawk could have implications not just on French national budget policy, but broader European fiscal and monetary policy. This is due to the influence on future appointments to the Council of Ministers and the European Central Bank.
Marine Le Pen
Another candidate faring well in the polls is Marine Le Pen, of the National Front Party. She is the daughter of National Front founder Jean-Marie Le Pen. And like her father, she is considered to be a hardline nationalist and populist candidate.
Le Pen's economic proposals have strong nationalist, paternalistic and protectionist overtones. She has called for the following:
- State intervention in the economy with greater control of policies aimed at stimulating national industry
- Measures to reduce bureaucracy and cut down on welfare dependency
- France to retake control of its borders
- Hold a referendum to reintroduce the French franc for use alongside the euro
- Return to the "currency snake" system used by EEC member countries in the 1970s to control exchange rates between national currencies
With this platform, Le Pen has been successful in generating a strong appeal among French working class voters, who have suffered under the effects of high taxes and high unemployment.
Emmanuel Macron, former economy minister in Hollande's government, is running as a left-leaning reformer. Macron took that role after working as an investment banker at Rothschild & Cie Banque, and he plans to run under a party he founded, En Marche.
Macron has walked a fine line between market-friendly policies and strong social supports, with pledges such as:
- Taking aim at the 35-hour work week
- Calling for flexible retirement ages and allowances for some workers
- Suggesting that stronger nations within the eurozone make budget transfers to other countries to promote "financial equalisation"
- Favouring appointing a Euro Commissioner in Brussels to coordinate the economic and social policies among the 19 euro countries
After winning the Socialist Party primaries against former Prime Minister Manuel Valls, Benoît Hamon stands as an anti-liberal and wants to create a universal income, giving more power to employees and citizens. The Socialist candidate is not against an increase in sovereign debt to finance his various societal projects.
Jean-Luc Mélenchon wants to take commercial retaliation against tax havens. He would like to apply social and environmental standards for products imported to France. He wants to introduce a sixth week of paid leave for all employees and he wants to make sure that the 35 hours are respected.
A Large Field On The Left?
While socialism has traditionally been a strong political current in France, it appears that the left-wing vote may also be diluted in 2017 by even more contestants. Other left-leaning candidates, including Jean-Luc Mélenchon and Cécile Duflot, have signaled they intend to skip the Socialist Party's primaries and stand directly in the presidential election. As many as five or more prominent candidates could end up competing for the presidential election schedule in April.
The Brexit Factor And Euroscepticism
The U.K.'s vote to opt out of the European Union stimulated a tide of anti-European sentiment in addition to the hope among many nationalist voters in Europe that their nations could follow suit.
France has been a reliable supporter of the EU and was in fact one of its founding members when the organisation began coming together in the 1950s. Because of this, it seems difficult to believe that French candidates may go as far as pushing for a Brexit-style move.
The Brexit event itself, however, may have the effect of weakening the EU economically so that it leaves its remaining members fighting over what's left of a smaller pie. If the future government in France takes an indifferent stance to reinforcing the euro area and the promotion of the region's economic strength, this factor alone may encourage separatist movements elsewhere.
The 2017 elections in France will take place within a context of growing Euroscepticism as several countries take measure of how strongly they wish to remain in the union. Alongside the Brexit vote and French President François Hollande's decision to step down, voters in Italy rejected Prime Minister Matteo Renzi. This leaves only German Chancellor Angela Merkel as the remaining strong pro-EU voice among the region's leading economies.
The changing sentiment has left the door open for calls of sweeping economic and political reforms in the union. But as some, such as European Commission President Jean-Claude Juncker have pointed out, reform in the unwieldy 27-nation bloc is a difficult and slow process.
Trump, Putin And France
The Brexit vote, the election of Donald Trump in the U.S., and the growing influence of Russian President Vladimir Putin have posed a quandary for France and the rest of Europe.
Economically, the scenario may force France and other prominent EU nations to revisit their relations with Putin. To date, they have been strained by disagreements over the Russian invasion of Crimea and Russian collaboration with the regime of Syrian President Bashar al-Assad in that country's civil war.
One of the top foreign policy issues for the future French president will be whether to seek improved relations with Russia. This could entail easing sanctions against Russia that have cost Europe and Russia more than US$100 billion in lost trade and business. While some in France may find easing sanctions an unsavory option, it could bring benefits. Those include increased business with Russia and a reduced need for European defense spending posed by escalating tensions with Europe's neighbor to the east.
The centrist and right-wing candidates in France's elections have signaled a warmer view toward improved relations with Russia than some of the candidates on the left of the political spectrum.
Greece, Bailouts And Debt
French President Hollande may have been unpopular with voters, but he was considered instrumental in helping to seek a resolution for the Greek debt crisis. The election of a French president who is not committed to a growing Europe could encourage the weakening of economic commitments to the European economy. This would favour the adoption of alternative arrangements and a further disbanding by weaker economies within the EU. Depending on who is elected in 2017, France may find itself continuing to battle economically conservative counterparts in countries like Germany in order to define the core of European economic policy.
Security: An Underlying Concern
Foreign investment in France fell significantly in the 2012-2015 period influenced in part by a sluggish global economy, and has remained tepid under the effects of concerns about terrorism. Following a terrorist attack in Paris in November 2015 that killed 130 people, France imposed a state of emergency which is scheduled to remain in effect until July 2017. In addition to the economy, concerns over security have been a central factor in dissatisfaction with Hollande's government.
Election Up For Grabs?
The victory of François Fillon over former French President Nicolas Sarkozy in electoral primaries seemed to suggest a strong surge by the electorate toward a centrist candidate.
However, analysts note that some political parties in France have been using primary party elections, similar to those used in the U.S., for the first time. Different from U.S. elections, though, is how voters in French primaries are not required to be registered with their party. Thus, there have been suspicions that Fillon was aided in the primaries by a strong anti-Sarkozy contingent of voters both from left-wing/Socialist-leaning voters and from right-wing Nationalist voters who would more naturally support Marine Le Pen.
It is unclear, then, whether Fillon can carry these voters with him into the general election in April. He may still benefit from a centrist image when flanked by a crowded and diverse field from the political left, and Le Pen, who has traditionally appealed to a more isolated percentage of nationalist voters on the right.
The potential impact on the euro following a change of power in France varies widely.
The effects could include a potential strengthening of the euro against its major peers. However, that depends on if the nation can influence Europe to shore up its fiscal and growth policies; or even a possible rearrangement to allow for the reintroduction of a French national currency should voters opt for a more radical and unlikely nationalist policy.
Clearly, however, if the winning presidential candidate opts for the continuation of low growth and high unemployment policies as seen over the past decade, it will place an additional burden on the EU as a whole and could reinforce a recent weakening trend for the euro.
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Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…