Even more than Britain's Brexit referendum of June 2016, France's April 2017 vote for a new president could be a decisive event for the future of European integration, and by correlation, European relations with the U.S.
Europe, and France in particular, have been central allies and economic partners for the U.S. over the years. But Britain's choice to exit from the EU has reinforced a trend of Euroscepticism that was touched off by the eurozone debt crisis over the last decade.
In 2017, the direction of the next administration in France may be key to determining whether the nation will move toward more autonomous and direct economic relations with the U.S.; or turn inward to reinforce the strength of a European Union whose viability has been called into question.
France-U.S. Political Relations
France has historically been one of the U.S. closest political allies. France was a key ally for the States from early in its history, providing assistance to the then-young nation during its war of independence from Great Britain. The two countries established diplomatic relations in 1778, shortly after the U.S. declared independence. Since that time, France only severed diplomatic relations with the U.S. once, during the Nazi Germany-backed Vichy Government in 1942 amidst World War II. Relations were restored in 1944.
Despite some periodic differences, both countries have strived to maintain close cooperation. In the period since WWII, they have served among the five permanent members of the UN Security Council. They're also top members and contributors to the North Atlantic Treaty Organisation (NATO), and have cooperated closely on several international efforts. Those include combating terrorism, curbing proliferation of weapons of mass destruction, minimising international public health threats and addressing conflicts in Africa, the Middle East, Eastern Europe and Asia.
2017 Presidential Election Candidates
From its start, the French presidential election campaign for 2017 shaped up to be a neck-and-neck race among a crowded and disparate field of candidates. And its result could be determined as much by shifts in the regional and global scenarios as by domestic French politics. Amid low approval ratings, incumbent Socialist President François Hollande has declined to run for re-election. Nonetheless, a full field of candidates has joined the race to vie for the leadership of the country.
The top candidates ahead of the vote include:
- François Fillon of the Les Republicains (LR) Party
- Marine Le Pen of the National Front Party
- Emmanuel Macron of the centrist En Marche Party
- Benoit Hamon of the Socialist Party
- Jean-Luc Melenchon of the Left Party
Left-leaning socialist candidates have traditionally made a strong showing in France, but they have so far been outflanked in the 2017 race's polls by more centrist and conservative candidates amid rising sentiments of protectionism and nationalism in Europe and around the globe. Le Pen has represented the strongest pro-isolation platform among the field, proposing to review France's position in the EU if elected.
Fillon, a fellow party member of former French President Nicolas Sarkozy, has represented a free-market, but slightly more moderate stance. He has called for a "sovereign France in a Europe respectful of nations" that plays a more effective role in promoting the interests of French and European business.
The race was thrown into turmoil in the final months of the campaign when Fillon, who appeared set to establish a firm lead, was caught up in a corruption scandal. Meanwhile, both he and Le Pen received a strong challenger in the form of Macron, a 39-year old former investment banker. Macron has promised to implement a mix of pro-business labor reforms and improved worker benefits. He has also rejected calls for France to abandon the EU, and has called for coordinated European trade policy and reinforcement of EU border controls.
The French Economy
France has the 11th-largest economy in the world, and is highly diversified in all sectors. Many of its large national companies have mixed private and public capital. Some of the country's most well-known companies are Air France, France Telecom, Renault and Thales.
The top industries in the country include:
- food processing
- and tourism.
France's government maintains a strong presence in some sectors, particularly the power, public transport and defense industries. Also, the country is the most visited tourist destination in the world—receiving more than 84 million foreign tourists per year—and takes in the world's third-largest amount of revenues from tourism.
France's leaders have traditionally shown commitment to a style of capitalism in which they seek to maintain social equality by means of laws, tax policies and social spending that mitigate economic disparities.
The country has posted an annual growth rate of around 1%, slightly lower than Europe's overall growth rate of about 1.5%. Unemployment remains high, at around 10%, and youth unemployment has hovered above 25%. France's public finances, meanwhile, have been strained by lower-than-expected growth and high spending. The country's budget deficit has come in around 4% of GDP, while public sector debt has risen to near 100% of GDP from around 70% over the last decade.
French-U.S. Economic Relations
France and the U.S. have historically intense economic relations, and any change in relations between the two nations could have some repercussions for the American economy. The U.S. is the top destination for French investment and also the largest foreign investor in France. The two nations have a bilateral convention on investment and a bilateral tax treaty addressing matters such as double taxation and tax evasion. French FDI in the U.S. totals around US$229 billion, making France the eighth-largest investor in the U.S.
There are more than 2,500 subsidiaries of French companies in the United States, which employ more than 500,000 people. Some of top French companies operating in the States include Airbus, Alstom Veolia, Safran, Suez Environnement and Keolis. Meanwhile, the U.S. is the fourth-largest foreign investor in France, representing about 10% of total FDI in France in 2016 (US$76 billion). At least 4,200 American companies operate in France, and the U.S. is the largest foreign employer in France, directly employing more than 450,000 people.
In 2016, France posted a US$15 billion trade surplus with the U.S., down from US$17 billion in 2015. French exports to the United States totaled US$43 billion in 2016, down from US$47 billion in 2015.
The top French exports to the U.S. include:
- transport equipment,
- mechanical equipment,
- electrical equipment,
- information technology
- and chemical and pharmaceutical products.
France's share of the U.S. import market has remained stable, accounting for 2.1% of total American imports in 2016, at the eighth position among U.S. suppliers. On average, more than US$1 billion in commercial transactions of goods and services between the countries takes place every day.
The top U.S. exports to France include:
- industrial chemicals,
- aircraft and engines,
- electronic and electrical components,
- computer software and peripheral
- and analytical and scientific instrumentation.
French Influence In Europe
The incoming French government's direction will have a significant impact on EU policy as a whole.
France was one of the founding members of the post-WWII regional European pact that became the EU. In addition to its historical significance within the union, the French economy represents about 15% of the European GDP.
Foreign direct investment in France in 2015 was US$44 million, compared to US$532 million in Europe as a whole.
Politically, France remains an important decision maker in Europe. Consider the following numbers:
- The country 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.
- The country also has 29 of 352 votes on the EU Council of Ministers. Its majority decisions require 260 votes.
The council of ministers, whose members are appointed by respective EU governments, shares legislative responsibility with members of the EU Parliament, who are elected directly by EU voters from around the continent.
France, Europe And The Euro
As a major influence on European politics, the next French administration may be critical to the direction of euro-area economic policy and the EUR/USD exchange rate. The euro has moved weaker against the dollar in the past years, as slowing activity in the eurozone has worked against the single European currency.
While Europe is a large market with nearly 500 million consumers, it has been hurt by chronic fiscal woes brought by its political structure that have weighed against the region's single currency. A debt 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 adopt low interest rates and a quantitative easing program that have discouraged the flow of capital into the region.
The euro area has managed to reduce its budget deficit in the last five years—2.1% of GDP from 4.2% of GDP previously—under the influence of austerity measures. Despite this and a period of loose monetary policy at the European Central Bank, growth has remained tepid at a rate of less than 2%.(Retrieved 03 February 2017 http://www.economist.com/news/leaders/21566640-why-france-could-become-biggest-danger-europes-single-currency-time-bomb-heart))
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. For the French trade balance, a weaker euro may be positive, but low investment rates have translated into slow growth and high unemployment rates. At the same time, the weaker euro has made U.S. exports to Europe less competitive.
Europe- U.S. Free Trade Accord
One of the most significant proposals on the table between the U.S. and Europe (as of February 2017) is the Transatlantic Trade and Investment Partnership (TTIP). The negotiations surrounding the accord aim to improve market access while streamlining regulation, rules and principles of cooperation between the U.S. and Europe.
The candidates have had mixed views on TTIP. Leading presidential candidate Fillon has taken a dim view of the partnership, while Macron has said it is still a possibility but would require Europe to be "demanding" in the talks. And despite her good relations with U.S. President Donald Trump, Le Pen has taken a hard line stance against the TTIP proposal, calling it a threat to France's economic interests. As for Hamon and Melenchon, they have aligned themselves against liberalising international trade, viewing it as a threat to national industry.
In the States, Trump has signaled a skeptical view of liberalised global trade, in line with growing protectionist sentiment around the globe. As a result, it remains unclear how strong the chances of such an accord prospering may be, regardless of who is elected in France.
U.S. Companies In Europe
U.S. companies operating in Europe stand to be strongly influenced by any changes in the direction of European leadership from France and elsewhere in the coming years. About 7% of all revenues from companies listed on the S&P 500 come from European operations.
Top U.S. companies including Apple, Alphabet, Amazon, Starbucks and McDonald's have come under target in the past few years by European tax and antitrust authorities for a variety of charges. The special scrutiny of U.S.-based firms has caused friction between the U.S. and EU governments and irritation among investors, who view them as efforts of EU bureaucrats to obtain revenues by cashing in on companies' successful sales in the region.
In 2016, Apple was ordered to pay US$14.5 billion in fines to the EU under charges of tax evasion. The ruling came as a shock for Apple executives and investors. And it could influence the Trump administration to lower the U.S.'s 35% corporate tax rate, one of the highest in the world, in an effort to attract companies back to U.S. territory.
However, the complaints have not been unilateral. French and European officials have also complained about U.S. treatment of European corporations, especially financial sector companies, for alleged violations of U.S. laws.
Last-Minute Election Turmoil
Four months before the French elections, the trends in the race have been thrown into doubt following revelations that the LR candidate, Fillon, may have favoured family members by placing them on government payrolls. His possible exit from the race in the wake of the scandal may pave the way for the entrance of fellow party member Alain Juppe, or even former French President Nicolas Sarkozy.
With the LR candidacy in doubt, polls indicate prospects may have improved for Macron and Le Pen. Thus, similar to the U.K.'s Brexit referendum and the 2016 U.S. presidential election, the outcome of France's election may remain poorly defined and highly unpredictable throughout the run up to the vote.
Impact Of The French Election Outcome On The U.S.
If the Socialist-leaning heirs to incumbent President Hollande win the election, there would be little reason to foresee a large change from the status quo. France would maintain its position as a central player in Europe and make an effort to maintain at least cordial diplomatic relations and traditionally stable economic relations with the U.S.
However, the opportunities for negotiation of new trade accords would remain remote. Should a candidate leaning toward a more free market and autonomous national position win the election, it's possible France could take one of several stances. Those include pushing for more intense EU commercial relations with the U.S., or distancing itself from the collective position of Europe and negotiating its own new accords with the U.S.
A French break with Europe would have a strong weakening influence on the euro, simultaneously making European exports less expensive and more competitive internationally. But it would also likely encourage more protectionist moves on both sides of the Atlantic. Any chances for intensified trade with France and Europe would naturally favour improved growth prospects for the U.S., France and the EU. But in the protectionist climate ahead of the upcoming French elections, these opportunities appear to have diminished.
The repercussions of French presidential elections are often restricted to Europe and France's diplomatic role in the world. However, the 2017 vote may stand to answer the question of how far the protectionist and nationalist sentiment in Europe could extend, and whether it may spill over into France and Europe's economic relationships with the U.S.
France has put forward a diverse field of candidates from across the political spectrum, but invariably, the conditions seem to point toward greater protectionism and growing restrictions to market access in both Europe and France. Much hope has been placed in the prospect of renewed U.S. and global growth ahead, and the disposition of the next French president could be critical in determining whether France and Europe will be engaged in that effort.
Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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…