Eric Reguly
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Europe's risk profile dropped a notch or two last night, when Emmanuel Macron won the French presidential election. But it did not disappear. To declare populism dying or dead in the long term is wildly premature.
Mr. Macron, the pro-EU, pro-euro centrist candidate, pulled off an unequivocal victory, with 66 per cent of the second-round vote. Marine Le Pen, the anti-EU, anti-globalization candidate, took 34 per cent.
Mr. Macron's margin of victor was higher than expected and he won convincingly in every age category. Two-thirds of young voters (18-24 years) endorsed Mr. Macron and his liberal agenda even though one in four of them is jobless. Given Ms. Le Pen's thundering criticism of globalization and its destructive effect on French industry and youth employment, that was a remarkable achievement for Mr. Macron.
Read more: France turns away from populism in election of pro-EU Macron
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Investors liked the election result, though almost none of them expected Ms. Le Pen to triumph. They started to push up the euro two weeks ago, when Mr. Macron won the election's first round. At that point, the only real question was Mr. Macron's margin of victory. In morning trading, European time, the euro reached a six-month high against the dollar, nudging past $1.10 (U.S.), before settling back a bit. French 10-year bonds rose, narrowing their yield "spread," or gap, over benchmark German bonds to only 36 basis points (100 basis points equals one percentage point). In early April, when the media was increasingly calling Ms. Le Pen as a competitive threat, the spread, at 75 basis points, was more than twice as high.
In the wake of the election, the MSCI All-Country World index was up 0.2 per cent to a record high, but the Stoxx Europe 600 fell slightly, as did the FTSE-100 and the benchmark indexes in Germany and France.
Julien Lafargue, JPMogan's European equities strategist, said "At the macroeconomic level, the focus on the euro zone will now likely shift away from politics and move on to the ECB," noting that the European Central Bank will soon have to decide when it should roll back its quantitative easing program, now that euro zone growth is improving while political risk is, apparently, on the wane.
Mark Siddle, European equities portfolio manager at Fidelity International, said that, "Simply not having Marine Le Pen as president will reduce the perceived political risks in Europe." With European valuations, such as price-to-book ratios, well below American levels, he expects more risk capital to find its way to Europe.
But that's the question. While "perceived" risk has certainly fallen, what about real risk?
The simple analysis suggests that populism has peaked and has shifted into reverse. The European elections seem to say as much. In December, Norbert Hofer, the far-right candidate in the Austrian presidential elections, lost to the centrist, pro-EU candidate Alexander Van der Bellen. In March, Geert Wilders, the nationalist, anti-EU candidate, was defeated in the Dutch general election. Ditto Ms. Len Pen in the French election. Next up is the German election, in September, where the populist, anti-immigrant Alternative for Germany party is expected to get trounced by Chancellor Angela Merkel's centre-right machine.
A closer look at the numbers suggests that French populism is far from dead. In the first round of French presidential elections, on April 23, Euroskeptic candidates, including Ms. Le Pen and the Communist-backed Jean-Luc Mélenchon, won about 40 per cent of the vote. The traditional centre-right and centre-left candidates went nowhere.
In Sunday's runoff, Ms. Le Pen's 34 per cent was the highest in the 45-year history of her National Front (FN) party and was double the level achieved by her father, Jean-Marie Le Pen, in the 2002 runoff. The FN could do well in France's National Assembly (lower house of parliament) elections in June. If Mr. Macron does not achieve a majority, his economic reform agenda may go nowhere. Unlike American presidents, French presidents cannot rule by executive decree.
Cas Mudde, a Dutch political scientist who researches populist and extreme parties in Europe, doesn't see populism dying in France in spite of Mr. Macron's strong showing. In a tweet, he said "the French presidential election is another step in the slow and steady rise and political normalization of the populist radical right."
And don't forget Italy, the euro zone's third largest economy.
While the world was focused on the French elections, Italy's populist Five Star Movement (M5S) has taken a big lead in polls over the ruling, centre-left Democratic Party. An election must be held by next spring and could happen as early as the autumn. M5S, which is already the biggest opposition party in the Italian parliament, wants to hold a referendum on the euro. If Italians vote to leave the European project, the EU and the euro would be doomed. Already, Italian support for the EU and the euro are plummeting.
Megan Greene, chief economist at Manulife, is among several economists who think that the European project will live or die in Rome, not Paris, Berlin or Brussels. "Even though the French elections were a political victory for those in favour of globalization and the liberal order, it is too simplistic to say that populism has peaked in Europe and is now waning," she said in note. "The days when voters stuck with their traditional centre-right and centre-left parties in Europe are gone and that is unlikely to be reversed any time soon. Nowhere will this be more obvious than in the upcoming Italian elections."
The message to investors: Enjoy the Macron market bump while it lasts, and it may not last long.