Our Fearless France Predictions

Donald L. Luskin
Friday, April 21, 2017
Yesterday’s attack is a wildcard, but Le Pen’s euro threat remains only a cygne noir.
Strategic view: 

Thursday’s terrorist attack is a wild-card that favors Le Pen and Fillon in Sunday’s French presidential primary. Our base case, based on the level and direction of polls, is that Macron and Le Pen will come in first and second, respectively. We caution against the automatic assumption that polls undercount populists, which really hasn’t borne out other than in the Brexit case. The most likely surprise would be Fillon nosing out Le Pen. If Le Pen advances to the May 7 run-off, we see her losing to any opponent. Her anti-euro position presents global systemic risk, but because Maastricht is incorporated into the French constitution, leaving the euro would require parliamentary action and a referendum. Except for the France-Germany 10-year spread, markets seem unprepared for a Le Pen win. So if she loses, there won’t be much reaction. If she wins, we would expect a risk-off reaction that would likely be a buying opportunity.