French Elections and the Remaining Populist Challenge

Emmanuel Macron received a strong endorsement from French voters in yesterday’s second round election, winning around 66 percent of the vote.  While abstentions were up from the last election (an estimated 26 percent), early returns suggest broad-based support for Macron and his centrist, pro-European message. Attention now turns to the June 11^th and 18^th parliamentary elections, where President Macron and his newly formed political movement En Marche! face uncertain prospects in their effort to gain a workable parliamentary majority.

The result was expected, and consequently the market response was muted though positive.  Clearly a major tail risk that would have rattled investors has been avoided, and markets view favorably Macron's economic program centered on business, labor and fiscal reform. European leaders were visibly relieved, and rightly so, as a Le Pen win would have presented a deep and immediate challenge to the future of the European Union. But I am less sure that the obverse is true, that a Macron win represents the zenith of the populist threat. As I mentioned after the first round, a common refrain during the recent IMF Meetings was the idea that, with the electoral challenge from radical populists in the Netherlands and France defeated, and assuming continuity in German elections this fall, Europe would be ready to make a strong push towards greater European integration, most importantly on economic issues. It also is assumed that Macron will take a strongly pro-EU line in the Brexit negotiations, though there again it isn’t until late this year or 2018 that the significant decisions will be made on the terms of the Britain-EU divorce, as well as what follows.

I am more convinced by the argument that the nationalism and populism that has spread across western industrial countries will remain a potent force in Europe, even as the immediate threat as been pushed back, until Europe’s leaders, policies, and institutions can deliver a more optimistic economic future (with more broad-based, inclusive growth and a more integrated Europe that is better able to respond to shocks) to more of its citizens. While immigration and security top polls now as the central concern of Europeans, a decade of economic growth has left many Europeans pessimistic about their long-term economic future.  In this scenario, these pressures are likely to fester, and potentially constrain even European-mined politicians to adopt more nationalistic policies. While a France-led Macron may become a leading voice for more Europe, forming a consensus across Europe (including, most importantly, those countries with the fiscal capacity to finance greater integration) on pro-growth, pro-Europe policies seems increasingly challenging.  European populism appears, as nicely put elsewhere, to have entered the awkward adolescence years: “able to borrow the car but not own it, have an influence on the household but be too young to run it.”

The election could have one immediate impact on international economic relations, as there are reports that Macron could look to IMF managing director Christine Lagarde, Managing Director of the IMF, as his prime minister. That would be good choice for France, but would confront world leaders with tough questions about the future direction the IMF.  Legarde had appeared to be building good relations with the new U.S. administration, and while the convention of European leadership of the IMF has held until now, a succession discussion could provide an early test of the organization’s relationship with a new U.S. administration that has entered office suspicious of multilateralism.