Standard Life Investments

Weekly Economic Briefing


Crisis averted?


The successful election of centrist Emmanuel Macron to the French presidency has removed a major source of concern for markets as Europhobic right-wing populism was dealt another blow; the second of the year following the underperformance of Geert Wilders’ PVV party in the Netherlands general election. Can we feel confident that the populist threat to the future of the Eurozone has been removed? Just as we thought that the election of Donald Trump in the US did not make a Le Pen victory inevitable, neither do we think that Macron’s success removes the broader Eurosceptic populist impulse. Indeed, low turnout and spoiled ballots at an all-time high in the second round of the French election imply that a large chunk of the electorate remains unconvinced by the president-elect. Macron’s ultimate success in implementing his pro-business reform agenda will rely on him building an effective Cabinet and majority in parliament. We await the results of the parliamentary election, but some degree of cohabitation is inherent in his Cabinet choices so far, which straddle the traditional left-right divide.

Power to the populists? Weighing up the risks

The pressure is on: there is a risk that if the negative social and distributional side effects of technological change and globalisation are not addressed by mainstream politicians like Macron, then the populist trend will continue to strengthen and threaten Eurozone stability in elections to come. That said, each country’s domestic settings are different and so serve to amplify or dull these effects. In France, the excessive size of its public sector and the country’s rigid labour and product markets weigh on employment and productivity growth, as well as making it difficult to absorb economic shocks. A better functioning labour market could help raise employment, lower structural unemployment and address the wide disparities between those on permanent and temporary contracts. If the new president and his Cabinet can push ahead with their plans, newfound flexibility in the labour market should help to boost French competitiveness and reduce the still-elevated unemployment rate. We can see this when we compare France to its neighbour Germany, which underwent labour market reforms in the early 2000s and benefits from greater flexibility and competitiveness.

This may also help to explain why support for populist parties is weaker in Germany as we approach the legislative election in the autumn, with populist Alternative for Germany (AfD) party polling below 7% (see Chart 6). The Italian general election on the other hand, which is due to be held by 20 May 2018 but likely before, is the next source of ‘existential’ risk for Europe. The populist Five Star Movement’s elevated support levels and, to a lesser extent, its history of being underestimated in polling, suggest the party could secure the largest vote share, giving it first shot at forming a government (see Chart 7). However, the Movement would struggle to form the necessary coalition to govern under a proportional system - the details of which remain to be agreed in parliament - given the number of parties with diverse ideologies in the system. Nonetheless, the Movement’s tone during the election campaign will be a key indicator of whether it plans to stick to tackling poverty at home, as likely PM Di Maio has said recently, or pivot back to a more hard-line Europhobic agenda that raises the risk of ‘Italexit’ coming to pass.

Stephanie Kelly, Political Economist