By electing Emmanuel Macron as their next president, the French have made the choice of an open, forward looking and European future. Can Mr Macron live up to his promises to revive the French economy?
Financial markets have already shown signs of relief, with a sharp decrease in the price of downside protection for stocks and sovereign debt. But investors still underestimate many of the positive catalysts that macronomics could bring to the table.
President Macron’s reforms aim to shake up labour markets, but at the same time maintain a robust social safety net including healthcare and education. It is a sensible policy combination following an economic recovery that benefited asset-owners but left behind an entire young generation.
In Europe, Mr Macron is likely to boost EU institutions together with a German ally, either Ms Merkel or opposition leader Martin Schulz. The focus in Brussels has already shifted towards fiscal policy and increasing the supply of European public goods including security, infrastructure and defence. This may mean also accelerating a debt restructuring deal for Greece, which has been outperforming its budget and reform targets yet still struggles with one out of two of its young people out of work.
Have markets priced all the upside from these policies? The short answer is no.
Many Eurosceptics continue to call the EU and the eurozone an economic impossibility. Their argument says you can’t have different economies under a common currency and monetary policy, without fiscal transfers and a banking union. This is true. Greece lost bank deposits and investment during the crisis, absent a clear framework for debt restructuring. Instead, no one mentioned Puerto Rico may go back to its own currency and out of US territories while defaulting on its debt. Yet all Eurosceptic arguments contain a substantial flaw: that to have fiscal transfers or to create a banking union a federalist superstate is necessary, which would steal sovereignty away from all member states.
Instead, an alternative solution is to strengthen pro-European institutions, like the European Central Bank and the European Stability Mechanism, which has already signalled its willingness to step up to a monetary fund role.
A boost to EU institutions and to common fiscal policy could also take some weight off the European Central Bank, which has so far done most of the stimulus legwork. Mario Draghi has already admitted that growth is improving and downside risks are receding. A normalisation in the central bank’s deposit rate towards zero could improve the outlook for banks — largely dependent on short- and midterm interest rates — as well as their ability to lend. This is key in the periphery, where bank loans make up most of financing and small firms create the majority of new jobs.
For policymakers and economists, these developments may suggest that Europe’s inclusive welfare, education and social policies do pay off in the long run, while the Anglo-American credit and consumption-led growth model has proven to be more vulnerable to rising inequality and populism.
For financial markets, the result will be faster investment, a rising euro against sterling and the dollar, higher interest rates in German debt and higher valuations for European stocks, which have rallied but continue to appear unloved relative to other markets. Greek 10-year debt, currently offering more than many emerging market countries, may ironically give better returns to investors than UK gilts, currently yielding 2 per cent below expected inflation.
The sceptics have already called this result a one-off and reminded us that Europe still faces break-up risks. This picture, albeit still popular, is looking increasingly far from reality. Spain, Austria, the Netherlands and now France have rejected populism. Mr Macron won on an anti-populist ticket of openness, economic freedom and unapologetic embrace for Europe. With him, Europe regains the ambition to build an inclusive and open union, made of concrete projects and a common purpose that goes beyond national differences.
Surely, the French election is only one step of a long way. But a few years from now, this could prove to be one Europe’s defining moments.
Alberto Gallo is partner at Algebris Investments and manager of the Algebris Macro Credit fund.