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The French Election: Macron-Good, Le Pen-Bad

L: We have a great friend who lives, along with his lovely wife, part of the time in the US and part in France. His short-line bio says, "J. Paul Horne is an Independent International Market Economist based in Alexandria, VA and Paris where he was chief international economist for Smith Barney for 24 years." I asked him to tell us how the French presidential election could affect the US economy. Here's what he wrote.

JPHorne: International markets reacted positively to Emmanuel Macron’s coming first in the initial round of France’s presidential election on April 23. If today’s consensus that the “Republican front” of traditional parties will vote together to defeat Marine Le Pen, head of the far-right Front National, in the run-off round on May 7 proves correct, foreign exchange, equity and bond markets in Europe and the U.S. will breathe more easily.

But the risk, which we guess is less than 40 percent today, that Le Pen might win, then call a referendum on “Frexit,” is enough to keep markets and other European governments cautious until Macron is pronounced the winner. One of six founding countries of the European Union, France remains critical, along with Germany, to the continued existence of the EU which, in effect, keeps the peace and ensures prosperity in Europe. In the unlikely event that the French were to approve Frexit, the EU and the euro single currency and monetary system would probably collapse, causing a global financial crisis comparable to or worse than the 2007-2009 disaster.

L: Yes, one more thing to worry about. As if we don't have enough already! Good news is that this is, theoretically, an unlikely outcome.

JPHorne: U.S. euro-skeptics cite the lack of a fiscal union, an incomplete banking union, a single monetary policy, one currency and frequently conflicting legislation of 28 EU member countries (27 after the UK completes its Brexit negotiations), plus repeated euro debt crises since 2010, as reasons why the euro could, or should, fail. Such critics ought to be careful what they predict, or hope for.

The EU’s GDP will total an estimated $20.5 trillion this year, compared with $19 trillion for the U.S. The EU is by far the U.S.’s most important trading partner. The European Central Bank is a critical interlocutor for the Federal Reserve, managing the Euro zone’s monetary policy. Given current constraints on fiscal policy, it has been playing the key role in stimulating the economy. The euro remains the world’s second reserve currency, accounting for about 20 percent of global foreign exchange reserves and a larger share of foreign exchange transactions.

Importantly, euro-denominated debt exceeds €14 trillion, 125 percent of the Euro zone GDP. If the euro system were to fail for political or debt-crisis reasons, the repercussions for the global financial system could be catastrophic. For this reason alone, markets will be happy to see Macron elected president for five years on May 7. His program of structural reforms is likely to be supported by a center-right majority in the National Assembly after the two-round legislative elections are completed on June 18. Macron’s proposed reforms of the labor market, excessive public spending and the burdensome tax system are essential first steps toward boosting anemic economic growth in Europe’s second largest economy. If lucky, his government could reduce the high chronic unemployment that causes the angry populism underpinning Le Pen and the Front National.

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