Buy France!

If the markets keep falling, buy more.

Photo by Florian Wehde on Unsplash

Everyone’s in a lather over French elections this Sunday and next.  Polls show the “Far Right” leading, the “Far Left” close behind and the “Centrist Coalition of Reasonable People” in complete disarray.  Financial markets have sold off and President Emmanuel Macron is widely reviled for betting the future of France - and Europe. 

Oh, là là!

But maybe it’s not quite the end of the world.  More likely it’s just a reflection of a country with a long history of messy politics, a currency union still balancing how much control over fiscal policy it requires and a president who is, in fact, a gambler.

For full disclosure, I am very much a Francophile, all the way from Astèrix and Molière to Cantal and St. Emillion.  I even admire Macron, who managed the enormous leap from economic technocrat to the presidency of France through a series of bets against long odds.  Yes, he has fallen short on many fronts.  Sure, he is more than a little self-absorbed.  But Macron has at least tried to tackle big issues like Russian aggression, European integration and – the third rail of all politics – raising the retirement age.

This snap election shocked voters, analysts and investors, who immediately demanded a sharp premium in French debt over German counterparts out of fears of political chaos and unconstrained spending.  Stocks fell, bond yields jumped and headline writers rejoiced at the chance to include the word “Frexit!”

But consider:

·      Neither the National Rally coalition on the right nor the National Popular Front (NPF) on the left will secure much more than 30% of the vote according to current polls, while Macron’s centrist may manage 15-20%.  Any “winner” will need the center to govern, which means any wildly expensive plans will be watered down.

·      The National Rally is already walking back many of its promises to cut taxes and has suggested it will delay the repeal of Macron’s hard-won increase in the retirement age from 62 to 64.  While it takes a hard line on immigration and talks of challenging some EU institutions, it no longer promises to withdraw from the euro.  The NFP, meanwhile, still promises large spending and tax increases, but remains a tenuous alliance of fractious personalities and programs that inevitably must compromise. 

·      Any new spending plans will face scrutiny from the European Commission, which last week recommended disciplinary action against France (and half a dozen other countries) for its widening deficits.  Spending powers ultimately remain in Paris, but Brussels can impose fines on governments that openly flout the rules.

·      Investors have already thrown down a marker that reckless fiscal plans will increase the country’s cost of borrowing.  The premium of French debt over German bunds shot higher as soon as the election was called, sending a clear message about the importance of keeping costs in line.

·      Maybe most importantly, the euro and the European Union are here to stay.  If there were any real fears of French debt sustainability or its future in the euro, the European Central Bank would surely intervene.  As we learned when Greece tried but failed to leave in 2015, exit is impossible without a devastating collapse of a country’s banking system and severe recession for the continent. 

So go ahead.  Think of these days as buying opportunities at a moment when nerves are frayed, rhetoric is hot and investors are trying to understand the risks ahead.  For Macron, there are risks of embarrassment if he is forced to share power (and travel to foreign summits) with a distasteful political opponent.  For France, reforms will likely be paralyzed at least until the next presidential election in 2027.  And for Europe, long overdue fiscal and banking integration will face more delay.

And if markets fall further, buy more.  Either the political chaos will pass – or we’ll learn to live with it.