New President Will Need Support to Implement His Agenda

Philippe Brugere-Trelat
Executive Vice President
Portfolio Manager
Franklin Mutual Series

For once the polls have proven correct.

Even before the first round of voting, Emmanuel Macron had been installed as the favorite for the French presidency and so his victory had largely been priced into the markets.

But as we look longer term, I think it’s significant to note that Macron is a real political outsider. While Marine Le Pen and the far-left candidate Jean-Luc Melenchon both presented themselves as outside the system during the first round of the campaign, both are seasoned political veterans. Macron really isn’t. He’s never held a senior political office and has no real political party behind him. His political movement is only a year old.

In our view, the immediate question is whether Macron can build a parliamentary majority to support the implementation of his reform program.

Keep in mind that we have French parliamentary elections due to take place on June 11 and 18, and we expect the outcome of those votes to play a big role in Macron’s ability to deliver on his election promises.

Our expectation is that the June elections are likely to produce a largely fragmented parliament. At the outset of the presidential elections, there were four candidates representing very different parts of the political spectrum who accounted for around 20% of the votes each. We’d expect that split to be reflected in the composition of the new French assembly.

As a result, Macron is likely to have to negotiate with all sides to implement his proposed reforms, but perhaps particularly with broadly center-right Republicans.

Much-Needed Reform on the Horizon?

France has always been seen as a laggard in terms of economic and labor reforms in Europe.

In our eyes, the chaotic French labor market in particular is ripe for reform. Unemployment is at unacceptably high levels, partly due to the strict employment rules that make it difficult for businesses to shed staff. As a result, businesses are reluctant to take on new employees.

In order to implement labor reforms, Macron is going to have to take on the French unions and reduce their political power, which is immense and which has been accumulated over decades of French political infighting.

We think these reforms are very important in France, and could prove positive not just for the French economy and the French equity market, but also for Europe in general.

We’d expect to see some stiff resistance from the unions, including some very noisy and visible national strikes. But we’d consider that to be a necessary step for the French economy. And if Macron is able to achieve some success with labor reform, I think we could see operating margins in France rising higher, unemployment going lower and the overall prospects for gross domestic product (GDP) growth improving.