Marine Le Pen needed to come first by some distance to stand any chance of prevailing in the second round. The reaction of European equities reflects the realisation that the Eurozone may find itself in a very strong position politically by end of the year. Nevertheless, Mr Mélenchon’s performance is a warning to equity markets: street opposition to further reform will be high. In this respect, the margin of Mr Macron’s likely victory in May remains critical.
For all his perceived faults, Mr Hollande introduced several reforms that helped create an ecosystem in Paris to rival London and Berlin. Indeed, Paris scores highly in the latest FT1000 list of fastest growing companies with 45 companies, second only to London (78). Tackling disincentives to hire, and creating the incentives to work, will be critical. It is not just the US that Europe is competing against: China is catching up in technology, and in some cases taking the lead.
If Mr Macron can deliver the right additional reforms, and unemployment does start falling more quickly, that could influence the political debate in Italy. Five Star and Forza have blamed the country’s economic stagnation on Brussels, and the inability to devalue. A stronger France may embolden the reformists. Moreover, if the recovery in France accelerates, it is hard to see how the ECB can justify keeping interest rates negative.
Summary
- Reform agenda of Macron can accelerate recovery
- Some reforms already paying off: Paris second behind London in top 1000 fastest growing companies
- But global competition is intensifying: China quickly establishing entrepreneur culture to rival US
