Macron 2.0

Key Points

• E. Macron’s second mandate will likely start with the prolongation of the Keynesian/interventionist stance of the last 2 years, although the financial room for manoeuvre is smaller.
• ECB hawks are strengthened by the resilience in the dataflow so far.

Removing a key source of uncertainty in Europe, E. Macron has been reelected President with 58.5% of the votes. Yet, the weak aggregate result of mainstream candidates in the first round will likely affect his stance. Some expressions in his acceptance speech (“not leaving anyone on the wayside”, “turning France into an ecological nation”) illustrate how the change from “moderate supply-side reformer” in 2017 to “interventionist” he had to undergo under pressure from the pandemic and the fallout of the Ukraine war will have to be prolonged into his second mandate. To find some financial room for manoeuvre, now that the ECB’s normalization reduces the options for expansionary fiscal policy at the national level, we expect Emmanuel Macron to push even more strongly for a second phase of debt mutualization in the EU. We expect this to be an uphill walk. Paradoxically, Olaf Scholz’ weaker position (the benefit of the “Zeitenwende” speech is eroding fast) may make him less open to concessions in this direction, while the relief brought about by M. Le Pen’s defeat in European capitals may reduce the impetus for reopening this particular Pandora box. Macron’s negotiating capacity in Europe will of course depend to his capacity to secure a parliamentary majority in June.

While the ECB always professes to ignore elections, the Governing Council must be relieved by the French result: if “quick wins” on common fiscal action may not be at hand, at least the EU can avoid another “existential moment” and focus can now return to the economic data flow. News are rather good so far on that front: the flash PMI for April came out much better than expected, especially in the services sector. It may be that the “economy reopening” tailwind is more powerful and is lasting longer than expected. The income-protection measures immediately put in place by governments to deal with the fallout of the Ukraine war on energy prices may be proving quite efficient. In any case, the resilience in the dataflow – so far - is playing into the hands of the hawks. We maintain our baseline for a lift-off in December, but September is a distinct possibility.

Beyond the impact of the Ukraine war, the extent to which the Chinese economy will rebound from its current Covid-related slowdown is going to be key to Europe’s export machine next year. Data for now suggests activity in China is being visibly hit, but nowhere near the levels seen at the beginning of the pandemic. Beijing needs to make hard choices ahead though.