In the late 1700’s, the English took to calling a departure that was abrupt and without permission a ‘French leave.’ About one century later, the French began referring to the same sort of absence as ‘filer à l’anglaise,’ or to leave English style. On April 23, France conducted the first round of its presidential election, which has become an important referendum on the nation’s attitude toward membership in the Euro area, the common currency union. There are two precedents last year in which voting outcomes took a surprising turn: the UK referendum on membership in the European Union and the U.S. presidential contest. From the U.S. perspective, how might our experience inform understanding the upcoming French election?
There is more than an ocean separating the U.S. and France; there is a gulf of understanding. When we talk to investors in Continental Europe on the topic of France, the conversation tends to center on a few constant themes—France’s commitment to the European project, their mistrust of factions and their voting system, which is designed with multiple steps to steer the outcome to the center. Consequentially, their advice is as follows: that the electoral prospects of French presidential candidate Marine Le Pen and the National Front are slim, that risk spreads should not be too wide and that portfolio hedges against a Le Pen possibility will unnecessarily lower total return. In the U.S., this sounds familiar to the advice offered in the first ten months of last year and then proven wrong in the eleventh. On November 8, 2016, the U.S. surprised the world by electing Donald Trump, the unconventional leader of a minority faction. What have we learned about expectations, elections, and governance since then?
Expectations are harder to assess in the 21st century. Pollsters are now sampling a more opaque and heterogeneous population than is their experience, implying that their ‘margin for error’ may be wider than they think. People are less anchored by traditional jobs; they move more, cut themselves off landlines and are harder to contact. For those who can be reached, there are more distractions and less focus on the details of the issue at hand— a sense of vagueness which is at times intentional. In our internet-savvy world, people who see that an on-line disclosure becomes fodder for trolls are less willing to reveal anything to a stranger. This might be especially true in supporting a candidate in disrepute among the establishment, whether named Trump or Le Pen.
The U.S. election revealed once again that the U.S. is divided by income, by race and ethnicity and by geography. The geographic split between city and countryside is most evident in the electoral map of the 2016 presidential-election results. States with dense urban population voted decisively for Hillary Clinton, colored in blue on the map by tradition, while rural states lopsidedly went with Donald Trump, colored in red. As a result, the U.S. was painted blue on both coasts and red in the center. The map, however, also revealed what mathematicians refer to as self-similarity, or the principle that close-ups to any part of the picture resembled the picture as a whole. Within a state, counties with urban centers tended to be blue, while rural ones leaned towards red; and within a county, blue turned to red with distance from population clusters. Rural voters—who, by the way, prove difficult for pollsters to snare—showed themselves wary of the current establishment and desirous of change back toward a more traditional system. Of note here, France has a slightly higher population share in rural areas than the U.S.—20% versus 18%, respectively, according to the United Nations.
Anglo Saxon elections in 2016 channeled voter anger against people and issues. The missed opportunity in doing so is that the will of the people reveals where they do not want to be taken, not where they want to be led. Voters in the UK decided to leave the European Union but were silent about subsequent arrangements. U.S. voters rejected the conventional in turning to Donald Trump, in part because he lacked the traditional infrastructure of electioneering. His campaign was innovative in its ability to harness new media (mostly free) and to work without a safety net of high-profile friends. While Candidate Trump won despite this, President Trump is finding improvisation is insufficient to staff a government or get legislation passed.
Take from this experience two worrisome lessons for the French contest.
For one, channeling anger tends the outcome to the ends of the political spectrum, raising investor concerns about national hostility toward the Euro area and lassitude about government debt burdens. Of note here, the interest-rate spread of French over German government debt has widened on the increasing vote share of Marie Le Pen and Jean-Luc Melechon. This points the direction, perhaps only tamely; to the market reaction were either to win.
For another, three of the four leading candidates lack formal surrogates already positioned in office. Marine Le Pen heads a party that has two members in the National Assembly, and Emmanuel Macron and Jean-Luc Melenchon describe themselves as leading movements, not parties. As with Donald Trump now, any of the three will have to find friends in authority quickly to govern if elected. This suggests that any enthusiasm or aversion incorporated into asset prices immediately after an electoral surprise will wane somewhat. Over time, the understanding will creep in that change at the top does not necessarily produce effective change in the government’s direction.