12.05 Weekly Viewpoint : The pro-Europe manifesto of France’s new president, Macron, is generating high expectations.

Unfortunately, his vision of Europe will have to come to terms with a difficult environment……

Sign up for our free newsletter to receive weekly news from BONDWorld. Click here to register for your free copy 

Intesa Sanpaolo – Research Department For professional investors and advisers only

What does Emmanuel Macron, France’s new president, have in mind for Europe? And most importantly, what can he reasonably hope to achieve?

In the past few days, the question has been raised by the international press, which has started to speculate whether France will continue to pursue its traditional special relations with Germany, making do with the possibility of begging for a little extra flexibility on fiscal targets, as Macron’s predecessors did, or if it truly will press for a reform of European governance, as the new president promised to do before and during the election campaign. The starting point is very interesting. In a speech delivered in Germany in January, Macron laid out five pillars on which to rebuild the Union: defence, trade policies which include guarantees of fairness, sustainable growth, digital revolution, and relaunching of the monetary union; all of which integrated by reforms capable of curing the democratic deficit of the European Institutions.

For what concerns the monetary union, “the Euro is incomplete and cannot last without major reforms”. In addition to respecting the rules, “we need deeper solidarity”. Macron believes this may be achieved by creating euro area budget, supported by committed revenues and joint issuance of debt, and by introducing “common rules for fiscal and social matters” to counter fiscal dumping among member states. With the three main goals: financing the most crucial investments for the development of the area, guarantee emergency financial assistance through the ESM, and helping member states hit by major economic shocks.

What are the hopes that this manifesto may be adopted and implemented?

First of all, Macron must yet build a parliamentary majority, which will presumably require the formation of a coalition with the centre-right. This could force him to water down his pro-Europe stance. Second, any reform of the euro area must garner unanimous consensus, and must mandatorily be approved by all the major member states. The most important changes will require the signing of new treaties, or even a review of the Treaty on the EU itself. The situation is made more complicated by the simultaneous opening of the negotiations with the United Kingdom on Brexit, the nationalist drift in some Central-Eastern European countries, and the weakness of governments in Southern Europe. However, the biggest problem is the attitude taken by Germany. In Germany as well, there is awareness in some circles (the SPD, the Green Party, and part of the academic world) that a change in perspective is needed.

However, the government, public opinion, and the monetary authorities, are still well under the control of the custodians of orthodoxy, which produced the Fiscal Compact and imposed a deflationary bias on economic policies: these same figures still have an excellent chance of winning the September elections. Their solution to the problem of instability in the euro area is in fact, a non-solution: taking for granted that it is impossible to proceed towards completion of the union due to the lack of political consensus, they believe it is better to set the stage for a restructuring of debt, should fiscal discipline prove insufficient to prevent a crisis. And if this leads to higher refinancing costs for the weaker countries, all the better: there will be a stronger incentive to implement the reforms and guarantee fiscal discipline. Regardless of the fact that the underlying economic analysis may be reasonable, in our view, the problem with this strategy is that is proving politically unsustainable. Although this is not the only cause, outside Germany, the German economic agenda has weakened support for the monetary union and made the fortune of movements calling for the restoration of monetary sovereignty. In his speech, Macron borrowed and adapted the words of Jacques Delors to summarise his view: “for Europe we need a vision and a screwdriver. Unfortunately, we currently have a lot of screwdrivers but we are still lacking a vision”. Hard to say if governments will be able to agree on a shared vision of how the Eurozone must evolve, but we are certainly in urgent need of one.


Analyst Certification

The financial analysts who prepared this report, and whose names and roles appear on the first page, certify that: (1) The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures: The analysts who prepared this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.

Important Disclosures
This research has been prepared by Intesa Sanpaolo S.p.A. and distributed by Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for the contents of this report. Please also note that Intesa Sanpaolo S.p.A. reserves the right to issue this document to its own clients. Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both authorised by the Banca d’Italia, are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.
Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor.
This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. It should not be regarded as a substitute for the exercise of the recipient’s own judgement.
No Intesa Sanpaolo S.p.A. or Banca IMI S.p.A. entities accept any liability whatsoever for any direct, consequential or indirect loss arising from any use of material contained in this report.
This document may only be reproduced or published together with the name of Intesa Sanpaolo S.p.A. and Banca IMI S.p.A.. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. have in place a Joint Conflicts Management Policy for managing effectively the conflicts of interest which might affect the impartiality of all investment research which is held out, or where it is reasonable for the user to rely on the research, as being an impartial assessment of the value or prospects of its subject matter. A copy of this Policy is available to the recipient of this research upon making a written request to the Compliance Officer, Intesa Sanpaolo S.p.A., 90 Queen Street, London EC4N 1SA.
Intesa Sanpaolo S.p.A. has formalised a set of principles and procedures for dealing with conflicts of interest (“Research Policy”). The Research Policy is clearly explained in the relevant section of Banca IMI’s web site (www.bancaimi.com).
Member companies of the Intesa Sanpaolo Group, or their directors and/or representatives and/or employees and/or members of their households, may have a long or short position in any securities mentioned at any time, and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any of the securities from time to time in the open market or otherwise. Intesa Sanpaolo S.p.A. issues and circulates research to Qualified Institutional Investors in the USA only through Banca IMI Securities Corp., 245 Park Avenue, 35th floor, 10167 New York, NY,USA, Tel: (1) 212 326 1230. Residents in Italy: This document is intended for distribution only to professional investors as defined in art.31, Consob Regulation no. 11522 of 1.07.1998 either as a printed document and/or in electronic form. Person and residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers under rules of the FSA.
US persons: This document is intended for distribution in the United States only to Qualified Institutional Investors as defined in Rule 144a of the Securities Act of 1933. US Customers wishing to effect a transaction should do so only by contacting a representative at Banca IMI Securities Corp. in the US (see contact details above).

Valuation Methodology

Trading Ideas are based on the market’s expectations, investors’ positioning and technical, quantitative or qualitative aspects. They take into account the key macro and market events and to what extent they have already been discounted in yields and/or market spreads. They are also based on events which are expected to affect the market trend in terms of yields and/or spreads in the short-medium term. The Trading Ideas may refer to both cash and derivative instruments and indicate a precise target or yield range or a yield spread between different market curves or different maturities on the same curve. The relative valuations may be in terms of yield, asset swap spreads or benchmark spreads.

Coverage Policy And Frequency Of Research Reports

Intesa Sanpaolo S.p.A. trading ideas are made in both a very short time horizon (the current day or subsequent days) or in a horizon ranging from one week to three months, in conjunction with any exceptional event that affects the issuer’s operations. In the case of a short note, we advise investors to refer to the most recent report published by Intesa Sanpaolo S.p.A’s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI’s web site (www.bancaimi.com) or by contacting your sales representative.

Source: BONDWorld.ch