15.04 Weekly Viewpoint : In France, voting intentions of left-wing electors have started to converge on Mélenchon

In France, voting intentions of left-wing electors have started to converge on Mélenchon, who is overtaking Fillon in the surveys, and is closing in on that two favourites to reach the ballot stage, Le Pen and Macron. The prospect (still unlikely for now) of a ballot between Le Pen and Mélenchon would have serious negative implications for the markets…..

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In Italy, the government has unveiled the DEF. The document is based on formal respect of the required structural adjustments imposed by European fiscal rules, although the Minister of the Economy has made no mystery of his doubts on the soundness of implementing such a strong correction of public accounts given the current context.

With ten days to go before the first round of the presidential elections in France, survey data are showing a very important development in voting intentions: left-wing electors have started to make their choice between the two radical candidates, Hamon and Mélenchon, and seem to be opting for the latter. As a result, Mélenchon is now awarded a 18-18.5% share, just behind Fillon (19-20%). Le Pen and Macron are still neck and neck, according to surveys (2324% Le Pen, 22.5-23% Macron). Considering the margin of error, there is a small probability, thus no longer insignificant, of major surprises. According to the surveys, Mélenchon would stand an excellent chance of beating Le Pen should they both reach the ballot stage, and he would also give Macron a run for his money. In our view, the manifesto set forth by Mélenchon could trigger negative market reactions on a par with a Le Pen victory, whether he should ultimately prevail, or simply win access the second round of the vote. Mélenchon is also highly critical of the EU, of globalisation processes, and of trade agreements: he considers them, quite rightly, as an obstacle that would hinder the implementation of his radical social agenda. Compared to Le Pen, Mélenchon is exactly at the opposite end in terms of his proposed policies on social inclusiveness, immigration, and labour. He is in favour of a universal minimum income, and of prohibitive income taxation beyond certain thresholds, as well as of aggressive wealth redistribution mechanisms. As for Le Pen, however, his victory at the presidential elections would likely be incomplete, because he would probably fail to achieve a parliamentary majority to rely on at the legislative elections. Forced cohabitation could result in a watering down of the more radical aspects of the manifesto, as has been the case in other countries where the radical left rose to power and had to then face the sad reality of government.

The goal of the DEF unveiled by the Italian government was to reconcile the irreconcilable: on the one hand the commitment to implement a substantial structural correction in the 2018-19 biennium, as required by European fiscal rules; on the other, the need to make sure that economic growth in the country continues, in a phase which promises to be delicate, given the prospected termination of the PSPP, and the political elections in 2018. The choice was made to formally respect commitments, reasserting on paper the goal of achieving a structural correction of 0.8 points in both 2018 and 2019. The document also takes into account the effects of the corrective budget on 2017 accounts, worth 0.2% of GDP. However, the government has also said that it will “play an active role, together with other European partners, in the evolution of shared economic governance rules, in view of an adjustment path that is compatible with the need to support growth and employment ” [our italics], and that the government’s priority – and that of the Budget policy outlined in the DEF – remains to achieve a “stable increase in growth and employment, in respect of the sustainability of the public finances”. The overall strategy geared to rejecting pressures towards an overly violent consolidation of government accounts is correct, considering the clouds that are building up on the 2018 scenario. The deficit will be cut further, but not as fast as the ill-conceived fiscal compact would require. It will now be important to also put the limited resources available to profit, avoiding the dispersion which marred the two latest budget laws.

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