FRANKFURT, Germany (AP) — The French presidential election could be a turning point for Europe’s biggest economic project, the shared euro currency.
Markets are mostly expecting a pro-euro candidate such as former economy minister Emmanuel Macron to win. And that leaves room for a very sharp drop in markets — and a blow to the longer-term prospects for the survival of the euro — if the winner turns out to be National Front candidate Marine Le Pen, who wants to take her country out of the common currency and the European Union.
Here’s a look at what the election outcome could mean for markets and for the European economy.
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WHAT HAPPENS IF LE PEN WINS?
Most market participants seem to assume that Le Pen will fail. Polls show she has a good chance to be one of the top two in the first round Sunday, but would lose in the second round May 7.
Some signs of nervousness have crept in. There has been a modest increase in the difference in interest rates on French and German long-term government bonds, an indicator of investor tension. The move, however, is nowhere near the volatility seen during the eurozone’s debt crisis.
“Markets are still underpricing the risks,” says Athanasios Vamvakidis, a foreign exchange strategist at Bank of America Merrill Lynch Global Research.
That means French stocks and government bonds and the euro could all drop if Le Pen wins. The euro, currently around $1.07, could head down toward one-to-one with the dollar. And it wouldn’t be limited to France. Stocks and bonds would likely fall in economically weaker eurozone economies like as Italy, Portugal, and Greece.
Frank Engels, managing director at Union Investment, says an anti-European outcome would be “a major shock to equity markets.”
Markets rose after Donald Trump’s surprise election on anticipation of more government spending on infrastructure, tax cuts, and renewed inflation, the so-called “reflation trade.” But Le Pen might be different.
“The threat that the European integration project could be at risk as a whole makes it a different scenario that could end the bull market, to some extent,” said Engels. “I doubt that the market would just return to daily routine and that the bull market would be back in full force. I would argue that the market would need to digest this for quite a while until you could potentially see the underlying economic fundamentals being strong enough to resume the reflation trade.”
WHAT ABOUT OTHER SCENARIOS?
All that would hit the markets even sooner, if the top two finishers this Sunday are Le Pen and leftist candidate Jean-Luc Melenchon. He too has questioned the basic foundations of the euro, such as the independence of the European Central Bank and limits on governments’ budget deficits. He has called for business-unfriendly measures such as a 32-hour work…