On 7 May, Emmanuel Macron won a landslide victory over far-right Front National Leader Marine Le Pen in the French presidential election, scooping 66.1% of the vote despite an abstinence of almost one-third of the eligible electorate.
The last twelve months have been extremely testing for international financial markets and particularly for the political landscape in Europe. On 23 June last year, the United Kingdom held a referendum on its membership of the European Union, with the “Leave the EU” campaign winning by 52% of the vote to 48%.
During this period, the central issue between Britain and France has been the volatility gripping their respective economies, as well as the rest of Europe. With the UK’s “snap” election to come in June, uncertainty over the future of international trade agreements between these nations has stalled and continues to confuse overseas investors.
The Economic Headwinds
On the face of it, the objectives of the UK appear to directly conflict with those of France, even under the prospect of new leadership. In the aftermath of this election, significant doubts need to be cleared, and important questions need answering. What is to become of the ties between these two great nations? What are the implications of a Macron presidency for Brexit? And how is France itself positioned to navigate the obstacles ahead?
President-elect Macron, a former investment banker turned politician, has long been advertised as a candidate with significant financial clout. He is a market-oriented centrist whose vested interests lie in some of France’s most vulnerable sectors.
As a committed and self-confessed “Europhile”, it is hardly a surprise that he is advocating a pro-EU agenda as well as a Nordic-style economic bill, with targeted spending cuts of €60bn over a 5-year period combined with a fiscal stimulus package of up to €50bn. He also wants to reduce several civil service jobs to prop up the private sector, and encouraging free-market thinking.
Further ambitions include increasing the flexibility of labour markets to negotiate working hours and pay, the maintenance of a budget deficit under 3% to comply with current EU regulations and, crucially, the creation of favourable corporate tax regimes to help draw more business into Paris and away from London.
Challenging the City of London
London currently ranks as the world’s top financial centre, but Macron wants Paris to bridge the gap over the next five years. Some argue that Macron’s policies could present major problems for the UK and its hopes of driving its economy forward.
Leading global investment banks such as Goldman Sachs and JP Morgan have indicated their intentions to move some front office roles out of London, and Macron’s proved business acumen could coax out 20,000 jobs into the French capital.
He intends to follow through with his manifesto pledge of pushing for even greater economic integration in Europe, forming a complete banking and fiscal union with all 27 EU member states to more effectively absorb asymmetric shocks and turn the region into a truly optimal trade area, with the Eurozone becoming an optimal currency area.
Macron’s Negotiating Stance
Macron also mentioned the need to adopt a tough stance when it came to Brexit negotiations. His ambition for ultimate integration seems to support the move to “exclude” the UK from the true benefits of access to the single market, free flows of factor inputs and free trade.
Macron and his views are likely to appeal to the sensitivities of the European Commission and German Chancellor Angela Merkel, thus enabling him to rebuild Franco-German ties and present a stronger, more imposing and fully united front to negotiate Britain’s future trade agreement.
Nevertheless, a Macron-led government is still cause for British optimism, both with regards to securing a mutually beneficial trade status and emboldening economic partnership with France. To fully appreciate the opportunities at hand, it is important to contextualise each nation’s trade.
The State of French Trade
France is currently the 6th largest global exporter of goods and services, while the UK occupies 9th position. The former has been running a net trade surplus with the latter for most of the post-WWII era, with total French exports to the UK valued at $37.6bn in 2016; the bulk of these exports includes refined petroleum, steel, cars and aerospace.
Due to the nature and direction of trade, the weaker pound has helped British exporters in construction and manufacturing and hindered French exporters, who are facing worse prices when they translate their earnings in sterling back into Euros. A plunge in aircraft exports has worsened France’s trade position with major Asian economies as well, thereby extending the trade deficit to over €1.1trn in the first few months of 2017.
France’s economy needs to run a consistent surplus on its capital & financial account to sustain this deficit. This will exert tremendous pressure on Macron to find ways of attracting capital inflows and foreign exchange into financial services. Meanwhile, London is still fighting hard to keep its status as the world’s leading centre.
So not only does France still value its trade links with the UK (its 4th-largest trading partner), but a whole host of inward-looking policies are required to address flagging growth of 1.5% and a stubbornly high unemployment rate that is close to 10%.
Uniting a politically divided and disenchanted nation needs to take priority, and this might influence the extent to which France takes an active involvement in trade negotiations over the next two years.
A Champion of Continuity
The salient point behind this line of argument is that Macron is a symbol of the continuity of the status-quo in Europe. Despite his initial war of words, he does not seek to “punish” Britain and the process of forming a Norwegian deal remains viable, as well as bilateral deal or a standard WTO-conforming agreement, and discussions on international affairs are still expected to follow pre-specified timelines.
In this regard, a victory for Le Pen may well have resulted in ineffective negotiations through an existential crisis in mainland Europe, with France then looking to reverse out of the monetary and trade systems.
Bridges, Not Walls
As it so happens, Macron’s passive approach attempts to appease the political left and the right simultaneously may result in Britain having sufficient bargaining power to reach the desired, mutually beneficial agreement on its terms of “divorce”.
British Prime Minister Theresa May is already engaging in discussions with the French President-elect, and both parties should continue to remain vigilant and open-minded. Each has vested interests in the other’s nation, looking to protect the rights of their respective nationals in the foreign country. Macron’s stance on The City of London’s financial passporting rights into the EU market remains to be seen. However, May’s commitment to lowering net migration to below 100,000 per annum is unlikely to strike a positive chord in proceedings.
Nevertheless, it is evident that both Britain and France will look to work together as equals and close relations, and “build bridges, not walls” on their paths to economic revitalisation.