Italy the next euro battleground after French election

Desmond Lachman

Governments and markets across the globe are justifiably breathing a deep sigh of relief today following this weekend’s first-round French presidential election. However, they would be making a big mistake to think that the European economy is now out of the woods from major political risk.

Rather, they should be focusing attention on ongoing political development in Italy, the Eurozone’s third-largest economy. That key eurozone country is scheduled to have elections by the spring of 2018 at the latest that could see the rise to power of a decidedly anti-European party.

This weekend’s advancement of Emmanuel Macron and Marine Le Pen to the second-round of the French presidential election represents a setback to the French political establishment. For the first time in the 60 years of the country’s Fifth Republic, neither of its two establishment political parties, the Republicans and the Socialists, will have a representative in the second-round run off scheduled for May 7.

This makes it all too likely that whoever becomes France’s next president will have to work with a parliament (to be elected in June) that is of a very different political complexion from themselves.

While this weekend’s election result was far from ideal, it at least spared France from the worst-case scenario of the National Front’s Marine Le Pen and the far-left’s Jean-Luc Melenchon advancing to the second round. Until last weekend, that scenario could not be excluded given the tightness of the polls.

Had that scenario materialized, the French electorate would have been given the option of choosing their poison. They would have been faced with the choice of Le Pen, who is determined to take France out of both the euro and the EU and reverse the trend toward globalization; or Melenchon, who seemed intent on destroying the French economy with punitive taxation and profligate public spending.

A further reason for comfort in last weekend’s French election results is that it heightens the prospect that a reform-minded and centrist, Emanuel Macron, will become the country’s next president. He currently leads Marine Le Pen by a full 20 percentage points in the polls, which would seem to give him a commanding lead in the run-off election.

In contrast to Le Pen, Macron offers France the prospect of a young reformist and energetic president who is intent on tackling the country’s many structural obstacles in getting itself on a faster economic growth path.

Sadly, while France seems to be clawing its way out of the danger zone, the same cannot be said of Italy, whose government bonds are now being downgraded by the ratings agencies to close to junk against the backdrop of heightened political uncertainty. Following last December’s no-vote in Matteo Renzi’s referendum on senate reform, the country’s ruling Democratic Party shows every sign of splintering.

At the same time, the populist Five-Star Party, which is intent on taking the country out of the euro, now appears to be riding a wave of popular discontent with Italy’s political establishment. The most recent polls indicate that the Five-Star Party is Italy’s most popular political party and that a majority of Italians now see the euro in a negative light.