Mark Lister, 22 March 2017

Markets breathed a sigh of relief after the Dutch election last week, as the highest voter turnout in 30 years looks to have re-elected the incumbent centre-right leadership.

There had been a little bit of nervousness in the lead up, as the more extreme anti-euro candidate made some strong gains in the polls.

Another surprise victory for populism would’ve been a big deal, and not just for the Netherlands. This election was viewed as a barometer for how the rest of Europe is feeling, particularly the French, who are also set to go to the polls soon.

Next month, five candidates will contest the first round of voting in France. Unless one of these wins a majority, which is unlikely, it becomes a two horse race for the second round about a fortnight later.

The candidate rattling markets is National Front leader, Marine Le Pen. Among other things, Ms Le Pen wants a Brexit-style referendum on France’s membership of the European Union (EU). That would be a big deal, much bigger than Brexit.

France is the second largest economy in Europe, behind Germany.  Unlike the UK, it is part of the monetary union, meaning it shares the euro currency with numerous other countries including Germany, Spain and Italy.

While the UK was part of the 28-member EU, it always retained its own currency (the pound sterling) rather than joining the smaller, more intertwined group of EU countries that adopted the euro. Because of this, a “Frexit” would be a much more disruptive exercise. In all likelihood, it would trigger a breakup of the Eurozone.

There is a decent chance Le Pen reaches the second round, as she will attract all of the anti-establishment vote, while the mainstream vote will be split across the rest. However, it will be much more difficult for her to emerge victorious from the second round, when it’s down to just her and one other.

Even if France did hold a referendum in the same way Britain did, the people wouldn’t necessarily vote to leave. There would be much more riding on their decision, and the consequences would be far greater.

Sentiment for the euro amongst member countries is actually quite healthy at present. In France 68 per cent of respondents are pro-euro, not quite as high as Germany, where 81 per cent are in favour of the common currency.

Italy actually looks to be most polarised regarding the monetary union, with just 53% in favour. Maybe that’s the one to watch over the next year or two, not France.

A Le Pen victory, followed by a successful campaign for France to leave the EU still only looks like an outside chance. However, given the events of last year that caught many a pollster, strategist and forecaster well and truly wrong-footed, investors will approach the French election with trepidation.

We should expect a little nervousness as it approaches, and a collective “phew” if one of the mainstream candidates ultimately wins. Should Le Pen pull off a surprise, there will be major volatility across markets.

It wouldn’t be the end of the world, but it could well be the end of Europe as we know it.

This article was published by The New Zealand Herald on 22 March 2017 under the title ‘Mark Lister: Sigh of relief following Dutch election’.