The City of London is not given to bouts of optimism, but the latest polling data from France has elicited something close to it. Edouard Philippe, the former Prime Minister, has edged ahead in the race for the French presidency, overtaking the perennial bogeyman of European markets, Marine Le Pen. For British investors who have watched the French far-right’s ascent with growing unease, this is a welcome signal that the Fifth Republic may yet hold the line against populism. But as any seasoned trader will tell you, a poll lead in June is not a victory in April. The bond market, for one, is not popping champagne corks.
Philippe, a pragmatic conservative who steered France through the early stages of the pandemic with a steady hand, represents continuity and fiscal orthodoxy. His platform, a mix of modest pro-business reforms and a commitment to European integration, is precisely the kind of centrist pudding the markets crave. Since the news broke, the spread between French and German 10-year government bond yields has narrowed by 5 basis points, a clear signal that investors are pricing in a lower risk premium. The euro briefly ticked higher against the dollar. These are the reflexes of a market that fears Le Pen’s protectionist, euro-sceptic agenda more than it dislikes Philippe’s technocratic blandness.
Yet caution is warranted. Philippe’s lead is within the margin of error, and the French electorate has a history of late swings. Le Pen, despite her defeat in 2017 and 2022, has steadily normalised her image. The far-right has learned to speak the language of purchasing power rather than ethnic grievance, and it resonates in the banlieues and rural towns left behind by globalisation. If the British experience after Brexit taught us anything, it is that populist surges are not linear. They can erupt when least expected, sending shockwaves through currency markets and triggering capital flight.
For now, the gilt market remains largely unaffected by French politics. The UK’s own fiscal position is perilous enough, with a debt-to-GDP ratio approaching 100 per cent, that investors are more focused on the Bank of England’s next move than on who will occupy the Elysée Palace. But make no mistake: a Le Pen victory would be a systemic event for European sovereign debt. Her proposals to leave the eurozone and renegotiate France’s EU treaties would reignite the existential crisis that nearly tore the single currency apart a decade ago. In such a scenario, British gilts would not be immune. Capital flight from the Continent would likely seek haven in US Treasuries first, but a pan-European sell-off would drag down all but the safest assets.
The key variable is the bond vigilantes. Since the 2012 ‘whatever it takes’ speech by Mario Draghi, the European Central Bank has acted as a backstop against fragmentation. But a French president actively hostile to European institutions would test that commitment to its limits. The ECB would face an impossible choice: either monetise French debt and risk its credibility, or let yields spike and trigger a sovereign crisis. Market participants remember 2011, when French bonds were downgraded and the spread over German bunds ballooned to over 200 basis points. That scenario could return with a vengeance.
Philippe’s lead is therefore a reprieve, not a resolution. The fiscal arithmetic of France remains grim: a budget deficit of 5.5 per cent of GDP, public debt exceeding 110 per cent, and a pension system that defies reform. Whoever wins will face the same structural headwinds. But markets prefer the devil they know. A Philippe presidency would likely pursue incremental reform, shying away from the radical spending cuts needed to stabilise the debt trajectory. That is a recipe for slow grind lower, not a crash. With Le Pen, the downside risk is catastrophic.
For British finance, the immediate takeaway is to watch the OAT-Bund spread like a hawk. If it widens beyond 100 basis points, it will signal that the Philippe bounce is fading and the Le Pen risk is repricing. Hedge funds are already positioning for volatility, buying put options on the euro and shorting French banking stocks. The prudent investor, however, will do what the City always does in times of continental uncertainty: buy gilts, sell the euro, and pray the British weather is more stable than French politics.
