The City breathed a cautious sigh of relief this morning as polling data confirmed Edouard Philippe, the technocratic former prime minister, now leads the race for the Élysée Palace. With the spectre of populist insurgencies haunting eurozone bond markets, the prospect of a centrist, pro-business figure at the helm is precisely the stabiliser investors have been desperate for. Philippe, a polished product of the French administrative elite, offers continuity and fiscal predictability. For UK investors still smarting from the Brexit premium, a stable France means one less headache in an already turbulent neighbourhood.
Markets have been jittery of late, driven by rising French yields and the widening spread over German bunds. The fear was that a Le Pen or Mélenchon victory would trigger a capital flight reminiscent of the 2017 scare, only this time with the ECB’s balance sheet stretched thin. Philippe’s polling surge has already trimmed those spreads. The question now is whether his lead is sustainable or just a temporary haven for risk-averse voters.
Downing Street will be quietly pleased. A Philippe presidency aligns with UK interests: he is a reliable Atlanticist, a firm supporter of NATO, and pragmatic on European trade realignment post-Brexit. Whitehall sources indicate that UK officials view him as a safe pair of hands who will not pursue the kind of hostile regulatory divergence that could strain cross-channel commerce. The alternative, a populist firebrand, would have unleashed a fresh wave of uncertainty for British exporters already grappling with red tape.
But let us not get carried away. French polls are notoriously volatile, and Philippe’s coalition is a fragile alliance of centrists and moderate conservatives. The populist candidates, Le Pen and Zemmour, still command a large bloc of disaffected voters who distrust the elite. Their campaigns thrive on anti-immigration rhetoric and promises of protectionism, policies that would spook bond markets and send the CAC 40 into a tailspin. A Philippe win would calm nerves, but a second-round showdown with Le Pen would still be a coin toss.
From a fiscal standpoint, Philippe’s track record is reassuring. As prime minister under Macron, he oversaw the abolition of the wealth tax and a reduction in corporate tax rates, policies credited with a modest revival in French business investment. He also kept the deficit within Maastricht limits, a discipline his populist rivals have vowed to abandon. However, his spending during the Yellow Vest protests and the pandemic pushed public debt above 115% of GDP. Markets will watch closely for credible deficit reduction plans in his manifesto.
For now, the direction of travel is positive. The euro has ticked higher against sterling and the dollar, and French banking stocks have rallied. The real test will come if Philippe’s lead solidifies into a clear majority. Until then, investors should remain hedged, because French politics, like the City, rewards the cautious and punishes the overconfident.
