"The Nightmare Scenario" And Everything Else: The Full French Election Matrix

Tyler Durden's picture

Yesterday, we presented a Deutsche Bank research report which tried to evaluate whether, despite polls suggesting otherwise, a Le Pen-Melenchon first round victory was possible in the French election this coming Sunday. In a surprising break from the conventional wisdom, this is what DB concluded:

Melenchon’s rise in the polls has been one of the key market drivers since the end of March. Further decline in Hamon’s votes is unlikely to support Melenchon to the same extent as it did in the last three weeks. However, the more important point is that the risk around the first round persists as (a) the top 4 candidates are within the historical margin of error and (b) the high level of undecided voters increases the uncertainty of the outcome.

Why so much attention on Le Pen-Melenchon? Because as the WSJ wrote  this morning, "with the start of the French election just days away, investors are contemplating their nightmare scenario: a choice between far-left and far-right candidates. In recent days, a surge in opinion polls has placed Jean-Luc Mélenchon, a left-wing firebrand who promises higher wages and fewer working hours, as a potential candidate to move past this Sunday’s first round of voting. That could set up a second-round vote in May 7 with Marine Le Pen, an economic nationalist who wants to pull France out of the euro."

A runoff between Ms. Le Pen and Mr. Mélenchon “would be a disaster for France…[and] a disaster for Europe,” said Patrick Zweifel, chief economist at Pictet Asset Management.


Under that scenario, investors would dump the debt of France and of weaker European economies and send the euro sharply lower, analysts say. 

Ok, so we know what the nightmare scenario is, and that as DB explains, it is certainly a probable outcome. What are the other 5 possible permutations for the second round? Here, courtesy of Market News is a breakdown of all 6 scenarios:

  • Macron-Le Pen (63%/37%, Ipsos poll April 14): The most plausible. The 2 candidates have led the polls for a few months. This scenario would come with no surprise on the financial markets, which have already integrated it.
  • Melenchon-Le Pen (60%/40%): The most feared. Risk is not fully priced, so it would come as a bomb on markets. Choose between the devil and the deep blue sea.
  • Macron-Fillon (64%/36%): The most welcome. This would give much appeasement with both Le Pen and Melenchon moved away.
  • Melenchon-Fillon (60%/40%): The most surprising. Fillon was not even favoritein the right party primary elections (Juppe was), Melenchon got 11% in 1st Round in 2012 Presidential, but French people know how an outsider can surprise (2002 elections, Le Pen (father) passing in 2nd Round)...
  • Fillon-Le Pen (56%/44%): The most at right. With huge abstention expected from left voters in this scenario, financial markets would not exclude a Le Pen win.
  • Macron-Melenchon (55%/45%): The most erratic. It would be feared that Le Pen voters slide towards Melenchon.

That's the summary. For those looking for a more detailed matrix-based breakdown of what to expect, here is BofA's Gilles Moec laying out the nuances of the French "binary event with multiple scenarios"

Next Sunday France will hold the first round of the presidential elections. Out of the 11 candidates, only the two with the highest proportion of the votes will qualify for the decisive second round on May 7. The opinion polls are so tight between the four top contenders that, once taking into account the error margins - as Deutsche Bank has done - they suggest 6 second-round combinations are arithmetically possible, with Le Pen-Melenchon a distinct probability.

BofA continues:

This only should be enough to keep the market on its toes. Indeed, the following scenario analyses indicates that out of these 6 combinations, only one would be “market friendly” (Emmanuel Macron vs François Fillon) in the sense that their stated policies suggest both would strive to keep France in the Euro area and, to varying degrees, would implement reforms to spur potential growth. We also found one scenario “market adverse” (Marine Le Pen vs Jean-Luc Melenchon), with both contenders being eurosceptic to varying degrees and supporting ultra-loose fiscal policy and a re-regulation of
the French economy. The remaining four combinations are binary, opposing one pro-European supply-sider to one Euro-sceptic big spender, see Table 1. We note based on available polls, in three of these cases, the “pro-European” candidate would defeat the “Euro-sceptic” (Macron would win against Le Pen and Melenchon, Fillon would win against Le Pen, although by a smaller margin than Macron). The riskiest of these binary combinations would be Fillon against Melenchon, in our view. Only a few polls tested this hypothesis, but they suggest the radical left candidate would win in this configuration with a comfortable margin.

Finally, here is a detailed breakdown of the supply vs demand economics, and pro-EU vs EU sceptics:

In nutshell, the economic debate around this election is centred on a dichotomy between reform – in particular deregulating the labour market – and protect – in particular affirming the French comprehensive welfare state. The relationship to Europe is to a large extent a by-product of this reform/protection focus. The reformists (Macron/Fillon) insist on the need for France to adapt to the current architecture of the EU, which promotes free competition and sets limits to national fiscal policies. Those who focus on protection consider either that the EU, and in particular the Euro area, is essentially incompatible with maintaining the French welfare state (Le Pen) or needs to be thoroughly reformed to offer space for demand-side fiscal policies and more social rights (Melenchon). Below, we briefly review main stated policies of the main four candidates (starting from the very left going towards the extreme right):




Melenchon wants to use fiscal policy to bolster the welfare state and growth. This includes a deficit-financed EUR 100bn capex programme and EUR 173bn additional public expenditure over five years. Consequently, the public deficit is expected to balloon to 4.8% in 2018 before gradually declining again, if all goes well (Melenchon explicitly counts on a large multiplier effect). An expansion of social security benefits, and adjustments of public sector pay are intended. Higher tax rates for higher incomes (including an income tax on the revenues of French citizens living and working abroad), revoking past labour market reforms and lowering the statutory pension age to 60 years (from currently 62) are discussed. Nationalisations of previously public companies (energy sector in particular) are among his goals, together with higher regulation and higher taxation for the financial sector.


Melenchon is EU sceptic: He has stated that he wants to renegotiate EU Treaties to provide France with more autonomy again, and though not his flagship project, an EU referendum on the renegotiated EU terms is among his considerations. While EMU exit is not explicitly part of his plan (unlike for Marine Le Pen), he is challenging the current functioning of the monetary union. He wants to change the status of the ECB, explicitly allowing the central bank to directly monetise government debt, and lifting the inflation target to 4-5% p.a.


In a Melenchon scenario, after an initial sell-off, the market could attempt to stabilise on the belief that Melenchon’s EU goals are sufficiently vague and his parliamentary support sufficiently thin to favour a sort of compromise solution. Although less extreme than Le Pen’s policies, we would still expect that having the second largest economy of the Euro area politically constrained and/or experimenting with ultra-loose fiscal policy would remain a durable drag on any rekindling of animal spirits in the whole region, in our opinion.




On fiscal issues, Macron’s policies are more prudent, combining nods to Germany – respecting the 3% limit for the deficit – with a protection of demand: reduction limited to 3% of GDP, public investment programme, no tax hikes and some income boosting measures for low to middle income families (abolition of the payroll tax to fund healthcare, offset by a rise in a wider-base tax , abolition of one local tax  for 80% of households). The idea there is to do just enough to procure from Germany some progress on fiscal union (harmonisation of fiscal policy, taxation, unemployment benefits etc are within his considerations as well as a joint Euro area budget and a Euro area minister of economics) and stabilise French debt.


On structural reforms, Marron’s motto is "flexibility". Effects on potential growth will be predominantly through increased total factor productivity, ie better relations between employers and labour unions and a facilitated integration of innovation in production procedures. But this means that the overall manifesto is vague on the definition of the measures themselves. Here, Macron seems to be pursuing a social-democratic agenda, in which the state sets guidelines but social partners (employers and unions) deal with details at the national or local level. This would allow Macron to avoid frontal controversies with the unions. He wants the pension system to be unified and to offer more choice to employees, but without reducing the overall generosity of the system. The same holds for the unemployment benefit insurance, which would be more efficient – and force jobseekers to be more active – but the overall replacement income would not fall. Working time would be treated in a similar way; 35 hours per week would remain a reference, but with more capacity at the local level to take deviate from it.


The overall agenda is tilted towards the supply-side - with for instance a decline in corporate tax from 33% to 25% over the mandate, but the social-democratic approach on structures has never really been tried in France, where unions are weak (less than 10% unionisation) and traditionally the government intervenes in a detailed manner.


This unusual approach provides Macron with a sense of novelty, but also deprives him of strong attention-grabbing, quantified measures for investors.


While a Macron scenario suggests to us that French and peripheral assets would probably benefit from the disappearance of the Frexit risks, there could be a cap on where French assets could go until proof of some capacity to deliver is shown.




The Republican candidate (Fillon) was the first to publish a full-blown and consistent supply-side intense reform program including corporate tax cuts, labour cost cuts, abolishment of the 35 hour week financed by a 2ppt VAT hike and non-replacement of public sector employees bound to retire. Public expenditure is planned to decline by EUR 100bn during the mandate. The pension age is set to increase to 65 (from currently 62). His program is the most reform-intense on paper with the potential to 'unlock' potential growth of c 1.5%. But as we argued before, sequencing becomes key for his plan to work: Supply side reforms will likely only work if demand does not falter, making a delayed implementation of the VAT hike, for instance, an important determinant of the potential outcome of his reform programme.


Broadly speaking, Fillon is pro-European. His supply-side economics reform approach is not far off what Germany has done in 2002-05, and his focus on lowering the deficit and debt burden would probably facilitate further Franco-German cooperation. However, it is less clear how fast and how much additional integration Fillon is actually envisaging for the EU. His policies are clearer on what he does not want (further EU enlargement, additional free trade agreements), while his plans to negotiate fiscal harmonisation (including a Franco-German initiative on corporate tax) are relatively less emphasised.


In a Fillon scenario, in short, while the market would probably react positively to Fillon's clear economic agenda and higher probability of achieving a working majority in parliament, implementation may not be as far-reaching as it seemed a month ago and some lack of visibility on the European project could take the edge off the relief rally on the periphery.


Le Pen:


Le Pen’s flagship project is the EU/Euro area referendum. She wants to renegotiate EU Treaties with Brussels in the first six month of her election. Her stated goal is to restore national sovereignty, and hold an EU referendum. She previously argued that her staying in power would be conditional on a referendum outcome.


Popular initiatives shall become a more widely used tool, in general, conditional on 500K signatures from the electorate. Her far-right stance comes with strict restrictions on immigration (10K limit per year) and more limitations to citizenship access.


Her economic goal is very similar to that of the far-left: bolstering the purchasing power of households, through income taxes in the lower tranches, helping SMEs through targeted corporate tax cuts and enforcing a production and purchases ‘home bias’ by levying a social charge on imports.


Explicitly part of her programme is the central bank: Banque de France independence from the ECB is a key feature, including direct credit financing of the government deficit (planned to reach 4.5% of GDP in 2018), hence her goal not only to reshape the EU, but also to take France out of the monetary union.


In a Le Pen scenario, in short, after an initial sell-off, the market could attempt to stabilise on the belief that Le Pen’s capacity to trigger and win a Frexit referendum. Still, we would still expect that having the second largest economy of the Euro area politically constrained and/or experimenting with ultra-loose fiscal policy would remain a durable drag on any rekindling of animal spirits in the while region, in our opinion.

* * *

Here is the bottom line: if on Sunday night the two candidates left standing are the following, it may be too late to sell.  

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Mimir's picture

Well, in France this scenario is not really possible as you can see. He is there for voters to decide on, at least in the first round of the election.. 

What happens in case of Mélenchon ending up as President is another story. We all saw how Hollande turned his coat within weeks. Mélenchon is different, but surely he will be under pressure to moderate some of his policies fairely rapidly. Le Pen also, by the way !!

quasi_verbatim's picture

Fillon-Macron are in the long tradition of 'Ollande-Sarkozy slimeballs going right back to Pierre Laval.

lablablabla's picture

Voilà voilà,

U.S. influence in French election... A Gladio special event between the two rounds ?

Thank you uncle sam, for what you did and what you do for us.


KennyW's picture

It's time to end the 4th Reich.

ds's picture

Take money off the table. Return if you must after the shoot-out. Currency (Euro) and Soereign hedges (Frane & Germany) are arguably cheap for a major geopolitical/economic risk. I stay with $ and US 10y Try until next week.

Fahq Yuhaad's picture

How anyone can be naive enough to believe that these pre-election statements and platforms of the candidates bear any resemblance to what happens when whoever gets into "power" -- as a cardboard cutout just like Drumpf or Obola --  is beyond my comprehension.

Joe A's picture

Both Melenchon and Le Pen have left economic policies which will bring the French economy to the gutter. They also are proponents of a strong state. That will make France only weaker in the now newly reemerging Franco-German axis. Since all politicians are liars, though, they might come back on their promises.

Cracker Pipes's picture

The real question behind this is whether or not France, Germany, and the rest of the European West have anything left to offer in terms of real advancement of civilization and not just the cost of real estate,  or are just Brazil and becoming more so... 

lakecity55's picture

No, the real question is how long will it be before all of Europe is under Sharia law!


Griffin's picture

In federal Europe tm, there will be a snackbar at every street corner.

If your thoughts and ideas are not purely globalist, then you might be the kebab that Merkel and Junker would like to sink their teeth into.


Rocco May's picture

France is the last hope for the anti-EU(ropeans).
I wish you success

TeaClipper's picture

Not quite the last hope, the EU ship has a lot of weak players on it. Once the crash gets underway its going to implode from many directions

ronaldwilsonreagan's picture

The Nightmare scenario is that the Jack booted nazi cunt might not win the french election and the same idiotic Trumptards that spent the last 18 months sucking orange cock will become constipated in her absence thus creating a national shit emergency. God help us.

CuttingEdge's picture

If God only helps the deserving, you sir, are fucked beyond measure.

lakecity55's picture

How do you know the polls are any less rigged in France than they were in the US?

How do we know if the Russians have hacked the French elections, hohoho.

Martian Moon's picture

Le Pen is not far right, she's a socialist, a national socialist

Any correlation with previous parties with that nomer are purely incidental and unfortunate

Mimir's picture

You haven’t read her program !

Look at what she intends to do with government institutions, the Parliament/Senate and the power of the President. Fascism in its traditional extreme right clothing.

Griffin's picture

I would think that Le Pen has a very good chance of winning the elections.

She seems to want to re enforce french values and breathe life into the french economy by making France more independent and distancing France from the economic control system that benefits only Germany, at a great cost to the rest of Europe.

I think that Macron, the EU favourite, will have some problems coping with this project and may seem out of his depth, not a convincing character for this position.

If he were to win, this would hardy be a problem, since he would have lots of people who are connected to him to help him make all the right decisions.




Ghordius's picture

yes, she has a good chance

no, what she actually wants is to have more French/national economic control

Macron is the favourite of the EU socialists and in part liberals(TM), yes. but Fillon is the favourite of the EU conservatives

Griffin's picture

Fillon seems to be having some corruption scandals chasing after him, and that is not a good for inspiring confidence in people.

Someone like that could have some skeletons in the closet, like having accepted gifts in the past from some generous friends, or something like that.



Mimir's picture

Corruption scandals follow surely also Le Pen too: Secrete bank account in Switzerland, fraud with European Parliament funds, cheating in tax by under evaluating her fortune, fraud in the financing of previous election funds... all together some seven legal investigations are ongoing against her and her collaborators. 

Griffin's picture

I guess Le Pen is not a perfect candidate.

But if you open a bank account in Switzerland, isnt it by default secret ?.

Fraud with European funds, this should be carefully investigated, starting with a full audit of the EU as a whole.


I must admit that i have not heard much about those 7 issues being investigated. 

Here in Iceland, where i live, there is not much news coverage from France.

Whatchamacallit's picture

I think Fillon (center-right) still has a chance.

1. The French know that most politicians are a bit corrupt. And they are astute enough to know that the corruption scandal that was hurled at Fillon just before the elections is just that: a low blow.

2. Apparently he did very well in the debates, being the only one to keep his calm and not deviate from his well-articulated program.

3. He is the only one who can rally a majority at the Assembly.

4. As the saying goes, the French "have their heart leaning to the Left, but their purse leans to the Right". 

5. Everyone in France knows that the first round of elections is "to vent". The second round is where the real voting occurs.

So if Fillon makes it for the second round, he will be the one. 


Disclaimer: I don't really care one way or the other.

Griffin's picture

I just hope that the person who wins will be someone who can be trusted to defend the interests of the French people.

Someone who is a asset to France rather than a liability. 

Trubador's picture

Scandals with French (Europe in general) politicians tends to be the norm. Fillon appears to be finally overcoming them as it gets much closer to Round One election day. Le Pen is starting to fade a bit as she contracted some foot-in-mouth disease, showing some of her true colors that are not necessarily appealing to voters. I don't see Fillon as necessarily pro-EU. Many see him as Thatcher-like. He's pro-France, and definitely leans right. And he seems to be walking a fine rhetorical line in order to attract as much support from as many sides as possible (which is necessary in order to more effectively rule under a parliamentary system). It seems clear to me that he's definitely anti-EC at least. Without the EC, the EU becomes severely weakened. He voted no in the referendum on Maastricht, which would've strengthened the EU if it passed. He has said he would not rule out leaving the ECHR, if other European countries block his reform measures on that human rights court. Regarding the EU specifically, he has said that it is "at best, ineffective, useless and irrelevant and at worst as an obstacle to our development and freedom." If Fillon gets through to Round Two, I think France will be in better shape with him as the eventual winner. Certainly much better than Macron and Melenchon.

TeaClipper's picture

Seeing EU flags being burnt on the streets of French cities will be a wonderful sight to behold. And when the fourth reich is finally killed, the remnants of Europe need to ensure Germany is balkanized into its constituent parts so that a fifth reich will never again be possible from that part of the world

Mimir's picture

Very good overview of the challenges and options France is confronted to in this election.

I believe however that there is another layer of the analysis, which would deserved to be elaborated on.

I the case of a Mélenchon win it should first of all be mentioned that he has underlined that he does not want to leave the EU or the Euro. What he wants is to force a change of EU politics which would include a new European Treaty. Whether he can succeed that, depends to large degree on what happens in other up-coming elections and first of all the one in Germany (24.September). If the Social Democrats comes to power in Germany, now that Martin Schulz (former European Parliament President) is a candidate Mélenchon might find a support for at least a weakening of neo-liberal policies in the EU and to put a break to austerity policies. This is Mélonchon's main demand. 

porcsale's picture

Once again, a poll in which Asselineau isn't featured is bound to be off by a large margin for every candidate.

All the polls you see purposely ignore Asselineau, the most dangerous candidate for the EU.