Centrist Emmanuel Macron's victory in the French presidential race is the most definitive sign yet that Europe has resisted, rather than embraced, the populist political tide embodied by Brexit and Donald Trump. While markets anticipated the win, the next test will be whether the renewed sense of solidarity in European politics leads to progress on issues that have long dogged the economic bloc.
In the near term, markets have already been inspired by the fading of European political risk. Elections in Austria, the Netherlands, and now France show Europeans leaning toward repairing the European Union and its common currency, the euro, rather than breaking it apart.
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Since the first round of the French presidential elections two weeks ago, European stocks have gained 4.3%, with French stocks up more than 7%. Credit spreads have tightened, French bond yields fallen and the euro traded Friday at $1.10, up around three cents since April 23. That implies some of the relief investors will feel from Mr. Macron's win has already been priced in. Markets have been further buoyed by the relative strength and resilience of eurozone economic data.
How could Mr. Macron's election keep the momentum going for European markets? A focus will be on whether he renews the relationship between France and Germany, a key development in potentially delivering greater European integration, such as strengthening the eurozone's banking union and crisis-response capabilities. Efforts to improve the functioning of capital markets in Europe too would be welcome. That would inspire longer term confidence about the ability of the euro to thrive, even if ideas like fiscal union remain on the drawing board.
An important part of that will be Mr. Macron's ability to reform France, boosting growth that has lagged behind that of Germany in recent years; to have the two biggest economies in the eurozone moving in tandem will be a powerful force. Vital tasks include making labor markets more flexible in an effort to lower French unemployment from 10%, as well as reducing public spending.
Another litmus test for progress will be Greece, whose financial crisis has been grinding on for seven years. A renewed Franco-German axis could perhaps find some way to agree a restructuring of Greece's debt. Ten-year Greek bond yields have fallen below 6% for the first time since 2014 as hopes have built of a deal with creditors.
One area to watch out for is less positive, and centers on Italy, and its weak growth and high debt. One consequence of Mr. Macron's win is that investors are likely to focus again on prospects for the European Central Bank winding down its bond-purchase program: Italian bond yields could rise as a result. And Italian politics remain a wild card, even if an election might not occur until next year. Continued strong support for the antiestablishment and euroskeptic 5 Star Movement could rattle markets anew.
The election of Mr. Macron is a step forward for Europe -- but in a system with so many moving parts, it is a necessary, not a sufficient condition for progress. Still, combined with a recovery in corporate profits and decent economic data, the pro-European story has the upper hand.
Write to Richard Barley at email@example.com
(END) Dow Jones Newswires
May 07, 2017 14:52 ET (18:52 GMT)