Deutsche Bank Research

French elections, March PMIs & Raising the cap of EFSF and ESM

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French elections: a second turning point looming?

A week ago, socialist François Hollande, after being portrayed for weeks as a clear winner in both rounds, was overtaken by Sarkozy in voting intentions for the first round (30% vs 28% for Hollande according to CSA, while other polls showed at least some catching-up).

This was a turning point. The gap has also narrowed in the second round although Hollande still has a clear advantage (54% vs 46%). Other notable developments: voting intentions for Front National’s Le Pen are falling and those for the radical left’s Mélenchon are steadily rising. Sarkozy’s move to the political right has apparently been successful. Polls further indicate that as doubt spreads among left-leaning voters, confidence is climbing among those on the right. The second-round dynamic is also changing. Sarkozy is gaining ground among the electorates of Le Pen and centrist Bayrou (the drifting-away of Bayrou’s electorate from Hollande is probably due to his plan to tax highest incomes at 75% ‒ fuelled by a need to rally the left at large). Hollande is expected to get most of the Mélenchon votes although fewer of them are voicing enthusiasm for a victory of his. One month before the first round, the presidential campaign is entering a new phase. The Toulouse killings have certainly disrupted the campaign, diverting attention away from central issues like unemployment and the euro. Sarkozy (as well as Le Pen) may benefit, especially if the subsequent political debate focuses on security issues. If it turns into a debate on values and social cohesion, Sarkozy may be weakened.

March PMIs – bringing back the blues

On March 30-31, the EU-27 finance ministers will meet at an informal Ecofin Council in Copenhagen to discuss issues such as combining the intervention power of the European rescue mechanisms EFSF and ESM from July onwards.

Following the pressure from the IMF, the US and most EMU countries, there will most probably be an agreement by the finance ministers to raise the overall intervention power. The most likely solution is a parallel use of EFSF and ESM: while EFSF would continue to manage and disburse existing programmes of about EUR 190 bn, ESM would kick in as of July 2012 and bring the combined firepower up to EUR 690 bn. In Germany, raising the EFSF/ESM cap will require parliamentary approval as it increases guarantees from EUR 211 bn at present to about EUR 260 bn for both mechanisms. That figure could even increase by another EUR 8 bn if current aid programmes for Ireland and Portugal were to be extended under EFSF by one year. Thus, conflict potential within the governing coalition could lead to intense political discussions next week. Merkel’s majority is anything but guaranteed – support from the opposition could be needed. Legislative approval should be concluded by mid-June in conjunction with the ratification of the Fiscal Compact.

Raising the cap of EFSF and ESM?

Preliminary March PMIs for EMU, Germany, France and China have one common theme: much weaker than expected. Unless the Anglo-Saxon economies (reporting early April), where the PMIs softened already in February, enjoy hefty rebounds, March global PMI could drop dangerously close to the 50 boom/bust-level (Feb 51.1).

The weakness in all releases comes as a surprise. Granted the surging oil price is squeezing profit margins, but the recent much improved US data should have provided some consolation. However, a further contraction in new export business in China and Germany, two of the world’s three largest exporters, suggests that global trade, which was up a meagre 2 ½% at the start of the year, has weakened further. In general, the contraction of incoming new business (domestic and from abroad) has accelerated in China and EMU, suggesting that Q2 is unlikely to see a strong recovery in global growth. This is particularly true for the EMU periphery where the drop in new business was considerably stronger than in France and Germany.

Published by kind permission of Thomas Mayer.


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