Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: This podcast was recorded for publication on the 13th of June 2024 by HSBC Global Research.
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Speaker: Just search for The Macro Brief.
Speaker: Hello and welcome to The Macrobrief.
Speaker: I'm Piers Butler in London.
Speaker: There were big developments in Europe this week where right-wing parties made significant gains in the European parliamentary elections.
Speaker: In fact, the far-right did so well in France that President Emmanuel Macron called a snap parliamentary election sending shockwaves across the continent.
Speaker: The results appear to leave Europe with a weaker pro-integration and pro-reform front, a deeply polarized electorate, and a more uncertain future.
Speaker: So what happens now?
Speaker: I'm joined by our chief European economist, Simon Wells, and Shantana Sam, economist for France and Switzerland.
Speaker: Simon and Shantana, welcome to the podcast.
Speaker: Hi.
Speaker: Hi.
Speaker: So, Simon, just to recap on the European elections, a big swing to the right was expected and happened.
Speaker: Yes, that's exactly right.
Speaker: In some sense, what happened was expected and anticipated by the polls.
Speaker: Gains for the centre-right bloc and also, of course, the far-right, particularly in France and Germany.
Speaker: But it wasn't necessarily a shock.
Speaker: And looking at the maths of it, the ruling centrist grand coalition still has a majority.
Speaker: So are we saying continuity?
Speaker: It does, yes.
Speaker: And that probably puts Ursula von der Leyen in pole position to retain her job as a commission president.
Speaker: But it's a narrow path for her.
Speaker: European politics is fragmented.
Speaker: She can't.
Speaker: necessarily even count on all of the votes from her own bloc.
Speaker: So it's definitely not guaranteed.
Speaker: But the difference, Piers, is that now if you combine all the far right blocs together, if they could come together and agree, they're potentially the second largest faction.
Speaker: How long can Europe's rulers go on just
Speaker: plowing on as if nothing's happened when more and more voters are moving to the far right.
Speaker: It's definitely not without big implication.
Speaker: So la grande surprise, as the French would say, is President Emmanuel Macron's reaction.
Speaker: According to press reports, not even his closest advisers expected him to call a snap election.
Speaker: Shantana, why did he do that?
Speaker: And remind us how these elections are going to work.
Speaker: Yes, it's a typical move from Macron.
Speaker: It's a clear gamble that he can achieve a majority following this severe defeat at the European elections.
Speaker: Probably he's a gamble on the fact that the legislative elections will have a very different system and that the prospects of having a national rally-led government could prompt voters to come back to support his coalition.
Speaker: But as you said, it's a very risky gamble.
Speaker: Regarding the functioning of the elections, French citizens will elect the 577 members of the National Assembly in the lower chamber of the parliament.
Speaker: The election will be held in each of the 577 constituencies.
Speaker: In each constituency, a candidate may win if he gets more than 50% of votes and he will be qualified
Speaker: if he gets more than 12.5% of registered voters.
Speaker: And in the second round, the candidate who received the most of vote will be elected.
Speaker: So what are the dates of the first and the second round?
Speaker: So the first round will be held on 30th of June, and the second round will be held one week later on 7th of July.
Speaker: So this is going to be a sort of French sandwich between the UK general election then.
Speaker: This is going to be a very busy time in Europe.
Speaker: Oh, Europe has got election fever.
Speaker: We're sort of going to get a movement to the right in France and a movement to the left in the UK.
Speaker: Potentially, yes.
Speaker: According to the polls, anyway.
Speaker: Potentially, yes, which, of course, is interesting from the UK's point of view because it's going to potentially get a centre-left government that wants to move and repair bridges with Europe.
Speaker: At the same time, Europe itself is moving in a more Eurosceptic direction.
Speaker: So, Chantana, your report goes into some detail regarding the French elections on all the different political factions, and there are many, and I don't propose to go through them on this podcast.
Speaker: There are a number of potential alliances, but the bottom line is that Marine Le Pen's party, Rassemblement National, is likely to have the largest share of votes, but not an overall majority, at least according to the latest opinion polls.
Speaker: In that instance, will they be able to govern?
Speaker: Yes, there is a lot of uncertainty about that.
Speaker: So first I will say that it's not a given that ARN will not have the majority at the parliament.
Speaker: It's possible that they could have because in the past, actually, most of parties tended to clean some alliances to prevent a win from ARN.
Speaker: This time it could be different, especially because LR
Speaker: would be more open to an alliance with, so LR is a central right Republican, and it could be more open to an alliance with Iran.
Speaker: So a few days ago, Eric Chuty, the leader of LR, even announced an alliance, but he was expelled by other members of the party.
Speaker: So even probably an electoral pact between LR and Iran will not be fined before the elections, but we cannot rule out an alliance after the elections.
Speaker: And in that case,
Speaker: Erwin could have the majority with a coalition with LR.
Speaker: So it's a possibility.
Speaker: Another possibility is that Erwin will not find any allies.
Speaker: And in that scenario, we will have an unparliamentment leading to some paralysis.
Speaker: So let's assume that they managed to establish some form of government.
Speaker: Can we have a look at their policies?
Speaker: What have they said?
Speaker: And in practice, how many of these policies are likely to be enacted?
Speaker: Yes, so far the RN has not updated its manifestos, so it's still the one that was published for the elections in 2022.
Speaker: But party officials have said that it was still the core of the policies that would be conducted if they were in power.
Speaker: The manifesto includes a lot of very expensive measures, like reducing the age of retirement, reducing the VAT on energy,
Speaker: They also want to suspend income taxes for people aged under 30.
Speaker: They want to introduce a new zero loan rate for young couples to encourage home purchases and this loan will be forgiven after the birth of the third child.
Speaker: So all in all is that they are very expensive measures.
Speaker: They were evaluated by the party at 68 billion euros, but an independent think tank has evaluated the amount to more than 100 billion.
Speaker: That being said, the party also wants to raise revenues in cutting access of social benefits to foreigners.
Speaker: and it could be a way to raise revenues.
Speaker: But according to independent estimations, the amounts of revenues could be overestimated by the party.
Speaker: And in addition, there are some uncertainties on whether this measure could be validated by the constitutional court, and it could lead to some clash with the constitutional court.
Speaker: So there is some risk on this.
Speaker: So Simon, looking at it from a European perspective, suddenly we have the prospect of potentially some quite significant fiscal slippage out of France?
Speaker: Yes, I mean, Shantan has done a very good job of explaining the details, but let's just take a step back.
Speaker: What he's outlined is a path potentially to power for a far-right government in Europe's second-largest economy, and one that may potentially pursue fiscally lax and expensive policies.
Speaker: And this has to come against the backdrop of already a degree of fiscal slippage in France that resulted in the downgrade quite recently.
Speaker: But the wider European context is this is a terrible time for the European Commission for this to happen.
Speaker: European fiscal rules have just been reimposed after a suspension in COVID.
Speaker: If you end up with a
Speaker: French government that wants to clash with Europe may drag its heels on complying with those rules or blatantly break them, other countries are going to say, well, why am I signing up to anything?
Speaker: Why am I going to do this if France isn't?
Speaker: The timing really is quite bad for the European Commission and the potential implications across Europe of what might happen in France, well, they're pretty enormous.
Speaker: From a sort of fundamental economic perspective, Europe, you published something on Europe exports.
Speaker: I mean, economically, Europe isn't doing too badly at the moment.
Speaker: No, that's right.
Speaker: And the economy is improving.
Speaker: And as you rightly say, there are signs the global trade cycle is turning.
Speaker: Europe's service sector is already doing OK.
Speaker: That might see Europe's manufacturing sector lifted as well if we do get that continuation.
Speaker: But this has just chucked an enormous new risk
Speaker: into the equation.
Speaker: If the markets turn against France, rather like they did to the UK, the back end of 2022, we could see a big tightening of credit conditions.
Speaker: Well, I guess you'll be watching the opinion polls and the onset of both the French and the UK elections.
Speaker: A busy summer for you and for Shantana.
Speaker: So thank you both for joining us today.
Speaker: Thank you.
Speaker: Thank you.
Speaker: Elsewhere, the Fed kept interest rates on hold this week as expected.
Speaker: Our U.S. economist Ryan Wang is only anticipating one rate cut this year, a 25 basis points reduction in September.
Speaker: And here in the U.K., the Bank of England is due to meet next week.
Speaker: Liz Martins, senior UK economist, says recent inflation data has all but ended any hope of a rate cut this month.
Speaker: Our base case is for a reduction in August.
Speaker: And that monetary policy outlook is going to be critical for sterling going forward.
Speaker: That's according to Paul Mackel, global head of FX Research.
Speaker: Although some think that the upcoming election will be positive for the pound, Paul argues that the pound remains beholden to rates and will likely be on a path of gradual weakness in the coming months.
Speaker: And don't forget that our next Live Insights event is fast approaching.
Speaker: On the 19th of June, James Pomeroy, global economist, will be looking at how the world has evolved since the pandemic and the key role played by themes such as automation, demographics, and energy transition.
Speaker: To register for that event or for more information on anything we've discussed on today's podcast, please email ossresearch at hsbc.com.
Speaker: So that's all we've got time for today.
Speaker: Thanks very much for listening to The Macrobrief.
Speaker: We'll be back again next week.
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Speaker: We hope you enjoyed the discussion.
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