French and Italian Elections: Spoilers

Published on February 21, 2017

A quick note on some potentially important political developments in France and Italy over the weekend as we approach the starting gate of what will be a crucial 2017 election cycle in the Eurozone:


The French bond market has been rattled by a late surge in the second round poll numbers of National Front leader Marine Le Pen in a hypothetical runoff against the front-runner, centrist independent Emmanuel Macron. That sell-off was further exacerbated by rumors of a possible alliance between Socialist candidate Benoit Hamon and the far-left’s Jean-Luc Melenchon, which, if it were to propel the left to the second round, could further increase chances of a Le Pen victory.

** The center-left/far-left alliance, while it cannot be completely ruled out, is highly unlikely. While we hear Hamon, despite playing coy in public, is pushing hard for a deal, Melenchon will agree to one only on condition that he will be the presidential candidate in the coalition – a condition Hamon, who leads him in the polls, would never accept.

** Le Pen’s candidacy could, however, get an assist from another, little noticed source, namely from centrist Fran├žois Bayrou, should he declare a presidential run in a press conference scheduled for tomorrow. From what we hear inside his party, not even Bayrou himself appears sure yet whether to announce or not. While early on in the race he was leaning against a run, he could now be tempted, with Les Republicains candidate Francois Fillon plagued by scandal, and centrist independente Emmanuel Macron losing some steam in the polls.

** A Bayrou candidacy would be a major negative for markets, as he would pick off votes from and further weaken both Fillon and Macron. That could even then, in a worst case scenario, open the way to a second round run-off between Hamon and Le Pen – again, the most dreadful second round pairing for markets.

And even an announcement that Bayrou is not running himself but backing Macron could be a negative for the independent former economic minister, who would then have a harder time in claiming his distance from traditional party politics. Indeed, that is the same reason we hear Macron has been begging former socialist presidential candidate Segolene Royal, who is eager to endorse him, not to do so, not wanting to remind voters of his ties to the embattled outgoing President, Francois Hollande.


The latest political news in Italy has been dominated by the infighting within the ruling Democratic Party, with its leftist flank (led by Pierluigi Bersani and Tuscany governor Enrico Rossi), now inclined to leave altogether.

Bersani’s move, while allegedly in response to former Prime Minster Matteo Renzi’s dictatorial control of the party, is in reality a response to the latest changes in the Italian electoral system, with its new purely proportional electoral law – with no majority prize – now favoring small parties over alliances and conglomerates.

Meanwhile, Renzi’s official resignation at this weekend’s Assembly has triggered the race to a party conference and a subsequent primary vote to select the candidate for prime minister. Both the conference and the primary should be held between the end of April and the beginning of May.

** But while Bersani and Rossi will leave the PD, short of a last-minute miracle, it seems that Puglia governor Michele Emiliano will actually stay, and that would make the split a much less dramatic event. With Emiliano, the spin-off to the left of the PD would be worth almost 10% of the electorate. Without him, the defections are worth probably more like 3-4%. Emiliano seems not inclined to run for the secretary post himself, as he is governing in a region with many Renzi supporters, and does not want to burn himself at this stage of the game.

** And the new voting system – which still has to be amended properly by the Parliament as per the constitutional court judgment (see SGH 2/15/17, “Italy: Renzi Push for Early Elections will Fail”) means at least for now the highest probability risk going forward is not so much a 5Star victory, but rather a return to the type of political instability that has plagued Italy for the bulk of the post-war era, from 1948 to 1994.

For his part, Renzi is still pushing for elections in September. But within his own supporters not only “Area-Dem,” Dario Franceschini’s group (the biggest in the Parliament), but also a good fraction of his own “pasdaran” (the so-called “Young Turks”) are pushing back, and want to reiterate support for the caretaker Prime Minister Paolo Gentiloni until the end of legislature.

Our expectation continues to be that elections will not be held until 2018

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