Blow To France's Sarkozy Seen As Unsettling For Markets

Tom Burroughes

23 April 2012

The failure of French president Nicolas Sarkozy to win the first round of the national elections, and notable showings by the country’s right and left-wing parties, will keep markets in a nervous state, wealth managers said yesterday.

Francois Hollande, the socialist opposition leader, won the first round of the elections, which conclude with a second round vote on 6 May.

“Whilst Hollande was favourite to win the second round, most had initially thought that the incumbent Nicolas Sarkozy would fare better in the opening contest. Instead his loss marks the first time for many years that a sitting president has failed to win the first round. Third in the election was far-right leader Marine Le Pen, with one of the party’s highest ever shares of the vote,” Andrew Morris, managing director of Signature, the UK wealth management firm, said.

With polls pointing towards a possible defeat for centre-right Sarkozy, the wealth management sector may need to brace itself for more taxes on high net worth individuals if a Hollande administration takes office; he has promised to impose a 75 per cent marginal tax on incomes above €1 million (around $1.31 million), for example. Meanwhile, Hollande has also promised to renegotiate France's austerity measures that had been designed to protect the eurozone.

Advances

“Disturbingly both the main radical parties managed to advance themselves, securing in aggregate some 25 per cent of the vote. Such voting shows the extent of the appetite for change in the eurozone, and continues to demonstrate the growing threat posed by extremism, as electorates become disillusioned by the current system and austerity. Politicians must wake up to this threat and in so doing realise that current economic policy in the eurozone, which advocates austerity and thus unemployment, is only fuelling the fire,” Morris said.

Hollande came ahead of Sarkozy in Sunday's 10-candidate first round by 28.6 per cent to 27.2 per cent. National Front leader Le Pen won 17.9 per cent of the vote, the biggest share of the vote that a far-right candidate has ever achieved. The total voter turnout was 80.2 per cent (source: Reuters). Communist-backed hard leftist Jean-Luc Melenchon, came fourth on 11.1 per cent, ahead of centrist Francois Bayrou with 9.1 per cent of the vote.

David Miller, partner at Cheviot Asset Management, the UK wealth manager, said markets will be jittery ahead of any definite result in the polls in early May. “If Sarkozy had won comfortably yesterday, it would have been business as usual with France and Germany trying to hold the eurozone together. However, the new prospect of a new President and new approach to dealing with the eurozone crisis has made investors and European markets nervous. “We’ll see muddled markets until the final result is declared,” Miller said.

In Morris’s comments on the first-round results, he said that he has already noted the “startling and somewhat worrying statistics on the French economy, such as it having the largest public sector relative to the size of its economy in the eurozone”.

“With this in mind, financial markets will be increasingly wary of some of the policies which Monsieur Hollande has pushed in his manifesto, not least his spending and tax policies, the combination of which could do lasting damage to the economy. With more than half of France’s government spending financed by overseas debt holders, any doubts could easily develop into something more worrisome,” he said.