French silver linings

The first round of the French presidential elections held its promises; it showed that opinion polls were no substitutes for actual vote counting and that the second round is more open than ever. 

To begin, voter participation was very strong at 80%.  Second, while Francois Hollande won, his lead over president Sarkozy was smaller than expected, 28.6% vs. 27.2%.  The National Front scored strongly at 17.9% but that was no surprise.  The biggest surprise was that Jean-Luc Melanchon, the candidate from the far Left scored only 11.1%, well below expectations. Finally, Francois Bayrou, the centrist, also disappointed with a 9.1% showing.

Clearly, this first round was a protest vote (massive participation, strong aggregate showing by the non-center parties), but it was not an outright rejection of the current political system as traditional candidates scored 64.9%.  Perhaps political commentators forgot that the median age of the French population is 39.4 years, not 20.

Two factors will determine the ultimate winner: how will the votes of the candidates eliminated after the first round be redistributed, and will there be a clear winner of the forthcoming debate(s).

Marine Le Pen, the Front National candidate, has been a very strong critic of Mr. Sarkozy.  She is highly unlikely to urge her supporters to vote for him.  She will probably prefer to retain the FN’s cohesion to win seats in Congress at a future date.  The FN is not unlike the Tea Party, but with a French flavor.  Immigration, big business, big government, diktats from far away seats of power (Brussels, Washington) are its bugaboos; as such, it is not easy to forecast how FN voters will cast their vote, and whether they will choose to abstain.  Hollande is loath to court them, while Sarkozy is doing it, but in coded language.  What these voters do will be determinant.

Jean-Luc Melanchon measured the limits of French appetite for insurrection (his own words).  In my view, both Hollande and Sarkozy are relieved that he underperformed.  Having declared that it was crucial to stop Sarkozy, he added that his support for Hollande in the second round would only be tactical as he would continue the “uprising” afterwards.  These are not the words that will fire his supporters to massively vote for Hollande.  Some degree of abstenation is likely.

A few weeks ago, Francois Bayrou was seen as a possible king maker, being a moderate centrist.  His low score was quickly noted, and with it, all rumors that he could make a good prime minister were quashed.

At this point, I would expect 60% of the Melanchon votes to go to Hollande and the rest to abstain; 60% of the Bayrou votes to go to Sarkozy and the rest to Hollande; 67% of the Le Pen votes to go to Sarkozy and 33% to Hollande.

This would give us:

Hollande: 28.6 + 6.7 + 3.6 + 6= 44.9 or 50.17%

Sarkozy: 27.2 + 5.5 + 11.9 = 44.6 or 49.83%

Clearly, Sarkozy cannot win unless he can convince a strong majority of FN supporters to vote for him, and even then, he would need extra help.

Which is where the debates come in.  True to form, Mr. Sarkozy asked for 3 debates with Mr. Hollande, while the tradition is for just one.  He may get two if he can pressure Hollande enough by painting him as afraid to debate.  He will then have to be persuasive but restrained, going for the jugular yet gentlemanly.  Mr. Hollande will have to convince voters that he can hold his own, be presidential, and yes, come up with strong arguments as to why he would be a better president than Sarkozy.  We may finally get what has been sorely lacking so far in this election: a serious debate on economic policies.

In sum, this election has tightened considerably and the incumbent could win.  Heavy betting against French stocks and bonds seem premature to me.