France Notebook

Author: Bill Witherell, Ph.D., Post Date: June 8, 2018

We are back in Southern France, in the town of Bonnieux, perched on a hilltop in the Luberon region of Provence, far from the hustle of Paris. The country has recently endured a record number of thunderstorms, which have caused some serious flooding, and continues to experience a series of rail and airline strikes. However, France’s economic performance continues to be robust despite some recent moderation, and French equities have been outperforming most other advanced-economy equity markets except that of the US. The iShares MSCI France ETF, EMQ, is up 3.9% year to date as of June 6 and 10.15% over the past 12 months. In comparison, the iShares MSCI EAFE (all advanced counties ex North America), EFA, is up just 0.6% year to date and 6.11% over the past 12 months.

France has the advantage of a strong and stable government, in marked contrast to the political turmoil to the south in Italy and Spain, the Brexit-related uncertainties across the Channel in the UK, and the disturbing antidemocratic developments to the east in Hungary and Poland. Fortunately, France’s neighbors in the northern tier, most importantly Germany, are also stable politically, with healthy economies.

French President Emmanuel Macron is no longer in the “honeymoon” period that followed his election. He continues to press ahead, nevertheless, with his reform agenda, believing he has a strong mandate to do so. The reforms, for the most part, are directed at improving the performance of the economy and are welcomed by business and financial markets. The opposition on the Left continues to resist the reforms but to little apparent effect.

Macron continues to push his ambitious proposals for reform of the Eurozone’s institutions. He and Germany’s Merkel are now in effect the two leaders of the Eurozone, and they are expected to set the reform agenda. Merkel appears to go along at least part of the way with Macron’s wide-ranging proposals. Both support the creation of a European Monetary Fund (EMF); but while Merkel sees the institution’s main role as strengthening budgetary discipline, Macron sees the EMF as a tool for fighting future financial crises. A clearer idea on this and other issues should come out of this month’s EU summit.

The issue of refugees and migrants continues to be very challenging for all of Europe. The emergence of a populist government in Italy was driven in large part by this issue, as are the political developments in Hungary and Poland noted above.  In France the whole country was moved by the courageous act of a 22-year-old migrant from Mali, M. Gassama, who had no papers. He came across a scene where bystanders were looking up at a young child dangling from a fourth-story balcony. Without hesitation he climbed up the four stories, leaping from one balcony to the next, and rescued the child. The country was thrilled, President Macron met the young man and offered him French citizenship, and the Paris Fire Brigade offered him a job. The event brought attention to the uncertain futures of the many migrants without papers who also have made long and dangerous journeys to France. The new populist government in Italy is likely to make it even more difficult for the European Union to reach agreement in this area.

French newspapers these days are full of the international tennis tournament underway at Roland-Garros and the upcoming World Cup soccer matches, with France’s first match on June 16th versus Australia. But even more attention is being given to the anticipated confrontation between President Trump and the heads of state of the other six countries that make up the G7, who are gathering for a summit in Quebec June 8th and 9th. Both Macron and German Chancellor Merkel have indicated in advance their reluctance to agree to issue the traditional joint G7 statement at the end of the meeting without the leaders finding common ground on tariffs, Iran (the Europeans demand to be exempt from any new US sanctions), and the Paris climate accord. That outcome seems pretty unlikely.

All of the other G7 members, America’s closest economic and military partners, are infuriated by Trump’s decision to pursue protectionist measures against them. At last week’s G7 finance ministers meeting, Canada’s finance minister, Bill Moreau, said, “Unfortunately, the actions of the United States this week risk undermining the very values that traditionally have bound us together.” Canadian Prime Minister Justin Trudeau summed up the views of United States allies, stating, “The idea that we are somehow a national security threat to the United States is quite frankly insulting and unacceptable.” “Deeply deplorable” was Japan’s Finance Minister Taro Aso’s assessment of America’s actions.

The French clearly share this strongly negative reaction. The French finance minister, Bruno Le Marie, referring to “the G6 plus 1,” said, “We cannot understand the American decision on steel and aluminum.” He explained that European steel companies face the same problem as American steel companies do, excess steel production capacity in China, and therefore the American action is clearly misdirected. President Macron’s formerly positive relationship with Trump has deteriorated sharply. It appears that the trade action was the last straw, and Macron will state his views strongly at the summit. In this he will have support from across the political spectrum in France and from Germany’s Merkel, although she will likely make her points in a more measured way. Trump may well seek to cut separate deals with individual European members, dealing with them on his preferred one-on-one basis. But that approach will not work with the European Union, which negotiates trade matters on an EU basis.

Until this morning (June 8th), global markets have been discounting the likelihood of a serious trade war breaking out, but the risks of this happening appear to be increasing. As this note goes to press, an outspoken Twitter war has broken out between Trump, Macron and Trudeau, with Trump now complaining about agricultural tariffs and “non-monetary barriers” and indicating he will leave the G7 Summit before the discussion on the climate and environment. This does not bode well for this heads-of-state gathering.

Bill Witherell, Ph.D.
Chief Global Economist & Portfolio Manager
Email | Bio

Sources: Financial Times, Le Figaro, Le Monde, New York Times, Bloomberg,

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