Is France on the march to a new revolution?


On the eve of La Fête national,  Ian Ormiston, manager of the Old Mutual Europe (ex UK) Smaller Companies Fund, Old Mutual Global Investors asks whether the French spirit of change is alive once again.

French politics have dominated European headlines in 2017. However, the initial  cloud cast over the presidential election by the divisive National Front leader Marine Le Pen has now given way to the unifying silver lining represented by Emmanuel Macron and his En Marche! Movement. Is this event as seismic as the storming of the Bastille? And what should we expect from this modern French revolution?

On the face of it, the electorate’s brush with the extreme right, its rejection of the two main political parties and the crushing victory of a political movement that was barely a year old, looks as significant as the events of 228 years ago. Over the last couple of months, the mood in France has rapidly shifted from gloom to a sense of euphoria. Consumer confidence has surged to pre-financial crisis highs and business surveys have also strengthened. Much of this is simply due to change.

France has struggled to match Eurozone growth rates after the European sovereign debt crisis and the Hollande presidency started with an experiment in modern socialism and ended with a shift back to the centre and towards modest reforms.

President Macron has a bold agenda, promising higher growth and lower unemployment which has been welcomed by the electorate. The problem, not faced by the revolutionaries of 1789, is that Macron is bound by a series of rules and relationships that he has no intention of breaking. The first sign of this stricture is that France intends to follow European rules on budget deficits; much celebrated tax cuts will be accompanied by expenditure cuts. The adherence to the European rules is a nod to Berlin and the German government, which Macron wants to rejoin at the forefront of the European Union. We await the crucial labour reforms, that still promise to unlock a higher growth potential in years to come, and of course the reaction of the labour unions.

So while we should all celebrate le quatorze juillet with more hope this year, it is important not to get carried away with this modern French revolution. Therefore, we will continue to seek to invest in companies where as much of the investment case as possible lies in the hands of the company management. While we welcome any improvement in growth potential in France, we do not expect it to be a stand-out contributor to returns in 2017.