There is no doubt about that, and of course the election results in Greece and France have done nothing to calm market jitters. As predicted, it was a close and ill-tempered contest in France, with lots of name-calling, claim and counter-claim. Marine le Pen enjoyed her role in the spotlight, and confused things further by refusing to back either party.
The election itself had a very low turnout – almost 25% of French people didn’t vote, which may have been confusion over which party would best look after them, or it could have been a ‘none of the above’ statement. But although not a decisive victory at 52%, France has a new President of the Republic. It is the first time in 30 years that a sitting President has not been re-elected.
Whilst Monsieur et Madame Sarkozy pack up their belongings, and head for new jobs (Monsieur Sarkozy to resume work as an avocat, whilst Carla Bruni-Sarkozy – heaven help us – has announced she will pick up her mike and revive her pop star career), the markets are starting to examine exactly what life in la République under President Hollande will actually mean.
The immediate reaction has been a sharp fall in the euro against most of the major currencies – in fact the last time we saw an exchange rate of GBP-EUR of 1 = 1.24 was back in November 2008. Our view is that there may be further weakening before a market correction. Often market sentiment – the initial reaction of traders – results in a ‘spike’ or sharp movement, which is often corrected in the following 24 – 48 hours.
Much depends however, on how quickly the European Central Bank moves to calm market jitters. If currency traders don’t see any words of comfort, quite simply they will sell off the Euro, weakening it still further. This effect will be magnified if they buy sterling instead, as it serves to drive the 2 currencies further apart.
So what are the essential differences with ‘Flanby’ (as Hollande has quickly been nicknamed) at the Elysee? Well, for a start, he is on the left of the party as a socialist (despite being from a ‘good family’ and being educated accordingly), and the vote for him represented as much a vote against Sarkozy and the austerity measures. There was much suspicion around the ‘Merkozy’ alliance of German Chancellor Angela Merkel and Nicolas Sarkozy, as the 2 most powerful countries in the Eurozone represented a major concentration of power and influence that was resented by much of Europe, especially in the South. Hollande has already intimated that he prefers a policy of ‘growth’, which cannot be achieved with continuing austerity measures to reduce debt. In very simple terms, for I’m not an economist, the difference is that austerity aims to reduce debt by drastic cutting of public expenditure. ‘Growth’ on the other hand, is not a policy, but the outcome of a policy – which aims to reduce debt by investment – giving people the means to earn and to reinvest their money into the public coffers (eg via pension payments) which will de facto reduce the public debt. Hollande has said he wants an amendment to stimulate growth (possibly in the form of Quantitative Easing, – QE – in other words, printing more money) added to the Fiscal Treaty that established the Eurozone austerity measures. This was a Treaty that 25 EU leaders, including Sarkozy, signed up to in December 2011.
The future for the Euro? Who knows. The political and economic ramifications of dismantling the euro are horrendous. The future for exchange rates? Your guess is as good as mine. We cannot foretell the way the markets will go. The riskiest strategy is to do nothing. If you know you need to move money from one currency to another, contact your FX broker, book it in and you can then budget with certainty and confidence. Yes, rates may go up – but they could go down. It all depends on your appetite for risk.
One solution is to compromise and hedge (book) half your currency. In that way if the markets move in your favour, you have gained on half your money. If however, they move against you, well, only half has been affected. Find out more from a no-obligation call to us at First Rate FX. Do remember to quote Normandy Insite for preferential rates.