Conservative Nicolas Sarkozy will win the May 6 run-off in France's presidential election against socialist Segolene Royal, according to all opinion polls, while the markets are largely indifferent, having already priced in what they see as the preferable result, economists and market watchers said.
"The election is a non-event" for the markets, one Paris-based trader said, arguing that any positive reaction to a Sarkozy win and a negative one to a Royal victory will be very short-lived.
The recent rally that has brought the CAC-40 above the 6,000 point mark has been driven by takeover speculation and corporate results, with the French election campaign largely ignored.
Any market interest is focused on certain company-specific issues where the state has a major role, notably the planned merger between Gaz de France (GDF) and fellow utility Suez, a possible tie-up between nuclear power group Areva and engineering company Alstom -- which specializes in transport and power equipment --, and a reorganization of the shareholder structure of troubled aeronautics group EADS.
A Sarkozy Victory
A Sarkozy victory on Sunday is seen as most likely given that, since coming top in the first round of the election on April 22 with 31.18% of the vote, ahead of Segolene Royal on 25.87%, opinion polls have continued to show the conservative clearly ahead, with 52-54% of projected votes.
Despite a combative performance from the socialist candidate, polls following the televised debate between the two candidates on May 2 have all shown that most voters found Sarkozy more convincing.
At the same time, observers caution that the result is not a foregone conclusion because of a history of frontrunners losing French presidential elections and given the large first-round vote of centrist candidate Francois Bayrou (18.57%), who has said he will personally not vote for Nicolas Sarkozy while declining to officially endorse or say he will vote for Segolene Royal.
"The outcome is the hands of these 18.6% people who voted for Bayrou in the first round," according to Dominique Barbet of BNP Paribas.
With the markets unimpressed by both Sarkozy and Royal's economic programs -- which are seen as impossible to square with the declared aim of reducing France's public debt and which are therefore certain to be substantially revised --, analysts' attention is concentrated on a number of corporate issues on which the new president will have a bearing.
Most of these questions relate to the energy sector, with the most pressing one being the planned GDF-Suez merger.
Neither candidate is enthusiastic about the deal brokered last year by the current centre-right government and which the courts have put back until July 1 at the earliest.
Royal is in favor of maintaining GDF as a public company and reuniting it with fellow state-controlled utility Electricite de France (EDF).
This is seen as unrealistic by most observers in view of the liberalization of energy markets required under EU rules, although Philippe Roos, senior energy specialist with Natixis, argued that there is an industrial logic in combining gas and electricity production, plus the fact EDF and GDF already operate a joint distribution arm.
Sarkozy has raised the possibility of a tie-up between GDF and Algerian state-owned gas producer Sonatrach, but did not oppose his own government's deal to merge GDF with Suez.
For Philippe Roos, the outcome is thus uncertain but GDF and Suez "will have to be told fairly rapidly whether the deal is going to go ahead or not".
Both companies are planning extraordinary shareholder meetings at the end of June to vote on the merger project.
JP Morgan analysts, meanwhile, argued that a socialist victory would be negative for both EDF and GDF since it would bring the risk of "'pseudo' nationalization via intervention" on pricing and employment.
And while Sarkozy is more in favor of liberalization, he also has a "populist agenda" that includes "tough talk on energy prices".
Elsewhere in the energy sector, a Nicolas Sarkozy victory could help bring about a merger between Areva and Alstom, analysts said.
According to Philippe Roos, there is industrial sense in creating a group with a full range of energy activities.
Such a deal is also seen as possible because of personal ties between Nicolas Sarkozy and Areva CEO Anne Lauvergeon, who is tipped to become a minister, and Martin Bouygues, head of the Bouygues conglomerate that holds a 25% stake in Alstom.
Another short-term issue that will be influenced by the new government is the financing and shareholder structure of EADS.
Both candidates have said they will modify weighting of shareholders, but Royal has emphasized the role of state and regional authorities, while Sarkozy has argued for the entry of new private-sector shareholders, "which should be seen as more market friendly," according to JP Morgan analysts.
In terms of overall sentiment towards the candidates, "the markets will not like very much a Royal win," noted Yves Marcais, sales trader with French brokerage Global Equities, given her regular criticisms of big business.
These have inspired proposals to tax the profits of oil companies, such as Total, the largest company by capitalization on the CAC-40 index, and to limit bank charges for consumers.
"In the medium term, Sarkozy's program would seem to generate more wealth," Marcais concluded.
Credit Agricole economist Olivier Eluere summarizes the difference between the candidates in economic policy in terms of Sarkozy's focus on the supply side and Royal's emphasis on the demand side.
Sarkozy, for example, has proposed to free up the labor market by abolishing tax and charges on overtime, and by lowering taxes for corporations and wealthy individuals.
In taxation, he also wants to experiment with a plan to shift the burden of taxation from employment-related taxes towards VAT on imported goods, while also pledging to a fresh attempt to get EU approval for a cut in VAT for the France's restaurant sector. Royal, meanwhile, plans to stimulate demand by raising the minimum wage to 1,500 euros per month versus 1,250 currently, and creating 500,000 subsidized jobs for young people.
Economist Jean-Christophe Caffet at Natixis agrees that Sarkozy "is more inclined to rethink the scope of state intervention whereas Royal wants the state pretty much everywhere." But Jean-Christophe Caffet contended that both candidates are focused on domestic demand, neglecting the short-term budget cuts and longer-term structural reforms necessary to simultaneously boost growth and reduce debt.
Observers are also disappointed with both candidates' tendency towards a protectionist approach to the French economy, marked by a hostility towards the European Central Bank, which they blame for focusing solely on inflation and not taking into account growth and currency exchange rates.
The markets are furthermore skeptical about the cost of the candidates' proposals.
Nicolas Sarkozy has costed his program at 32 billion euros ($43.5 billion), while Segolene Royal has put a figure of 35 billion euros ($47.6 billion) on her proposals, with both candidates mainly relying on an acceleration in economic growth to finance their policies and also reduce Frances public debt.
Mathieu Verougstraete of ING has estimated the cost of the programs in the 40-50 billion range, arguing that these sums raise the question of funding in an environment characterized by challenges such as the ageing of the population.
Jean-Christophe Caffet at Natexis underlined that France would need to reach nominal GDP growth of 5% in order to reduce debt through growth alone, well ahead of the growth of around 2% seen in recent years.
In other words, the winning candidate will inevitably modify their program if they want to reduce debt, according to Olivier Eluere, echoing a widespread view that French presidents are always forced to go back on most of their election promises.
Eluere nonetheless sees a significant change in the economic outlook of both the socialist and conservative programs, which show greater awareness that we have entered a world of competition in which France must adapt through a series of reforms.
Francois-Xavier Chauchat, chief economist at CA Cheuvreux agreed, arguing in a study on France entitled 'Growth without confidence' that there is excessive pessimism over the state of the economy among both consumers and industrialists.
He estimates that for the year to date, France's economy is running at a rhythm of GDP growth equivalent to 3.0% over the full year, well ahead of the 2.0-2.5% official forecast.
What's more, Chauchat believes whoever triumphs on Sunday, confidence in the economy is set to "take off." This positive view on France's economic outlook is also supported by the European Commission's comments this week that growth prospects in the euro zone are the most favorable seen "for many years".