Try Not to Laugh But France Really Might Reform This Time

(Bloomberg Gadfly) -- There are two French election celebrations happening today in the business world. One is cheering the short-term relief for Europe; the other the prospect of long-term reform in France. These sunny views will be tested politically over the next few months, but there's reason for hope. "Macronomics" is no revolution, but investors should give it a chance.

Monday's market rally is all about "Le Phew," as my colleague Marcus Ashworth notes. The euro zone, barring any big shocks, has dodged a populist bullet that threatened political and financial stability. Marine Le Pen's vote share was lower than in recent regional elections. While much could change in the two weeks until the second round, Macron's the man for now. That's why bank shares across Europe are soaring, with top Italian, German and French banks up almost 10 percent.

Beyond the relief rally, there's the promise of reform. Macron has vowed to deliver flexible labor laws, a cut in corporate tax to 25 percent and a drop in some payroll charges. These will have tangible benefits -- if implemented.

Macron's a new force in French politics and building a workable majority of lawmakers will be hard. Plus we've been here before in France (remember Nicolas Sarkozy). But Macron has momentum. Heavyweight politicians from the left and right parties are backing him, even if it will be a struggle to win over the frustrated voters who supported extreme candidates.

And there's plenty of value to unlock from corporate France. If Macron can indeed cut labor costs, Kepler analysts estimate a rough increase of at least 5 percent on next year's pretax earnings for a basket of blue-chip French companies including Vinci SA, Eiffage SA, Alstom SA and Bouygues SA. If he delivers the corporate tax cut, that would lift total net income for France's biggest firms by 4 percent, according to Bank of America. For smaller companies that do more of their business at home, the gains would probably be greater still.

Does it matter that this adds up to less than the "electro-shock therapy" promised by Francois Fillon? Not really. I've argued before that an improved picture for euro-zone growth has already boosted corporate earnings and expectations. French business failures are at an eight-year low; construction groups such as Vinci are bullish. Fillon's drastic cuts might have killed growth, as has happened elsewhere.

Sticking closer to the status quo -- while trying to exploit some of Macron's youthful zest -- might not be such a bad place to be. An improved economic environment makes reform easier, according to Bank of America economist Gilles Moec, and less political risk should get companies spending again.

Obviously, much depends on whether Macron maintains his opinion poll lead over Le Pen and whether the force stays with him through to parliamentary elections. Without a majority or a coalition, Macron will find it hard to back up his talk with action, as Bloomberg View's Therese Raphael writes.

It's always sensible to take French promises of reform with a heavy pinch of skepticism. This is a country that's glued to its famed social model, where services are backed by heavy state spending. Yet cheerier bankers and investors reckon France is at a turning point that will carry the establishment with it. If Macron can avoid any big shocks against the formidable Le Pen, the rose-tinted crowd may at last have a point.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

To contact the author of this story: Lionel Laurent in London at llaurent2@bloomberg.net.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net.