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What is Frexit?

Frexit is the term for a possible French exit from the European Union (EU). Could we see a Frexit in the next few years, and what would it mean for the markets?

The most outspoken of proponent of Frexit in France is Marine Le Pen, sometime leader of the Front National (FN) party (a position renounced as she campaigned for the presidency). Most people saw a presidential win for Le Pen in the 2017 French election as the most likely path to Frexit, as her election rival Emmanuel Macron was stridently pro-EU.

After Le Pen lost the second round of the election to Macron, the probability of Frexit in the next few years dropped to near-zero. Whether it flares up again will depend on how Le Pen decides to try and build on her first round success - where she took 21.5% of the vote, more than the candidates from either of the two mainstream parties - and where the FN party goes from here.

But problems still exist. A 2016 poll found that 61% of France had an unfavourable view of the EU (compared to 48% in the UK), which appears to indicate that while the French public might not have wanted Le Pen in office, many do have real reservations about the union.

Would a Le Pen victory have meant Frexit?

While many saw Frexit as a likely outcome of a Le Pen presidency, in truth it was more complicated than that.

Le Pen made a referendum on France’s EU membership a priority should she win the election — but only if the EU didn’t comply with her proposed reforms, including the dismantling of the euro and border-free Schengen zone. And in order to hold a referendum, she would have needed parliamentary approval, which would have required huge successes in June’s legislative elections.

Far more likely was France’s exit of the euro, as Le Pen had stated that she would take an election victory as a sufficient mandate to take France out of the single currency without a referendum. 

Why would Frexit matter to traders?

You only need look at Brexit to see the impact of the voting to leave the EU. In the wake of Britain’s referendum, global indices were sent tumbling — the FTSE 100 and S&P 500 both fell over 5% on the day of the result, and the DAX fell over 9%. And though indices may have subsequently recovered, the pound did not, dropping from $1.4787 before Brexit to $1.244 by the time Article 50 was triggered.

EU impact

For the EU, the departure of France could have potentially been far more damaging than that of Great Britain. France is Europe’s second biggest economy, and played a huge part in the development of the both the EU and the single currency. Both would have been vastly weakened without French involvement.

French impact

Returning to the franc would in all likelihood have seen the French taking a major hit to the value of their currency. That would also have meant downgrades to its credit rating from most if not all of the major agencies, and a major downward move for the CAC 40.

Of course, the impact of Frexit would have been felt on a far wider scale than just in France and Europe. Currencies, stocks, indices and commodities all around the world would likely have seen sustained movement.

Read more about the potential market impact

Which markets might be affected most by Frexit?

The impact from Frexit would have been felt around the globe. Here are four key markets to watch if Frexit is ever back on the cards.

Market

Reason to watch

EUR/USD France would almost certainly exit the euro before the EU itself, which would be disastrous for the struggling single currency.
CAC 40 France’s flagship index will undoubtedly see movement if Frexit returns to the agenda.
DAX The biggest companies in the EU’s biggest economy, the DAX will reflect investors’ fears about the potential impact of Frexit on the union.
Gold In uncertain times, investors still flock to gold — and Frexit would mean plenty of uncertainty for Europe. 

 

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