(Bloomberg) — French President Emmanuel Macron spent much of his tenure persuading bankers and fund managers to flock to Paris after Brexit. His decision to call snap elections may give some in the industry pause.
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Global firms such as JPMorgan Chase & Co. and Bank of America Corp. have moved billions in assets and hundreds of staff to Paris over the past years, in a wager that the French capital would one day rival London as a European finance hub. Macron has estimated the push created more than 7,000 extra jobs in the industry, where rising interest rates have fueled record earnings.
None of that is likely to be reversed in the short term. In private, however, some bankers admit they’re worried about issues such as work permits and taxes. Dealmakers are bracing for transactions to stall while investment firms warn of potentially devastating economic consequences should extreme measures be adopted. French stocks and particularly banks have slumped along with government bonds.
“If one of the extremes wins in the election, then it’s going to have an impact,” said Stephane Rambosson, head of executive search firm Vici Advisory. “It’s pretty binary.”
Paris has been a major beneficiary of Brexit as Macron burnished his pro-business reputation by reducing taxes on corporations and reforming the labor code. As recently as last month, he entertained some of Wall Street’s biggest names at Versailles while his government introduced more measures to boost France’s attractiveness, including a law that will make firing traders cheaper.
The snap elections that start June 30 risk becoming a showdown over Macron’s trademark economic policies. While final results in France’s two-step legislative elections are difficult to predict, the most likely outcome, according to polls so far, would be a lower house of parliament in which none of the three main blocs — the far-right National Rally, the leftist New Popular Front or Macron’s party and its allies — end up with an outright majority. How close any of those three groups comes to that would determine how unstable French politics, and perhaps policy, becomes as a result.
Bank stocks have tumbled amid concerns that France could descend into instability and its public finances deteriorate. Shares of Credit Agricole SA and BNP Paribas SA, the country’s largest banks, have lost more than 9% since Macron’s June 9 announcement, leading European lenders lower. Societe Generale SA has slumped 14%.
“The uncertainty linked to the elections has put the financial community in a wait-and-see mode,” said Francesco Galietti, co-founder of Rome-based political risk consultancy Policy Sonar. Yet even if Marine “Le Pen’s right-wing party were to win, it would be difficult for people to find a safe haven elsewhere, given that even more extreme right-wing parties are rising in several core European countries.”
So far, none of the firms that flocked to Paris after Brexit have indicated they plan changes, and people close to some of those firms say their investments were made with a long-term view that’s not affected by the current instability.
In private, finance executives say Macron’s decision, announced after a crushing defeat in European elections, blindsided them, according to a person familiar with the matter. Some had already engaged in talks with lawmakers and the government over a potential tax on buybacks in the next budget, the person said.
Now, they worry about the impact that a far-right victory would have on their ability to move staff from abroad, said the person, asking not to be identified in discussing private conversations. Taxation remains another area of concern, should proponents of more extreme policies win enough seats to form a government.
Renegotiating the Schengen agreement and granting priority to French nationals on the job market was part of Le Pen’s past electoral pledges. Both the far left and far right parties will likely seek a wealth tax, according to a recent note by Goldman Sachs Group Inc. In addition to revisiting tax breaks for corporations, the left-wing coalition is expected to push for a higher tax on financial transactions, they wrote.
Investment bankers, meanwhile, are expecting activity to stall as political uncertainty makes it difficult to get deals over the line in a country where takeovers tend to be closely scrutinized by the government, according to people familiar with the matter. Prolonged political instability could also affect an ongoing hunt for talent and dent the recruitment efforts of some international banks looking to beef up their operations in Paris.
Among the largest lenders to have bulked up in Paris is JPMorgan, which now has about 900 employees in the city. Bank of America was among the first US banks to announce plans to create a sales and trading base for Europe at its Paris office. Since then its local headcount surged from roughly 100 to 600 as of last year. Citigroup Inc. has more than doubled its headcount to about 400.
Representatives for the banks declined to comment.
“The financial service providers who have moved to France in recent years will not move to Frankfurt just because of election results at the beginning of July,” said Carsten Brzeski, head of macro research at ING Diba AG in Frankfurt. “But I can imagine that Frankfurt will simply become a little more attractive for new companies that are still moving away from London.”
That’s also the view of Hubertus Vaeth, managing director of Frankfurt Main Finance, a lobby group that promotes Frankfurt as a financial center. Rambosson says London is likely to benefit as firms have already begun to reconsider the UK capital. The government there decided last year to remove local pay restrictions for bankers.
“Tax holidays and other perks to get banks and bankers to move to Paris were orchestrated by Macron,” said Vaeth. “That will no longer work with Le Pen’s approach of appealing to blue-collar workers. Incentives that were temporary, such as individual tax advantages, will likely not be extended.”
For investment firms seeking to put billions of euros in client money to work over a longer horizon, stability is key to attract foreign investors, said Bertrand Rambaud, Chairman of France Invest, a private equity lobby group.
“There’s one thing we don’t like as investors, and that’s uncertainty,” he said. “You can’t make investment decisions that will bind you for five, six or seven years if you’re in an environment as unstable as the one we’ve been reading about for the past days.”
Apart from the prospect of new wealth and transaction taxes, financial firms will be watching how the next administration plans to plug budget holes. France and Italy were reprimanded by the European Union this week for running big deficits, the first stage in a confrontation that will test the bloc’s resolve and could in theory prompt billions of euros in fines.
S&P Global Ratings last month downgraded France’s credit score, saying the deficit will remain above 3% of gross domestic product through 2027. France’s fiscal watchdog says the government’s deficit strategy lacks coherency and credibility, while the International Monetary Fund called for “substantial” additional efforts.
“If the strong measures that some people are announcing were to hit the French market tomorrow,” said Rambaud, it would be “an earthquake for the economy.”
Investors in public markets have already voted with their feet. The benchmark CAC 40 stock index lost 6.2% last week, pushing France below the UK as the region’s largest stock market by value. French stocks are now the least popular in Europe, according to BofA’s latest poll of fund managers in the region, a sharp swing from May when the country was their top choice.
For Stephane Boujnah, who runs stock exchange operator Euronext NV, such fears are overblown, because the country’s institutional framework will ensure that whatever change is coming won’t be as radical as some may fear.
“It’s totally understandable that people are puzzled and try to analyze what’s going on in France, because France does not have a tradition of snap elections,” he said in an interview. Still, “I don’t see any dismantling of what makes the attractivity of France, or what has made the attractivity of France solid and robust for the past 10 years.”
–With assistance from William Shaw, Arno Schütze, Harry Wilson, Sonia Sirletti, Sonja Wind, Pamela Barbaglia, Thomas Hall and Alan Katz.
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