Where may the Populist-Nationalist Forces Stall?

This weekend's Austrian presidential election and the Italian referendum may see the populist-nationalist forces do well.  The polls suggest Hofer in Austria likely to win and become the first far right head of state in more than a generation.  

The defeat of the Italian constitutional reform, if it comes, will be not solely at the hands of the populist-nationalist forces.  Even some of Renzi's PD party is opposed to the constitutional changes, as is former PM Monti, who is hardly a part of the populism-nationalism in Italy.  Still, a defeat of the referendum in Italy may give the euro-skeptical 5-Star Movement a fillip after winning local elections in Rome and Turin earlier this year.  

However, developments in French politics over the weekend suggest both where the populist-nationalists may stall and at what cost.  Specifically, though Sarkozy and Juppe were expected to handily beat Fillon in the primaries, Fillon won and won easily.  Fillon dispatched Sarkozy last week and sent Juppe packed with a nearly 2:1 victory with past weekend.    

Polls suggest that more than Sarkozy and Juppe, Fillon can hold back the insurgence the National Front.  The National Front's Marine Le Pen had been polling in first place in the French presidential contest, but not against Fillon.  The first set of polls since Fillon's primary victory showed he would win the first round 32% to 22% for Le Pen.  Current President Hollande, who has not formally declared his intentions, would receive less than 10% of the vote.  The market-friendly prime minister Valls is reportedly considering entering the contest.  If Valls runs, he would likely resign, especially if Hollande stands for a second term. 

If no candidate gets more than 50%, France holds a run-off between the top two candidates.  Fillon would beat Le Pen, according to the Odoxa poll for France 2 television 71%-20% in the second round.   Harris Interactive poll, according to Bloomberg, had Fillon winning the first round  26% to 24%, with Hollande or Valls drawing 9% of the vote.  In the second round, Harris has Fillon winning by 67% to 33%.   

The price of stopping the populist-nationalist Le Pen will likely be a shift to the right.  Fillon fancies himself a French Thatcher.  He campaigned on lengthening the work week, raising the retirement age, cutting 100 bln euros in spending, and cutting corporate taxes by 40 bln euros.  He has proposed a constitutional amendment to prevent planned budget deficit.   

Germany's Merkel, who formally announced she would, in fact, seek a fourth term, has already begun to tack to the right to steal some thunder from the anti-EMU anti-immigrant AfD party.    She moved to close ranks with Bavaria's CSU.  There had been a falling out by Merkel's immigration policy and tilt to left with the introduction of minimum wage and child care support.  Merkel has emphasized law and order issues, and at the end of last week, the coalition government announced an agreement that will boost pensions in the east to west German levels by 2025.   

There is a dispute with the government how the pensions will be paid.  The CDU says that they can be financed by social security contributions, but the SPD says government subsidies may be important.  The funding difference seems minor, and the CDU deputy whip acknowledged the importance of the pensions in competing against the AfD's populism.  

Some observers had linked the rise of the euro in Asia to the Fillon's victory.  However, the euro has slid a full cent since the Asian high and is now lower on the day.  The speed in which the euro upticks have been unwound is breathtaking and shows that the bearish sentiment toward the single currency remains intact.  Similarly, the French premium over Germany had stabilized initially but has widened a few more basis points today.  At almost 60 bp, it is the largest French premium on 10-year bonds since early 2014.  The two-year premium has narrowed a couple of basis points today, but at 14 bp it is at the upper end of where it has traded over the past two and half years.  

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