INVESTORS AND international businesses across the world will be paying close attention to events in Paris on the 6 of May. As the 2012 French elections unfold, socialist opposition candidate François Hollande is looking more and more likely to oust incumbent president Nicolas Sarkozy. This could spell bad news for UK exporters.
A recent opinion poll suggests that 49% of voters feel Sarkozy’s campaign is overly right-wing. This could mean that Hollande wins the election with popular support from both the left-wing and centralist voters.
But why is a Presidential election in France so pivotal to British business?
Simply put, Hollande is anti-austerity and this could spell serious trouble for the Euro.
The “would be” president has made very clear that he will not ratify the European austerity package agreed between Sarkozy and German chancellor Angel Merkel. Hollande argues that France needs to focus on public spending to boost growth, and that European nations should follow suit – spelling a major policy shift for the eurozone.
This in itself is not enough to spook financial markets. The best method to fix the debt crisis in the eurozone could be debated forever. It is uncertainty that causes concern.
What the markets want is some clarity over what policy will be adopted, and solid action that is fully supported by eurozone members. This would provide the stability and certainty that investors are looking for. That would provide the stability and certainty that investors constantly seek.
A regime change in France will mean major upheaval for European financial stability, and this is weakening the euro considerably. The single currency has touched 24 month lows against Sterling and is being abandoned by investors across the world. The Swiss National Bank has recently re-aligned its foreign currency reserves away from a long Euro position because of the threat of euro weakness – a move representative of market opinion across the world.
This is great news for UK businesses who are importing from across the Channel as goods become cheaper and profit margins widen.
The opposite is true for UK exporters, and the outlook for them is concerning.
Over 50% of UK exports are purchased by our European neighbors. There is no doubt that our ability to sell to Europe will be hampered by euro weakness. Indeed, this has already been reflected in UK economic data releases. New exporter orders for April posted the steepest fall since 2009 as the eurozone struggles through financial crisis.
Continued weakness of the single currency can only accelerate this further as European businesses and consumers struggle to afford to import goods, or find cheaper alternatives closer to home.
British businesses must remain vigilant for events in Europe. If Hollande does take power in France, exporters will need to sharpen their pencil considerably to remain competitive in Europe.
With the UK government pushing hard for an export led recovery, this is just one more reason for UK exporters to seek alternative markets, while protecting their margins when dealing with the Eurozone through prudent hedging against adverse currency swings.
Torrie Callander is a corporate trader at foreign exchange provider, Global Reach Partners