Europe Outlook: A French Economic Evolution

A potential economic and political revolution in France and Europe was averted. President Emmanuel Macron won a decisive victory over the populist Eurosceptic Marine Le Pen in the second round of the French elections on April 24. The results should allay immediate concerns about potential cracks in NATO and the European Union’s (EU’s) efforts to forge closer ties to respond to Russia’s devastating war in Ukraine. We also expect the market-friendly Macron to address high inflation in the cost of living stemming from higher energy and food prices, which should be positive for the region’s second-largest economy and broader regional equity markets.

Confronting a Cost-of-Living Crisis

Macron faces some significant economic challenges at the outset of his second term. The war in Ukraine has pushed already-high European energy prices even higher. Europe imports about 40% of its natural gas and almost 30% of its crude oil from Russia, according to data from regional statistics compiler Eurostat.1 Fears about the region’s lack of energy independence and potential supply interruptions have made regional energy more expensive over the past two months.

Given how important oil is to the global economy, rising prices could hurt economic output. Europe has been racing to find new supplies from the United States and Qatar to reduce its dependence on Russia. Some countries, like Germany, have been reluctant to immediately curtail Russian gas imports, while others are targeting the end of 2022 to stop using Russian energy.

Food prices, which started to rise last year, are of increasing concern in the region. Russia is a major exporter of fertilizer, a key input in crop production, and both Russia and Ukraine are significant wheat exporters. Supply disruptions resulting from the war are pushing up grain and other food prices.

European consumers have felt the pinch. As inflation stays higher for longer and trade remains disrupted, we could see greater demand destruction and a weakening of the European economy in 2022. In response to these pressures, we expect Macron’s budget to focus on supporting workers and insulating households from higher prices and a potentially shakier economy.