Vive la différence

Watching the acceptance speech by the new French president Emmanuel Macron yesterday, I must confess to a tinge of envy because it represented everything which is lacking from the UK scene. The French electorate decisively rejected the knee-jerk politics of division in favour of a more inclusive EU-friendly alternative whilst at the same time electing a man who, at 39 years old, is the youngest leader since Napoleon Bonaparte in 1799. At least for now, Macron represents hope for a more positive future. His election also breaks the recent trend towards right-wing populism, as represented by his opponent Marine Le Pen.

Here in the UK an election takes place in just over four weeks’ time and the choices on offer are nowhere near as palatable. Theresa May represents a continuation of the dogmatic opposition to the EU, with the prospect of the economy moving closer to the cliff edge that she claims to want to avoid. But the opposition offers no choice at all. Even accepting that Jeremy Corbyn probably does get a bad press from a media which is viscerally opposed to the Labour Party, he increasingly appears an ineffectual leader unable to rally centrist voters to his cause and who presides over a party which has slipped so far to the left as to be unelectable. The French, of course, had just such a candidate in the first round of presidential voting two weeks ago in the form of Jean-Luc Mélenchon and he trailed in fourth with less than 20% of the votes.

Over the weekend, the shadow Chancellor John McDonnell denied being a Marxist but did suggest that “there is a lot to learn from reading Das Kapital.” Whilst recognising the importance of Marx’s tract as a seminal work in the field of political economy, it is fair to say that from an economic viewpoint there is more to disagree than to agree with, but I’ll leave that for others to debate.  However, coming just days after Labour suffered heavy losses in local elections, losing 382 council seats across the country whilst the Conservatives gained 563, it seems that this is a message which the UK electorate does not want to hear. Labour does not have a positive message to sell the voters and with UKIP all but wiped out as a political force, losing 145 of the 146 seats it held, it is difficult to see the Conservatives winning anything other than a landslide victory at the general election scheduled for 8 June.

Quite what the Conservatives’ economic policy will look like is unclear, since it has delayed the publication of its election manifesto until next week. It is likely to maintain a pledge to reduce immigration but will almost certainly not repeat the mistake made in 2015 when it promised not to raise income tax, VAT or national insurance contributions. But as Jagjit Chadha of the National Institute points out, this election should be about more than just Brexit. Answers need to be found to the weakness of UK productivity for only this way will we finally be able to make some progress on the vexed question of stagnating living standards.

Of course, Macron will face all sorts of challenges to get the French economy back on track. Like the UK, fiscal issues will be high on the agenda with Macron planning to reduce the tax burden, including a reduction in the corporate tax rate from 33% to 25%, and to simplify the tax system. At the same time, he has promised to cut public spending to a still-high 52% of GDP (though on the basis of the European Commission’s data this is not exactly a high hurdle). The new president also plans to decentralise the labour market in favour of firm-level rather than collective agreements, and a gradual loosening of the 35 hour working week. As I noted a couple of weeks ago, the extent to whether he gets a mandate to push through his plan will depend on how much support he has in the National Assembly following June elections. He will have his work cut out.

Macron’s victory yesterday took my mind back 20 years to the election of another young left-of-centre politician in the form of Tony Blair. Blair was viewed across Europe as a breath of fresh air following the fractious Conservative government of 1992-97. He promised a third way in politics which involved a bit of state intervention and a lot of market forces, and offered hope to social democrats across the continent. He took over as UK prime minister at a time when the European economy was a lot stronger than it is today and he was obviously economically successful for a long time. But the story of how he came to be reviled by his own party should be a lesson to Macron. Today’s fresh face of optimism can just as easily become yesterday’s man. As former PM David Cameron once taunted Blair in 2005, “You were the future, once.” And now Cameron, too, lies on the scrapheap of history. Nemesis is never far away

Central banks: A balancing act

One of the issues which central banks are going to have to face up to at some point in future is the question of whether and how to reduce their balance sheets, which have been swollen by the huge purchases of financial assets under the QE programme. The balance sheet of the US Federal Reserve, for example, now stands at $4.5 trillion, which is roughly 25% of GDP compared to a figure around 7% at the start of the financial crisis, with the expansion comprised primarily of Treasury and Mortgage Backed Securities (MBS).

From the outset, central banks were clear that it was the stock of assets held on the balance sheet which was important for the purpose of injecting additional liquidity, not the rate at which they were purchased. This was because the purchase of bonds has a counterpart on the liability side of the balance sheet in the form of a credit to the banking system (excess reserves), representing the transfer of funds from the central bank to the seller of the bond. To the extent that the banking system creates liquidity as a multiple of the deposits in the system, this rise in banking sector deposits held at the central bank is what ultimately determines the pace of liquidity creation in the wider economy. The Fed ceased buying assets in October 2014. But as existing bonds matured so they ceased to be an item on the asset side. In order to prevent an unintended decline in the balance sheet, it was forced to rollover maturing securities which means that it is still actively buying assets, albeit on a smaller scale than previously.

But the Fed has indicated that it will ultimately shrink its balance sheet, and thus impose an additional degree of monetary tightening, but not until “normalization of the level of the federal funds rate is well under way.” Whilst markets are concerned about when this is likely to happen, a more interesting question is how rapidly it is likely to proceed. It is widely anticipated that the Fed will allow its maturing bonds to simply disappear from the balance sheet – a form of passive (or less active) reduction compared to the alternative of actively selling bonds. Ben Bernanke (amongst others) has argued that the Fed should simply aim for a given size for the balance sheet and allow the maturing of existing bonds to continue until the desired level is reached.

It is pretty likely that wherever we do end up in the longer-term, the balance sheet will not go back to pre-2008 levels. With Fed estimates indicating that demand for currency is likely to reach $2.5 trillion over the next decade, compared to $1.5 trillion today (and $900bn before the crisis), it is evident that the absolute size of the balance sheet in the longer term will be far higher than it was 10 years ago. In one sense, this makes the Fed’s task easier because it will not have to run it down so far. Indeed, in a nice little blog piece in January, Ben Bernanke reckoned that the optimal size for the balance sheet over the next decade is likely to be in the region of $2.5 to $4 trillion. If indeed the optimal size is close to the upper end of the range, it implies that the degree of reduction will be very small indeed, and would have little impact on markets which fear that a rundown of the balance sheet will result in a sharp rise in interest rates.

This absence of a dramatic reduction would be in keeping with past historical evidence. Analysis by Ferguson, Schaab and Schularick which looks at central bank balance sheets over the twentieth century, argues that prior to the onset of the financial crisis balance sheets relative to GDP were very small relative to the size of the economy compared to longer-term historical experience. They also note that “outright nominal reductions of balance sheets are rare. Historically, reductions have typically been achieved by keeping the growth rate of assets below the growth rate of the economy.”

Perhaps what this all means is that we should stop worrying too much about the potential impact of big central bank balance sheet reductions. But it does mean that a more permanent change in the conduct of monetary policy is about to take hold. Prior to 2008, central banks controlled access to demand for banking sector liquidity by regulating its price via the overnight rate. Now that liquidity is plentiful, both the Fed and ECB operate a floor system by controlling the rate they pay banks on reserves held with the central bank. As recently as November 2016, the FOMC described the current floor system as “relatively simple and efficient to administer, relatively straightforward to communicate, and effective in enabling interest rate control across a wide range of circumstances.”

Such a policy requires the banking system to be saturated with reserves and implies that the balance sheet may be about to assume a more important role in the conduct of policy as it becomes the tool via which bank reserves are supplied. So maybe central bank watchers will spend less time worrying about the policy rate in future and we will go back to the old-fashioned job of trying to predict how much liquidity central banks are injecting into the market. Now that takes me back a bit …

Dial it down

The rhetoric over the Brexit divorce has gone up by a few notches in the course of recent days. Leaked accounts of last week’s dinner engagement between Theresa May and Jean-Claude Juncker were splashed all over the German press at the weekend. Subsequently, the FT has calculated that the upfront cost of departure is likely to be in the region of €100bn whilst Theresa May today made the extraordinary allegation that “some in Brussels” did not want Brexit to succeed. It might be wise at this point to dial down the rhetoric before things get out of hand.

Dealing first with the politics (I know it’s dull but this whole debate is driven by it), there is little doubt that the European Commission was responsible for the leaks to the Frankfurter Allgemeine Zeitung. The details were too precise to be made up, and it is clearly designed to rattle the UK’s political cage in order to remind the government that it will not get everything it wants during the Brexit negotiations (if indeed, it gets anything at all). It is not very edifying but that’s politics for you.

As for Theresa May’s statement, she is right – except it is probably more accurate to say that “no-one in Brussels” wants Brexit to succeed. Why would they? We have known all along that the EU has no incentive to make life easy for anyone who wants to leave: If Brexit is a success the whole basis of the EU is threatened. If the EU is serious about holding together in the absence of the UK’s departure, of course it wants to see Brexit fail – to suggest otherwise is an act of incredible naïveté. The suggestion that there is any meddling in the election was, however, a step too far. In any case, this unnecessary election is all about the UK’s bargaining position regarding Brexit, so the PM’s comments were a bit rich.

Which brings us to the issue of divorce costs. I have referenced the work of the FT’s Alex Barker before, and I am indebted to his analysis of the data for an insight into where the EU’s increased bill comes from. Previously, the bill was estimated at around €70bn – a figure which included numerous questionable items. The extra €30bn is even more controversial, largely due to the demand for contributions to commitments planned for 2019 and 2020, which occur after the UK has already left the EU and which is estimated to cost between €10bn and €15bn. The EU is also believed to be demanding an upfront payment of €12bn to cover contingent liabilities rather than stumping up at the point when they arise. Finally, France and Germany are also believed to be doubtful that the UK has any entitlement to the EU’s assets – a move which is calculated to wind up the UK government.

It should be stated at the outset that the €100bn is a gross figure. If the UK is paying its full share of the budget beyond 2019, it will be entitled to its normal rebate. Once we add in farm subsidies and other items, it is expected that the final figure will be around the €65bn mark. Of course, like any good dealmaker, the EU is bound to start with a high figure in the knowledge that it will be beaten down, but the higher you bid the more chance of  getting a figure close to what you believe to be reasonable. The ratcheting up of pressure was likely also partly triggered by the recent UK government belief that it can legally walk away without paying anything at all, and this is the EU’s way of letting the UK know it is not in a strong negotiating position. After all, the UK will not get any form of trade deal if it refuses to pay anything (which, of course, the UK knows). More problematic still is that Michel Barnier, the EU’s chief negotiator, will not put a final bill on Brexit until the negotiations are complete – he simply wants the UK to agree on the methodology.

All told, this puts the UK in a difficult spot. David Davis, the UK’s chief negotiator, will not sign up to such a deal – and for once I have some sympathy. The UK will already be asked to contribute to the unattributed parts of the budget which have not been allocated on an accruals basis (the so-called reste à liquider payments), whose provenance is dubious. To deny the UK any claim on EU assets is morally indefensible, particularly since the UK is such a big net contributor to the EU budget. But to pay for budget commitments beyond the time the UK leaves is a red line. It’s like being charged in a restaurant for a meal you already don’t want to eat, but then you are being asked to pay for the next customer’s food as well.

The whole day has been one of high octane posing. As I have said before, there are deals to be done but if both sides continue to antagonise the other, the prospect of successfully concluding one will diminish. My advice would be to turn down the noise – no trade deal is ever concluded with anything other than a cool head.

Abbott without the Costello

For many years I have tried to keep politics separate from economics but these days it is virtually impossible, particularly when looking at UK related issues. Regular readers will know that I do not have a lot of time for the current UK government’s Brexit strategy. But, in the spirit of impartiality, never let it be said that I do not apply the same rigorous standards to the policies of all parties. This morning’s car-crash radio interview  by shadow Home Secretary, Diane Abbott, highlighted once again that it is not only the Conservatives who struggle to get their economic policies across.

In the interview, Abbott tries to explain how the opposition Labour Party plans to fund an expansion to the number of serving police officers. You really have to listen to the interview to do it full justice, but for the record I set out parts of the transcript below. 

Nick Ferrari (interviewer): Where will the money come from Diane Abbott? Good morning. 

Diane Abbott: The money will come from reversing some of the tax cuts for the rich that the Tories have pushed through. And the tax cut we're specifically identifying to pay for the 10,000 policemen is the cut in capital gains tax. 

NF: So how much would 10,000 police officers cost? 

DA: Well, if we recruit the 10,000 policemen and women over a four-year period, we believe it will be about £300,000. 

NF: £300,000 for 10,000 police officers? What are you paying them? 

DA: No, I mean, sorry... 

NF: How much will they cost? 

DA: They will cost, it will cost about, about £80 million. 

NF: About £80 million? How do you get to that figure? 

DA: We get to that figure because we anticipate recruiting 25,000 extra police officers a year at least over a period of four years. And we are looking at both what average police wages are generally but also specifically police wages in London. 

NF: And this will be funded by reversing, in some instances, the cuts in capital gains tax. But I'm right in saying that since Jeremy Corbyn became leader of the party, that money has also been promised to reverse spending cuts in education, spending cuts in arts, spending cuts in sports. The Conservatives say you've spent this money already, Diane Abbott. 

DA: Well the Conservatives would say that. We've not promised the money to any area, we've just pointed out that the cuts in capital gains tax will cost the taxpayer over £2 billion and there are better ways of spending that money. But as we roll out our manifesto process, we are specifically saying how we will fund specific proposals. And this morning I'm saying to you that we will fund the 10,000 extra police officers by using some - not all, but just some - of the £2 billion. 

NF: But I don't understand. If you divide £80 million by 10,000, you get £8,000. Is that what you are going to pay these policemen and women? 

DA: No, we are talking about a process over four years. 

NF: I don't understand. What is he or she going to get? Eighty million divided by 10,000 equals 8,000. What are these police officers going to be paid? 

DA: We will be paying them the average... 

NF: Has this been thought through? 

DA: Of course it's been thought through. 

NF: Where are the figures? 

DA: The figures are that the additional cost in year one, when we anticipate recruiting about 250,000 policemen, will be £64.3 million. 

NF: 250,000 policemen? 

DA: And women. 

NF: So you are getting more than 10,000. You're recruiting 250,000? 

DA: No, we are recruiting two thousand and - perhaps - two hundred and fifty. 

NF: So where did 250,000 come from? 

DA: I think you said that, not me. 

NF: I can assure you you said that, because I wrote it down.

It was shambolic and described by one journalist as the worst interview from a front line politician he has ever heard. There is, actually, a policy in there. Indeed, I have raised the issue of police funding in a previous post (here). But the whole affair gave the impression of a politician who was ill-prepared and a policy which was badly thought-out. I have done my share of media interviews in my time, and I know how easy it is to have a brain fade. But this is a politician seeking high office, trying to put across one of their key policies. Despite the fact that the apologists will say we should not allow the presentation to get in the way of the message, the fact is if a senior politician cannot prepare for a radio interview and get their facts straight, what chance would they have when faced with the difficulties of Brexit negotiations?

All this undermines the opposition’s case to be taken seriously at a time when the government is open to criticism on its track record in managing public spending, and will reinforce the media view that Labour cannot be trusted on key policy matters. Now more than ever, the UK needs effective government and a strong opposition able to hold it to account. On matters of economic policy, the government is getting off far too easily. The prime minister struggles to answer when pinned down on points of detail, but wriggles out of it by repeating to her interviewer that she will bring “strong and stable government.” It is the soundbite of the election campaign so far.

But it is a slogan, not a policy. Faced with the Scylla of the prime minister’s position and the Charybdis of Diane Abbott’s, it is hard to avoid the view that the electorate is not being well served by its politicians. Twenty years ago today it all seemed so different, when a freshly minted prime minister in the form of Tony Blair, marched into Downing Street promising to bring a fresh approach to government. Blair has come and gone, and is widely reviled - even by his own party. But his ability to communicate was first rate. The inarticulacy which characterises today's policy debate would simply not be allowed to stand.

Are we too complacent on interest rates?

One of the ongoing puzzles in the current conjuncture is why interest rates remain so low, despite the fact that the global economy has turned the corner. Indeed, central banks have recently been subject to widespread criticism for maintaining them at levels consistent with the emergency rates required in 2009 when the economy does not face anything like the same degree of danger. Despite the fact that the Federal Reserve has raised interest rates on three occasions since December 2015, yields on the 10-year Treasury note are still lower than in summer 2014 whilst UK 10-year gilts are trading just above 1% and 10-year Bunds below 0.4%.

Looking at the issue in a longer-term context, the standard approach in the academic literature is to point out that the neutral global real interest rate has fallen over the past three decades. A Bank of England Working Paper published in December 2015 highlighted that the long-term risk free real rate has fallen by around 450 bps in both emerging and developed economies since the 1980s.

The major factors which drive underlying long-term rates are expectations of trend growth and factors which impact on savings and investment preferences. The authors (Rachel and Smith) point out that the impact of a growth slowdown on lower rates is limited, accounting for less than a quarter of the total observed amount, and that the bulk of this can be attributed to changes in savings and investment preferences. Their key finding is that whilst there has been a sharp rise in saving preferences across the globe, desired investment levels have also fallen significantly. This is, of course, fully consistent with the savings glut hypothesis first postulated by Ben Bernanke in 2005. But Rachel and Smith go further by giving some quantitative estimates for the magnitudes of the quantities involved. Thus, they attribute 100 of the 450 bps decline in real rates to slower global growth; 90 bps to demographic factors and 70 bps to lower investment demand. All told, once they account for a number of other factors, they claim to account for 400 bps of the decline in real rates.

As an academic tour de force, this paper is an excellent and comprehensive overview of the factors driving rates lower. But it is not the whole story. A quick look at the data, compiled by King and Low in 2014 (chart), suggests that whilst there was indeed a sharp decline in the global real rate between 1990 and 2008 of around 250 bps, the last 200 bps has occurred post-financial crisis – a period when central banks slashed the short end of the curve to zero at the same time as they were engaged in huge asset purchases. In order to probe a little deeper, it is worth highlighting the concept of the natural rate of interest, postulated by Swedish economist Knut Wicksell at the end of the 19^th century. Wicksell argued that if the market rate exceeded the natural rate, prices would fall; if it fell below, prices would rise. Obviously, we do not know what the natural rate is but a quick-and-dirty method is to measure the difference between nominal GDP growth and the interest rate to assess the extent to which the real and financial sectors of the economy are misaligned.

In the UK, over the period 1975 to 2007, nominal GDP growth was on average within 30 bps of Bank Rate but since 2010 it has averaged a full 300 bps above, and similar deviations have been recorded in the US and the euro zone. This is not proof that interest rates are too low. After all, it is not as if price inflation is a problem for the global economy. But it does highlight the extent to which the interest rate on financial assets is too low relative to returns on real assets, which in turn has helped to propel financial asset prices to stratospheric levels. The concern is clearly that at some point asset markets will turn. But central banks will probably have no choice but to watch the bubble deflate because after having used a huge amount of monetary resources to pump markets up, they cannot realistically deploy more to cushion the fall.

Whilst I understand why central banks have been reluctant to raise interest rates so far – although the Fed is now grasping the nettle – I do detect a slight note of complacency. The fact  that (some) central bankers have justified their low interest rate policy on the basis of lower global equilibrium rates, without fully accounting for the fact that their actions have themselves pushed global rates down, strikes me as distorted logic. I am reminded of the situation a decade ago when many central bankers dismissed rapid growth in monetary aggregates as a problem not worth worrying about, when in fact it reflected the actions of banks to pump up their balance sheets. And we all know how that ended.

In a galaxy far, far away

As the EU starts to get serious about dealing with the prospect of the UK’s departure, this week's events suggested that the two sides are as far apart as ever. I was less than encouraged by the comment from an EU diplomat suggesting that the British “are not just on a different planet, they are in a different galaxy.” German Chancellor Merkel also pointed out in a speech in the Bundestag that some British politicians are still living under the “illusion” that the UK will retain most of its rights and privileges once it leaves the EU.

Theresa May’s response to Merkel’s comments was to pull a line from the Alex Ferguson/Jose Mourinho playbook to suggest that the rest of the EU is ganging up on the Brits (“27 other European countries line up to oppose us”). As if this should somehow come as a surprise when all rational people know that the EU’s objective is to maintain its integrity after Brexit. Indeed, we are now entering the business end of the negotiations, with this weekend’s Brussels summit giving the EU27 the chance to thrash out their line of negotiation. It is increasingly evident that the British are not in a good place and matters have clearly not been helped by the delusional approach taken by the British government.

Ironically, with the Conservatives looking likely to win a landslide victory in the 8 June election, Theresa May will take this as vindication of her government’s stance so far. But the government’s efforts since last autumn have been singularly unimpressive. I find it hard to shake off the suspicion that the government is rather unsure of itself, given the narrow margin obtained by the Brexit supporters in last year’s referendum, and has since spent a lot of time trying to convince the country of the rightness of its Brexit course rather than adequately planning its negotiating position.

The lawyer and blogger David Allen Green has pointed out that rather than getting on with the job of providing “strong and stable” leadership, “there are at least three ways in which May’s government has not got on with the job with Brexit and wasted precious time instead.”  In the first instance, she set up two competing government departments from scratch, resulting in turf wars which ate up a lot of government resources. Second, the government wasted time and effort fighting the attempt by Gina Miller to force parliament to vote on Article 50. As I have pointed out (here) the government could have put a simple bill before parliament in the first place which was worded in such a way as to be virtually impossible to reject – as it ultimately did, but only after a huge amount of time (and public money) was spent in the process. Perhaps worst of all, May has called a needless general election, despite promising not to do so, which in effect will result in the loss of two months of valuable negotiation time.

As a piece of anecdotal evidence to demonstrate how much pressure the civil service is currently operating under, HM Treasury has determined that the monthly survey of UK economic forecasts – to which I contribute – will not take place in May. The Treasury cites the election process as the reason for not conducting the survey. But this is the first time I can ever remember it not being conducted in the more than 20 years since I first contributed – and certainly not for electoral reasons. This is a governmental process under strain.

What is likely to happen over the next few months is that the British government will cry foul over the lack of progress on EU negotiations, with suggestions that the EU27 are somehow trying to punish the UK when in reality it is the UK’s own position which forces the EU to adopt the stance which it does. The Brits want to do a deal on trade but it is clear that the EU will first want to discuss the exit strategy. It is looking pretty likely that no deal will be done quickly. Following last week’s meeting between EU Commission President Juncker and PM May, Juncker was apparently taken aback by May’s unwillingness to compromise, and emerged from the meeting saying that he was ten times more sceptical that a deal could be done than before he went in.

The terrible irony is that all this is panning out as I feared. Indeed, I was contacted by one Brexit voter this week who remarked on my prescience and that I must somehow feel vindicated. But I take no pleasure at all from any of this. Even now, there are deals to be done but I fear we are going to get to the cliff edge far sooner than the British government thinks. Frankly, I do not trust the current government to be able to reach a compromise with the EU – and certainly not unless we see a change of tack from the prime minister. Businesses located in Britain may hope for the best but they are increasingly realising they have to prepare for the worst.

Et maintenant?

With the first round of the French presidential election running exactly to script, the markets today breathed a huge sigh of relief. To recap, Emmanuel Macron and Marine Le Pen made it through to the final run-off, polling 24.01% and 21.3% of the votes, respectively, followed by Francois Fillon (20.01%) and Jean-Luc Mélenchon (19.58%). This was pretty close to what the polls had predicted ahead of the election. With the polls suggesting that Macron will win the final runoff by a margin of around 60-40, the markets decided to get their celebrations in early. On the basis that Frexit will not now happen, the CAC40 posted a gain of 210 points today (4.1%) which is a bigger increase than has been mustered year-to-Friday (197 points). They may be overdoing it!

I have said all along that I did not expect Le Pen to make it to the Élysée Palace, and although we have to wait another two weeks for final confirmation, that looks like a pretty good bet. Assuming that is the case, what happens thereafter? Amidst claims that the French political establishment has been overturned, with neither a traditional left-wing nor Gaullist candidate making the final round for the first time since the establishment of the Fifth Republic in 1958, it should not be overlooked that Macron himself is part of the old establishment. He is a graduate of l’École nationale d'administration (ENA) and a former member of the socialist party who served as Economy Minister between 2014 and 2016, where he pushed through a series of business-friendly reforms. He is also a traditional Europhile who believes deeply in the aims and objectives of the EU (although he has denied that the label is an accurate description of his position).

Indeed, he may be further ahead of the Germans in this regard as he has previously stated that he is in favour of a euro zone budget and the issuance of common euro bonds. Macron is also expected to take a fairly conciliatory approach to Greece’s problems. But for all that he is in favour of economic positions currently not in line with those espoused by Germany, there is a strong sense that he will be in a position to strengthen the Franco-German axis and provide impetus to the flagging EU project. That is, of course, so long as he is secure at home. Macron’s En Marche! movement is not a conventional political party – it was only founded last year – and he may not have enough support in the National Assembly to pursue his domestic agenda.

We cannot write off Le Pen just yet, however, and in a bid to rid herself of the stigma associated with the far right politics of Front National, the party founded by her father, she tonight stepped down as head of FN. Writing in Project Syndicate last week, Zaki Laïdi, Professor of International Relations at Sciences Po, wrote “France has not endured such political turmoil since 1958”. A distrust of elites, fear of globalisation, rising economic inequality and a renewed emphasis among voters on national identity leaves France – along with any other European countries – in a very febrile state. Le Pen taps into the anti-establishment Zeitgeist but although much of the commentary on this side of the channel focuses on her promise to hold a referendum on France’s position in the EU, I suspect that even she will not be able to deliver Frexit.

The bigger problem for both candidates is that neither of them really has a magic bullet to offer the voters. Whoever wins the election will have to make some unpopular choices to make up for the fact that reform progress has been delayed for so long. Outgoing President Hollande’s policies did not move the dial forward. His predecessor, Nicolas Sarkozy, was occupied with the fallout of the 2008 crash whilst the Chirac years of 1995-2007 were hampered by his early failures to push through economic reforms in the face of intense political opposition. France is undoubtedly still a major economic and political power, but like an athlete who has been away for too long, the economy is out of shape and struggling to cope with fitter rivals – locally Germany, and further afield from the rise of China.

Like the UK, France is a proud country with a long history, but it is unable to throw its weight around like it once did. Just as the Brits expressed their frustration by voting for Brexit, so the French have opted to overturn the duopoly formed by the socialists and the centre right. On 7 May, the electorate will thus be faced with a stark choice between an outward-looking Macron and an inwardly focused Le Pen. Whilst the polls suggest that French voters will opt for Macron, if he fails to deliver the prosperity and security that they demand of him, Le Pen and her supporters will continue to ratchet up the pressure. The arguments we will hear over the next two weeks will not end on 7 May – not by a long shot.