Where may the Populist-Nationalist Forces Stall?

This weekend’s Austrian presidential election
and the Italian referendum may see the populist-nationalist forces do
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
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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