Le Pen erodes market`s certainty of France`s future

France will not turn its back on Europe and the euro following far-right leader Jean-Marie Le Pen`s presidential election breakthrough but strong government and economic reform is far from certain, economists said.

Le Pen`s shock qualification on Sunday at the expense of Socialist Lionel Jospin pitches conservative President Jacques Chirac into a May 5 runoff against a populist ex-paratrooper who attacked the creation of the euro as "national suicide".

While economists were sure voters would rally behind Chirac on May 5, they read the first round vote as a blow to mainstream politics and free market economics that would haunt Chirac, and the government that emerges from legislative elections in June.

"You won`t see Chirac saying `let`s pull out of the euro`, but there are other worries for him and the next government," said Jean-Francois Mercier, a Frenchman working as European economist with Schroder Salomon Smith Barney in London.

"Will they attack the European Central Bank more vigorously or change tack on fiscal policy?" he asked.

"Financial markets will have to rethink their strategy and politicians rethink their message, and voters will need a few days to reflect."

"Beyond Le Pen, Sunday`s vote showed fear of globalisation, of supranational power. Rightly or wrongly, the vote was in part anti-globalisation and partly anti-free market," Mercier added, noting that candidates from both extremes scored highly.

Le Pen, who campaigned largely on law and order, hammered home an anti-Europe message in an appeal for votes.

"I call on patriots, sovereignists and authentic republicans to unite around my candidacy, to oppose the technocratic Europe of Brussels and create a true popular force to defend national independence and oppose globalisation," he said in a statement.

Before the voting, investors were comfortably saying that France`s presidential and legislative elections made little difference because they amounted to battles between centre-right and centre-left, people like Chirac and his Prime Minister Jospin.

That certainty soon vanished after a first round result marked by record abstentions and protest voting. National Front leader Le Pen took 17 per cent of the vote, Chirac less than 20 per cent, and the extreme left more than 10 per cent.

In terms of policy, eyes turned to the legislative elections on June 9 and 16, on the assumption that Chirac would be assured of a landslide "by default".

While the euro was marginally weaker in the currency markets and French shares ebbed a little too, economists said this was nothing major and stressed that the doubts were about what happened after Chirac`s largely expected re-election.

"What`s at issue now is the risk of three poles emerging in the legislative elections - right, left and extreme right - which would make France ungovernable," said Antoine Brunet, chief investment strategist at HSBC-CCF bank in Paris.

Economic experts, like political commentators, wondered whether Chirac might end up "cohabiting" with a left wing government for another five years, prolonging the uneasy power-sharing deal he had with Jospin.

But few knew which was worse - the possible inertia of yet another cohabitation or a right-wing government working under Chirac but forced to take account of pressure from the extreme right and Le Pen`s tirades against European Union policy.

"If we get a right wing president and parliament, we are slightly more cautious because we think this limits the potential for structural reform," said ABN Amro strategist Phillip Chitty.

Several analysts noted that both Jospin and Chirac had resisted moves to liberalise France`s energy market at a recent EU summit in Barcelona but that both men had felt forced to sign up to EU projects for wider liberalisation and reform.

Now it was impossible to tell if things would stay that way. Jean-Noel Vieille at Aurel Leven brokerage put it bluntly.

"There`s likely to be strong social and political uncertainty, of the kind that markets do not find reassuring," he said.

"The markets could have done without this added risk amid the current economic climate," he said, referring to the need for political stability at a time when the global economy is struggling to rebound from last year`s sharp downturn.