Mohamed El-Erian, Allianz SE’s chief economic advisor, invoked the image of a “mound of sand” to show how foundations of economic stability could be undermined if either Nationalist Marine Le Pen or Communist-backed Jean-Luc Melenchon is elected president of France.
“That is inherently unstable,” El-Erian said in a Bloomberg Television interview Friday. “At some point, one single sand grain can change the shape of the whole thing. If we get a victory after the second round by Le Pen or Melenchon, that will constitute that grain of sand.”
Le Pen, an anti-euro candidate, and Melenchon are among the four main competitors in Sunday’s voting, which will determine the two candidates who qualify for the May 7 runoff. Voters have already rattled the political and economic establishments in the U.K. by choosing to leave the European Union, and in the U.S. by selecting Donald Trump as president after he called for trade restrictions and tighter immigration policies.
“If France goes away from the centrist candidates, then there will be a question about the construct of the European Union,” said El-Erian, who is also a Bloomberg View columnist. “And if there’s a question about the construct of the European Union or, in the case of Le Pen, the construct of the euro zone itself, that is very disruptive.”
El-Erian said markets are prepared for the possibility that Le Pen advances Sunday to face centrist Emmanuel Macron or Republican nominee Francois Fillon, and expecting that she loses in the next round. Should Le Pen and Melenchon finish first and second, yields for French bonds would climb compared with benchmarks, he said, and the disruption could also spread to debt from Italy, Spain and Portugal.
“You will see a major hit to risk assets,” he said. “It will be an extremely volatile open on Monday.”
Asked about trading of short-term credit instruments, El-Erian emphasized a shift that has added stability since the credit crisis. Lenders are stronger now, meaning that investors don’t have to worry like they did in 2008 about the predictability of once-routine banking transactions, he said. Still, there can be volatility when people begin to question their previous assumptions in politics.
“In the marketplace, you have constants that you can rely on, and then you have a small set of variables,” he said. “Now the constants become variables, and that is a very different environment to trade in.”