Global Macro Research Top of Mind March 14, 2017 Issue 55

European Elections: More Surprises Ahead? From the editor: With the UK referendum and US election in hindsight, whether this year’s European elections will deliver more surprises is Top of Mind. At least one potential outcome—the election of Euroskeptic Marine Le Pen in France—would likely have serious consequences for both markets and the future of Europe (think redenomination risk and Frexit fears). Given the high stakes, we dig into Le Pen’s platform, voter base, and prospects for winning, including in an interview with political expert Nonna Mayer. We also interview Pascal Lamy—an early architect of the EU—who calls the current political environment Europe’s worst crisis in 60 years. Sharing Lamy’s concerns, our own Huw Pill outlines the challenges facing mainstream parties even if they do prevail as we expect. Lastly, while market fears in the run-up to Trump have (so far) proved unfounded, we warn that this would likely not be the case with a Le Pen win.

Inside European politics in flux 4 Huw Pill, GS European Economics Research Interview with Pascal Lamy 6 President Emeritus, Jacques Delors Institute Interview with Nonna Mayer 10 Research Director Emerita, French National Center for Scientific Research, Sciences Po The populist pull in France 12 Pierre Vernet, GS European Economics Research Q&A: president, parliament, and Le Pen 14 Alain Durré and Marina Grushin, GS Research Equities and elections 16 Peter Oppenheimer, GS Equity Strategy Research Rates: no sign of systemic risk 17 Francesco Garzarelli, GS Global Markets Research The question for Germany: how pro-EU? 18 Alain Durré , GS European Economics Research Click here for a video summary

Source: www.istockphoto.com.

You simply can’t compare There is no doubt that the …[In] contrast to the focus [Donald Trump’s] situation to that election of Le Pen would be of many market participants on of Marine Le Pen, who is still interpreted as the third act of a political developments in the struggling to overcome the legacy Greek tragedy, which started with coming weeks, the future of the of her father and whose party is Brexit, and was then followed by Euro area is likely to be still not seen as capable to Trump… this is the biggest crisis determined over a period of years govern.” [Europe has] seen yet.” rather than months.” Nonna Mayer Pascal Lamy Huw Pill

Editors: Allison Nathan | [email protected] | Marina Grushin | [email protected] Macro Executive Committee: Jeffrey Currie | Jan Hatzius | Kathy Matsui | Timothy Moe | Peter Oppenheimer

Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html.

The Goldman Sachs Group, Inc. Goldman Sachs Global Investment Research Top of Mind Issue 55 MacroEl news and views

We provide a brief snapshot on the most important economies for the global markets

US Japan

Latest GS proprietary datapoints/major changes in views Latest GS proprietary datapoints/major changes in views

• Following the strong February jobs report, we pulled forward • No major changes in views. our expectations for rate hikes to March, June, and Datapoints/trends we’re focused on September from March, September, and December. • The first positive core CPI (ex. fresh food) print in nearly a • We also changed our forecast for the start of balance-sheet year (0.1% yoy); we expect a continued modest uptrend. normalization to 4Q2017 from mid-2018. • The sharp rise in capex (+8.4% qoq ann.) in Q4. Datapoints/trends we’re focused on • New rules that open the door to PM Shinzo Abe leading his • Upside surprises to data, raising our average CAI for the last political party—and potentially the government—until 2021. 3 mo. to the fastest pace of growth since late 2014 (3.6%). • Steady BOJ policy; we currently see no urgent need for • Healthcare legislation and its impact on tax reform timing. further easing and expect no action at the March meeting. From “long shot” to “fully priced” Positive territory Market expectations for a March rate hike, %; US MAP index (rhs) Japan CPI inflation, % yoy 120 1.6 2.00 Market odds of a March hike Fed Chair Yellen signals National core CPI (ex fresh food) readiness to hike 1.4 National new core CPI (ex fresh food & energy) GS MAP index of economic 1.50 Tokyo core CPI 100 1.2 surprises (rhs) Tokyo new core CPI 1.0 1.00 80 0.8 0.50 0.6 60 0.4 0.00 0.2 40 0.0 -0.50 -0.2 20 -1.00 -0.4 0 -0.6 -1.50 Jun-2016 Aug-2016 Oct-2016 Dec-2016 Feb-2017 2012 2013 2014 2015 2016 2017 Source: Bloomberg, Goldman Sachs Global Investment Research. Source: MIC. Europe Emerging Markets (EM) Latest GS proprietary datapoints/major changes in views Latest GS proprietary datapoints/major changes in views • We raised our China Q1 growth forecast to 6.3% qoq ann. • We raised our Euro area Q1 growth forecast to 0.5% qoq from 0.4% qoq on strong sentiment and survey indicators, from 5.5% on a larger-than-expected rebound in fiscal which we believe reflect stronger underlying momentum. spending and ongoing upside surprises to global activity. • We lowered our FY18 India growth forecast to 7.5% yoy Datapoints/trends we’re focused on from 8.6%, reflecting a smaller rebound following the milder- • Political risks as voters in the Netherlands and France go to than-expected impact on Q4 GDP from demonetization. the polls on March 15 and April 22, respectively. Datapoints/trends we’re focused on • The recent passage of the Brexit bill by UK parliament, • The impact of a faster Fed hiking cycle across the EM space; clearing the way for PM May to trigger Article 50. in our view, Mexico and Turkey will be among the most • A softening of UK PMIs and our UK CAI since December. affected, given their relatively weak inflation anchors. Looking up Fiscal flip Euro area composite PMI, 50+ indicates expansion Change of China’s on-budget fiscal spending to GDP ratio, % 60 20 Feb-17 composite 58 PMI reached a 15 70-month high 56 10 54

52 5

50 0 48 -5 46

44 -10 10 11 12 13 14 15 16 17 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Source: IHS Markit, Haver Analytics. Source: CEIC, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 2 Top of Mind Issue 55 EuropeanEl elections: more surprises ahead?

With the unexpected results of the UK referendum and US The populist pull election in the rearview mirror, whether the chock-full Select populist parties’ share of the vote, %* European election calendar this year—kicking off with tomorrow’s general election in the Netherlands, historically a Last Election Second-to-last election Party did not yet exist political bell-weather—will deliver additional surprises is Top of 2013: Italy: Five-Star Mov't. 2008 Mind. This is especially the case because at least one potential 25.6% 2007: 2012: outcome, the election of Euroskeptic Marine Le Pen to the France: Front National French presidency, presents redenomination risk that would 4.3% 13.6% 2012: 2010: Netherlands: PVV likely have severe economic and market consequences, and 10.1% 15.5% could prove to be the death-knell for the European project. 2013: Ge rmany: AfD 2009 4.7% That said, movements driven by Euroskepticism and “anti- 2013: 2008: Italy: Northern League establishment” sentiment will play a role in all of Europe’s key 4.1% 8.3% elections this year; besides this week’s Dutch election and 0.0 10.0 20.0 30.0 upcoming French elections (April 23, 1st round; May 7, 2nd round; legislative elections in June), elections in Germany *Presidential elections in France, parliamentary elections elsewhere. (September 24) and potentially Italy (TBD; see pgs. 8-9 for Source: NSD European Election Database, government websites. details) are also on the horizon. On some level, the “populist” Given the systemic risk that Le Pen presents, we dig into her political trends in these countries are nothing new; strong platform and motivations in an interview with Nonna Mayer, an populist influences have ebbed and flowed in Europe over time. expert on the FN at Sciences Po. Mayer notes that Le Pen’s But this tide has again swelled in recent years for both success in uniting the far-right around her anti-immigrant economic and socio-cultural reasons, as we first laid out in our “national priority” platform is unprecedented, and believes that April 2015 Top of Mind: Populism, Parties and Politics as well any softening in her Euroskeptic tone is just a strategy to win as our June 2016 Top of Mind: Political Uncertainty. (See map votes. But Mayer agrees with the consensus that a Le Pen win on pg. 19 of this issue for a summary of related indicators.) is very unlikely. Of course, we’ve all heard that before… and for what it’s worth, she cautions that a record-low share of French To be clear, we don’t think Euroskeptic forces will win control voters is decided at this stage, making polls even less reliable. of government in any of the upcoming elections. But as GS But she also insists that Le Pen and Trump’s situations are Chief European Economist Huw Pill argues, even that result simply different (Le Pen is a true outsider; Trump is not). should be far from comforting for proponents of the European vision. In his view, mainstream European parties are caught in a Our own European Economist, Pierre Vernet, dives further into trap, with needed reforms likely to draw ire from both ends of the FN’s support base by comparing election results for nearly the political spectrum. The upshot: Unless mainstream 30,000 French municipalities with socio-demographic variables politicians use their (expected) wins this year to capitalize on and income levels, using satellite-recorded light intensity as a the favorable macro environment and move swiftly to proxy for economic activity. He confirms that Marine Le Pen’s overcome voter concerns, Euroskeptic threats will continue to pull is strongest in areas that are (1) farther from major cities, rise and support for European integration will further erode. and have (2) smaller economies and (3) high socio-cultural heterogeneity. On this basis, he warns that the populist pull is Pascal Lamy, an architect of the EU as former Chief of Staff for likely to extend well beyond the 2017 election. European Commissioner Jacques Delors in the 1980s/90s and former Director General of the WTO, is similarly concerned As for market implications, if there is one thing that Brexit and about the outlook for Europe, calling the current crisis the Trump have taught us, it’s that unexpected political outcomes worst since the signing of the Treaty of Rome 60 years ago. In are one thing, and the markets’ reaction to them is another. his words, a victory by Le Pen in the French race would be the Nevertheless, Francesco Garzarelli, GS Co-Head of Global “third act of a Greek tragedy” that began with Brexit and Markets Research and Peter Oppenheimer, GS Chief Equity Trump, and would likely mark the beginning of the end for the Strategist, believe a surprise victory by Le Pen would likely EU and the euro. (But even if she loses, the EU must become bring about dislocations in EMU bond markets and a sell-off in less “frigid” to reinvigorate the European project, he says.) risk assets, since euro redenomination risk leaves her presidency a more systemic risk than Brexit/Trump. If Le Pen At first glance, much of Le Pen’s ability to deliver on anti- loses, on the other hand, relief rallies might ensue. European campaign promises would hinge on the presence of her party, the Front National (FN), in parliament, which is likely We close with GS Senior European Economist Alain Durré’s to be limited even after the legislative elections (see pg. 14). Le early look at elections in Germany, where the question is not Pen would thus face serious obstacles to pursuing the key which candidate is more Euroskeptic, but, paradoxically, which market concern: a referendum on “Frexit” (which polls suggest is more pro-Europe—with important consequences for the the French public would not support). That said, her election future of European integration. could be shocking enough to upend France’s institutional dynamics, making what follows hard to predict. And even Allison Nathan, Editor beyond the question of “Frexit,” the reality that many of the Email: [email protected] European Council’s key decisions must be unanimous leaves Tel: 212-357-7504 Goldman, Sachs & Co. little doubt that a Le Pen win would be bad news for the EU.

For related coverage, see our European elections page on GS360.

Goldman Sachs Global Investment Research 3 Top of Mind Issue 55 EuropeanEl politics in flux

While Mr. Draghi’s famous commitment to do “whatever it Huw Pill argues that market concerns about takes” to preserve the euro has proved remarkably efficient in immediate election risks are perhaps containing self-fulfilling, market-driven speculative attacks against the integrity of the Euro area, the effectiveness of this overdone, but that political risk and its impact backstop in the face of a political decision to exit the euro is on Europe won’t diminish anytime soon open to question. The credibility of a commitment to deploy ECB facilities in As elsewhere among the advanced economies, European potentially unlimited amounts in support of a country whose electorates are disturbed by the nature and pace of economic government has a political mandate to abandon the euro—and and social change wrought by liberalization, globalization, and redenominate liabilities to the rest of Europe in a new (and technological change. For many, the process of European weaker) currency—is (predictably) low. We have empirical integration is both a source and an amplifier of these underlying experience of such a dynamic (even if it was ultimately arrested forces. As a result, disgruntled voters see European institutions by a new bailout program): Greece’s flirtation with Grexit in as scapegoats for the disruption they face. Looking to avoid the mid-2015. That is not a happy precedent. Notwithstanding blame themselves, national governments often encourage such “whatever it takes,” we saw capital controls, blocked bank thinking. Euroskepticism therefore draws support both from deposits and economic chaos in Greece. Market participants voters who feel “left behind” by the pace of economic change are thus understandably perturbed by today’s political risks. (largely from the traditional political left); and from voters concerned by the social challenges posed by immigration and …but the likelihood is low multiculturalism, as well as the loss of national sovereignty to Viewed from afar, European political risks look daunting. supranational bodies (largely from the traditional right). Indeed, they are hard to characterize and understand: binary in nature and complex in character. Closer to home, though, such Fragmentation on multiple dimensions Political parties organized according to their ideologies/positions political risks appear less threatening, at least for now. After many unfortunate experiences with populism in the twentieth Mainstream / Pro-Euro century, European political institutions have evolved in a way that creates a high hurdle to a populist government taking Conservatives; Liberal; SPD; LibDem; Républicains; office. Institutional specifics vary from country to country, but Labour FDP; En Marche! CDU/CSU whether via the strict system of proportional representation that operates in the Netherlands or the two-round presidential election employed in France, scope exists for a mainstream “grand coalition” to emerge to defeat the populist candidate. Left Right While Euroskeptics may (and do, at least in the polls) achieve a plurality of votes, they are not yet close to winning a majority of Podemos votes (the 50%+1) that would confer real political power. Linke AFD, FN Sweden Such is the conventional wisdom in Europe—a wisdom we Syriza 5-Star Democrats UKIP PVV broadly agree with. Concerns expressed from outside Europe about political risks to the Euro area may be overstated.

Populist / Euroskeptic A plurality may raise concerns… Source: Goldman Sachs Global Investment Research. Polling for the 1st round of the French presidential election, %

As a result, political allegiances are becoming more 35 % End-January: complicated, and political alignments are evolving. At least in - Hamon wins Socialist primary - Fillon involved in 'fake job' affair principle, there is potential for the emergence of a Euroskeptic 30 Marine Le Pen coalition that draws support across the traditional left/right (Front National) 25 spectrum. Paralleling the surprise vote for Brexit in the UK and François Fillon unexpected election of President Trump in the US, electoral (Centre-right) 20 outcomes in Europe may be becoming more difficult to predict. Emmanuel Macron (Centrist) The stakes are high… 15 Benoît Hamon Speaking in broad-brush terms, the political surprises in the (Socialist) Anglo-Saxon world last year passed off with little lasting impact 10 Jean-Luc Mélenchon on financial markets or adverse effect on the economy (at least (Far-left) 5 thus far). But the potential disruption stemming from an February 22: explicitly Euroskeptic government taking office in a Centrist Bayrou and Macron to form alliance systemically-relevant Euro area country would be profound—in 0 Results some cases, possibly even existential—for the single currency. Jan-2017 Feb-2017 Mar-2017 Apr-2017 Source: Goldman Sachs Global Investment Research, Ifop, BVA, Odox, Harris Interactive, Kantar Sofres-OnePoint, Elabe, Ifop-Fiducial.

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Unless macroeconomic performance improves and social …but does not guarantee a majority nd concerns abate, the populists will win in the end. Scenarios for the 2 round of the French presidential election, % 100 A dangerous trap 90 Viewed through this lens, Europe is caught in a trap. The rise of populism is both a cause and a consequence of this trap. On 80 Le Pen Le Pen one side, mainstream governments inevitably find it hard to 70 implement necessary reforms in the face of vociferous 60 opposition from populist parties. Efforts to deregulate the labor market (and thereby expose previously protected workers from 50 the consequences of international competition) draw the ire of 40 the populist left. Transfers of sovereignty from the national level to European institutions (such as via banking or fiscal 30 Fillon Macron union) draw the ire of the populist right. 20 On the other side, the inability of mainstream governments to 10 implement the governance and economic reforms necessary to 0 render the Euro area more workable means that Scenario 1 Scenario 2 macroeconomic performance suffers and social uncertainties Source: Goldman Sachs Global Investment Research, Ifop, BVA, Odox, Harris Interactive, Kantar Sofres-OnePoint, Elabe, Ifop-Fiducial. and disruption persist and intensify, fueling the rise of populism. A self-sustaining vicious cycle of ever-intensifying Caution against complacency tension can emerge. Breaking this cycle becomes central to the economic, financial, and ultimately political stability of Europe. Still, there are several reasons to guard against complacency. First, even if the risk of an explicitly Euroskeptic government Facing the fork in the road—eventually remains low at present, the consequences of such an outcome It is not as if the European authorities do not know what to do. would be substantial, to say the least. Given the systemic The economic and institutional requirements that were lacking nature of such an event, the spillovers across countries—both from the Maastricht framework—stronger mechanisms for risk- within the Euro area and outside—would be significant. Pricing sharing across Euro area countries—are well-understood. What the underlying risk or hedging against it raises questions that go has been lacking is the political will to implement them. beyond our normal experience and models. A Euro-optimist would say that, in the present improving Second, conventional wisdom can be (and has been) wrong, macroeconomic environment, the populists’ electoral strength especially with regards to politics and public opinion. Recent will act as a galvanizing force for reform. The mainstream experience in the UK and US is ample demonstration of that. governments we see as likely to emerge from forthcoming Lightning can strike twice, or even three times. elections will exploit the space afforded them by European Third, even if they do not enter or form the government, the electoral systems to make necessary changes that break the rise of Euroskeptic populists is undoubtedly influencing the vicious downward spiral. We have long awaited such action. wider political debate in most European countries. To protect A Euro-pessimist would argue that mainstream politicians have their electoral base against erosion from the populists, repeatedly failed to make use of the time provided to them to mainstream parties are embracing some of their take difficult but necessary measures, preferring instead to preoccupations and concerns. A more nationalistic and perpetuate a status quo that is unsustainable over the longer protectionist approach to European relations may result. run. It is always easier to let one’s successors do the heavy Fourth, the “grand coalition” governments created to stem the lifting down the road, especially if the ECB’s largesse and the populist rise are unlikely to have a coherent agenda. By nature, political space created by electoral systems make the current they are creations of circumstances rather than conviction. situation tolerable. In this scenario, conditions slowly Their ability to deliver necessary but controversial policy deteriorate, populism strengthens, and the underlying instability initiatives—such as the governance and structural reforms eventually becomes manifest. required to make the Euro area more workable—is uncertain. Only time will tell which of these two interpretations is correct. Fifth, as result of the above, mainstream governments formed But either way—and in contrast to the focus of many market in the face of populist insurgencies may find it difficult to participants on political developments in the coming weeks— overcome the underlying economic and institutional the future of the Euro area is likely to be determined over a weaknesses that fueled the rise of populism in the first place. If period of years rather than months. they are unable to find and implement solutions to the challenges posed by the economic and social dislocations Huw Pill, Chief European Economist stemming from globalization and technological change, these Email: [email protected] Goldman Sachs International governments will be threatened with further loss of popularity Tel: +44-20-7774-8736 and legitimacy. Ultimately, the populist vote will gain further:

Goldman Sachs Global Investment Research 5 Top of Mind Issue 55 InterviewEl with Pascal Lamy

Pascal Lamy is President Emeritus of the Jacques Delors Institute and former Director General of the World Trade Organization (WTO). Between 1985 and 1994, he was Chief of Staff to the President of the European Commission, Jacques Delors, and his “sherpa” at the G7. In this capacity, Lamy contributed to projects that laid the foundation for the European Economic and Monetary Union. He subsequently served as CEO of Credit Lyonnais until 1999, before returning to Brussels as European Trade Commissioner until 2004. His two terms at the WTO lasted from 2005 to 2013. Below, he argues that today’s political zeitgeist threatens European integration, and that reinvigorating the European project requires Europe to become less “frigid”. The views stated herein are those of the interviewee and do not necessarily reflect those of Goldman Sachs.

Allison Nathan: What do you make them” and not “like us.” This undercurrent of the political of the rise of populist parties in discourse is often more about perception than reality. In Europe on both the right and the France, for example, despite the widespread perception that left of the political spectrum? the inflow of migrants has been very large, the number of migrants is in fact relatively small, certainly when compared to Pascal Lamy: This is not just a country like Germany. happening in Europe. We see it in other parts of the world, for example Allison Nathan: What do you think is driving the rise of with Donald Trump in the US, Rodrigo Euroskeptic parties and politicians? Duterte in the Philippines, Narendra Pascal Lamy: These politicians are largely following the pulse Modi in India, and Recep Tayyip Erdogan in Turkey. As far as of domestic sentiment. The fact is that the public is less Europe is concerned, I see two main reasons for this enthusiastic about Europe than it once was. It is therefore no phenomenon. The first is economic hardship and perception of surprise that we don’t have many strongly pro-European rising inequality. The second is a cultural backlash driven by the national leaders like we had in the 1980s and ‘90s with feeling that migration is excessive and unharnessed. The François Mitterrand of France, Helmut Kohl of Germany, Felipe question is, what are the proportions of these two? I’d probably González of Spain, or Ruud Lubbers of the Netherlands. Take say half and half. present-day Netherlands as an example: The prime minister, Allison Nathan: How does protectionism fit into the who is considered pro-European in the present Dutch context, current political zeitgeist? Do you foresee a rollback in is probably three times less pro-European than his predecessor trade, whether in Europe or globally, as a result? was twenty years ago. Pascal Lamy: There is a growing discourse about Allison Nathan: What, in your view, is at the root of protectionism and mercantilism, including the notion that dwindling support for European integration? imports are bad and exports are good, and that running a trade Pascal Lamy: European integration has not produced the sort deficit means exporting jobs. These are medieval ways of of output, say prosperity or security, that people expect for the thinking, in my view. Not everyone has embraced them; UK price of surrendering some control at the national level. The Prime Minister Theresa May intends to address Brexit with a European system therefore suffers from a legitimacy problem, “global Britain” open to international trade—far from the anti- made worse by the distances between the national capitals and globalization aspect of what excited the Brexit vote. But the Brussels, and the misguided sense that officials in Brussels are risk of protectionism is there. I think it is larger in the US than in unelected, unaccountable bureaucrats. Of course, that is just Europe, because the US social safety net is thinner. But I am wrong. There are democratic processes and institutions in still betting on Trump being softer on trade than some of his place at the European level precisely for the sake of rhetoric has suggested. establishing legitimacy. The European Parliament is elected; it In general, I do not foresee a meaningful rollback in trade has the power to sack the European Commission, which it has; because the world economy is now so tight-knit and global and there are other checks and balances like the European supply chains are so complex. The costs of protectionism Court of Justice. But the proof that Europe is better as one would be extremely high, and would accrue quickly. The than as separate nations is just not there in many respects. We “safety ropes to reality,” so to speak, are much shorter today will be able to test this belief for the first time with Brexit. than they were 10 or 20 years ago. In other words, it would not Allison Nathan: You spent a great deal of time at the be as difficult to steer support back towards free trade today. European Commission. To what extent is Brussels Allison Nathan: Much of the political discourse fueling anti- responsible for the Euroskeptic backlash? establishment parties in Europe seems to be anti-migrant Pascal Lamy: Brussels shares in the responsibility, but only in rather than anti-trade. Would you agree? small part. Most of the responsibility rests with the member Pascal Lamy: It’s difficult to distinguish between anti-migrant states, given the message they have perpetuated that all good and anti-trade. Both are ways of scapegoating foreigners and things come from the nation and all bad things come from attributing one’s problems and failures to those who are “like Brussels, as if decisions in Brussels were not taken by national

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leaders. That’s an old game, and one that is played in many But if Le Pen were elected President of France and had the federal systems, including in the US, Canada, or Australia. legitimacy and capacity to deliver on her campaign promises, this would be very bad news for Europe. The share of responsibility that falls on Brussels largely owes to the willingness of the European Commission under José Of course, whether or not she could secure this legitimacy is Manuel Barroso to effectively accept this division of roles, with an open question. Contrary to what many people believe, Brussels being the “bad guy” on austerity, forcing fiscal France has a parliamentary, not a presidential, system of discipline on national governments. This reinforced the notion government. The president is directly elected and has more that punishment comes from Brussels, and was a huge executive authority than heads of state in other parliamentary mistake in my view. The proof is in the numbers: The systems, such as the German president, but he or she still Eurobarometer—a methodical and reliable measure of public requires a parliamentary majority to implement policy. Many sentiment in Europe—shows that with the exception of the UK, observers do not grasp this. They’re focused on the train the share of people who think belonging to the EU is a good coming at them—the presidential election—while ignoring the thing remains around 60% across Europe. But the share of train right behind it—the legislative elections in June. Le Pen people who trust European institutions to fix their problems has would need the support of parliament, for example, to pursue shrunk over the last ten years, and is now only around 35%. her plan to leave the euro. This may be a tall order, especially since current measures of public opinion suggest the majority Allison Nathan: To what extent was such a Euroskeptic of the French population supports the euro. Nevertheless, backlash predestined by the structure of the Euro area? there is no doubt that the election of Le Pen would be Pascal Lamy: There are indeed intrinsic fragilities in the way interpreted as the third act of a Greek tragedy, which started the Euro area was built. These vulnerabilities were well- with Brexit, and was then followed by Trump. identified at the time. As one of the authors of the system, I Allison Nathan: Would it be possible to maintain the Euro know too well the difference between what we proposed in area with a core of committed countries pursuing further 1988 with our report on economic and monetary union and integration and a set of surrounding countries that what was ultimately accepted by national leaders and maintain more of their independence? diplomats in the Maastricht Treaty in 1992, as nations resisted economic union. Jacques Delors himself said at the time that Pascal Lamy: This is an intellectual question that has long been the economic and monetary union was “very monetary and not debated. The idea of a “multi-speed” Europe or “concentric very economic.” He used the image of a person with one circles” has come to fruition in some respects through the strong leg—the monetary one—and one weak leg—the Schengen Area and the Euro area, which do not include all EU economic one. If you have a strong leg and a weak leg, you can members. Beyond that, if the UK exits the EU, the chances for walk—albeit not very well—but you can’t run, which is what a multi-speed Europe are smaller because the UK was always was required to recover from the 2008/09 financial crisis. The the most likely candidate for the second speed. If the UK can’t crisis exposed this discrepancy between the strong monetary achieve this, we’ll have doubts that others can. In short, the union incarnated in the single currency and interest rate policy, ability of a few countries to move forward with faster, deeper and the relatively decentralized macroeconomic policy and integration has not really materialized to date. coordination, which explains why Europe was not able to Allison Nathan: How concerned are you about the respond as rapidly and as effectively as the US to the crisis. European project today compared with past challenges? Is Allison Nathan: Given all of this, how concerned are you it possible to reinvigorate it at this point? that Brexit and Donald Trump are precursors for Pascal Lamy: I think this is the biggest crisis we’ve seen yet— unexpected election outcomes in Europe? and I say that as we approach the 60th anniversary of the Pascal Lamy: There are obvious similarities, so I do see some Treaty of Rome this month. But in my view, it’s not an risk of unexpected political outcomes in Europe. But I don’t existential crisis; assuming Le Pen and similar forces stay at think the risk will materialize because the European continent bay, the European project will continue to move forward. That has larger social safety nets that help mitigate people’s sense said, it’s still a crisis that has slowed European integration and of suffering from inequality, immigration, or lack of healthcare has therefore left Europe weaker compared to what it could or or education. Europe has generally not experienced the should have been relative to the rest of the world. And the substantial reduction in safety nets that came with Thatcherism longer we remain in slow motion, the more growth and welfare and Reaganism. But, again, the sense of suffering or frustration opportunities that will be missed. or disempowerment is still there, and so is the the risk of The key to reinvigorating the vision of an integrated Europe is political surprises. to focus on the symbolic aspects of integration, which have not Allison Nathan: If Marine Le Pen is elected, would that be received enough consideration. We have to introduce more the beginning of the end for the European project and the emotions and narratives. As the famous Israeli diplomat Élie euro? Barnavi once said, we have to make Europe less “frigid.” That thawing needs to come first and foremost from the people. But Pascal Lamy: Probably. It would be far more significant than all aspects of civil society including intellectuals, social Brexit because the UK has always been a very specific case. movements, political parties, national leaders and even The European continent has a different mindset; polls suggest Brussels can play a role in reviving the vision of a greater that pro-European sentiment on the continent actually Europe. increased by 5% in the months following the UK referendum.

Goldman Sachs Global Investment Research 7 Top of Mind Issue 55 AEl guide to Europe’s upcoming elections - — wing - second runoff in election) — higher taxes and May 7: ” referendum left - . head of Socialist Party; . left on economic policy; far left - fmr ( MEP; far Marie Le Pen, 1972 in Marie Fmr. MinisterFmr. of the Economy; immigration, Euroskeptic - Fmr. Prime Minister; conservative on Fmr. Education Minister; left MEP; far 25%): — anti lower taxes, end to 35h work week; under— lower35h work week;end to taxes, (20%): , Harris Interactive; Goldman Sachs Global Investment Research. (26%): than against whoseMacron, agenda may appeal spectrum of voters , spending spending , cuts, tax/labor reform Pen Odoxa François Hollande Fillon presidential election, first round; led coalition in the National Assembly coalition led thein - Fillon Elabe , Luc Mélenchon (11%): a broader , BVA, , BVA, to Without an unprecedented decline in voterparticipation or increasesharpLe Pen base, FN’s in supportlooks unlikely to winagainst secondcandidate round any Le Pen win in first round,first butinLe Pen second not in win Polls do slightly Le Pen maysuggest in second roundbetter against spending, cut to 35h workfin. week; regulation; Euroskeptic higher taxes, cut to 35h work week, universal35h work basicweek,to incomecuthigher taxes, Jean - economic policy investigation for allegedly paying family for work they didn’t do Benoît Hamon (14%): Unexpected mainstream candidatesUnexpectedLe Pen: mainstreamwith competing Marine Le right on other issues Emmanuel Macron ( independent seeking to bridge left and right; program includes investment François President chose ratings; notseekweak approval re to- Prime Minister Bernard Cazeneuve Socialist Le Pen,Led by Marine Regional Councilor & MEP Jean- father,Founded by her April 23: caseno absolute oflast majority; in held 2012 June 11 : legislative election, first round; June 18: in roundcaseno absolute oflast majority; held in 2012 Calls Calls for strict immigration controls, tighter domestic security Proposes 35h work week,lower retirement age,to return national currency,withdrawal frommajor free trade deals Seeks 6 mo. of talks over France’s sovereigntyofFrance’son economic/over talksSeeks 6 mo. “ Frexit holding before policy immigration • • • • • • • • • FRANCE • • • Front National (FN) • • • • • • • Sofres - EU - Fiducial, Kantar - oriented - Ifop , right on right econ.; tax - immigrant, anti - , the party of Prime Mix of far left/right on on Mix of left/right far in parliament, but a mainstream government remains the most likely outcome (8 March 2017) and Europeanch Fren 2017)Economics outcome andDaily: Marchgovernmentmainstreamlikely(8 parliament, mostthe a remainsbut in left social social left democrats, - People’s Party for Freedom reform; socially reform; progressive wing on wing economy; focused on - Social Social democratic, labor Center/center right right fractionalisation - right on economy; limited gov’t.; Left - , and center , De Stemming, TNS NIPO; OpinionWay Increased Center seats): bus. tax cuts; socially conservative — - Ipsos , 35/150 seats) , 18 ( Peil PvdA ( programme , appears but unlikely (6win to February 2017). party coalitionparty withoutparticipation PVV - environment; socially progressive SocialistParty (15 seats): cuts, educationcuts, spending; pro - GroenLinks fiscal discipline, tax cuts; getting tougher on immigration Christian Democratic Appeal (20 seats): Centrist on economy; small Democrats 66 (18 seats): VVD VVD (25 seats): Led by Geert Wilders, who left VVD in 2004 Formed coalition with VVD in 2010 but dropped out after refusing to support proposed austeritymeasures Seeks independentand monetary immigrationpolicies; has promised referendumon EU membership if elected Has called for strict immigration controls including closing to Muslimborders immigrants general election for House of Representatives; ofHouse March 15:election for general 2012 in held last Fragmentedlandscape; 20+ parties running; several are projected to secure 10 orseats. moreFrontrunners include: Party for Freedom (PVV, 23 seats): econ. (tax cuts, earlier retirement);anti Coalition Coalition between center Labour and (VVD,Democracy 40/150 seats) MarkMinister Rutte Multi Mainstreamparties said they will not formcoalition with PVV Even if they renege, any coalition will require compromise;any negotiationsPVV withwould be long and likely downbreakto shifting positionsWatchfor on immigrationand otherissues as VVD and others respond to strong PVV support • • • • • Party for Freedom (PVV) • • • • NETHERLANDS • • • • • • • • Currently in Power Recent Polling Averages Populist to Party Watch Expected Outcome Election Date Election elections: FN presents a more nationalist Source: Nationalparliaments;Reuters; Politico; Polling numbersaverages are the of 10 polls.last See also European EconomicsDutchDaily: elections

Goldman Sachs Global Investment Research 8 Top of Mind Issue 55 El - late mayors - ’s and the Left/ labor center include include Gentiloni on April 30,on April left), - establishment, - 6%): euro/migration - euro/migration - (DP, Matteo Renzi led led by the anti oriented, environmentalist - wing, anti unified center Populist, anti - wing on some issues (supportswing - of the lower house of parliament - wing, - (following elections; members stronger immigration control establishment. Frontrunners: right; led by fmr. PM Berlusconi establishment platform , - - - , the partyof Renzi and speaker ) EU; divided between traditional left - wing; labor wing; - Center Gentiloni municipal corruption; left - deputy left, pro left, formed by defectors from PD and SI Euroskeptic off on May 7 off - Party (PD Paolo run - Casaleggio in recentin Center ; compiled;Politici by Goldman SachsGlobal Investment Research. business reform agendas; holding primary gains general election scheduled to take place in early 2018 but earlyplace in take election scheduled togeneral wing on others (immigration control) status quo, anti - Democratic - Rome and Turin, oriented; recently Italian Left (SI, 3%): Left Democratic and Progressive Movement Brothers of Italy (FDI, 5%): Right Forza Italia (FI, 12%): with possible Northern League (LN, 13%): Right and pro - environmentalist, Fractured incumbents vs. anti (26%):PD Five Star Movement (M5S, 28%): Prime Minister TBD: lastcase); ourcould held base 2013 (not happenin sooner Early scheduling depends largely on harmonizationvotingof upper/lowerhouse and on approvalrules2018 budget for of resignationthe due to popular rejectionpackage) his ofreform Coalitions in both chambers of parliament left contributing to gridlock PD PD likely to remain largest party;primaries will be key to watch likely fragmentationIncreased(drivenby a potentially more proportionalelectoral law and a less Established comedianin Grillo Beppe 2009 by former Coalition government without M5S participation M5S has historically refusedto form alliances with other parties or compromise its anti Gianroberto Made of sustainable development, public water,environmental activism); right on EU notSeeks allowed(currently by referendum the constitution) Anti • • • • • • • • ITALY • • • • • • Five Star Movement (M5S) • • • • • • , SWG, IPR, EMG, Scenari EMG, IPR, , SWG, Ixe ; plus EU ; Index, Civey , class; led class; led by fmr. - friendly outcomes (15 February 2017). 310/630 seats Relative newcomer; bailout platform; has - EU, divided on migration; CSU, FDP, Greens), or less CSU, FDP,or Greens), , with , with and Euro- - business, small government - member of Saxony state Emnid Ipsos, INSA, , public spending;public pacifist Pro - euro/anti Christian Democratic Union - immigration Petry, - right, pro - Dimap - right right - left; focus on sustainable development - wing; prowing; - left, traditionally working traditionally left, - - Frauke Infratest Center Left Social Democrats (SPD, 193/630) Center Center Wahlen , (33 %): founder left left %): - business coalition (CDU - 7 friendly repeat of friendly the current Grand Coalition, - , the ,partyof Chancellor Merkel, and its sister party, CSU - EU coalition leading,EU partnersfollowed by smaller parties: business coalition (SPD, Left,Greens) German elections: Polls point to market Christian Social Union (CSU) parliament since 2014 Fell shortof votes needed to enterBundestag in 2013 Euroskeptic; seeks more German sovereignty on policy mattersand reintroduction of national currencies Calls for strict controls over borders Established in 2013 on anti changed leadership andon migration pivotedfocus to Led by co Market more pro - pro - Merkel would representcontinuity; SPD leadership under Schulz would likely mean more support for EU integration AfD likely to win butseats, not to influence government; mainstreamparties unwilling to enter into coalition with AfD Greens ( (FDP,Free Democrats 6%): European Parliament President Martin Schulz on pro- platformof social justice, reduced austerity/inequality Alternativefor Germany(AfD, 10%): Euroskeptic, populist, anti led by Chancellor Merkel since 2000; represents status quo statusrepresents since 2000; Chancellor Merkel by led (31%):SPD The Left (8%): CDU Pro - September 24: election for the Bundestag, the federal 2013 in held last parliament; Coalition Coalition of the center (CDU) the the center • • • Alternative for Germany (AfD) • • • • • • • • • • • • Forschungsgruppe GERMANY • • Currently in Power Recent Polling Averages Populist to Party Watch Expected Outcome Election Date Election Polling numbersaverages are the of 10 polls.last See also European EconomicsDaily: Source: National parliaments;

Goldman Sachs Global Investment Research 9 Top of Mind Issue 55 InterviewEl with Nonna Mayer

Nonna Mayer is Research Director Emerita of the French National Center for Scientific Research at Sciences Po’s Center for European Studies. Her work focuses on political behaviors, right-wing extremism, and attitudes on race, immigration, and inequality. She is the author of several books on French politics and the sociology of voter behavior, and has published extensively on the Front National. From 2005 to 2016, she chaired the French Political Science Association. Below, she discusses Marine Le Pen’s mobilization of the right wing in France—a dynamic that is unprecedented but nevertheless unlikely to lead Le Pen to victory in the upcoming election. The views stated herein are those of the interviewee and do not necessarily reflect those of Goldman Sachs.

Allison Nathan: How significant is Nonna Mayer: “National preference” or the more recently the rising support for Marine Le Pen adopted “national priority” has always comprised the essence and her party, the National Front of the party platform. The idea is basically “French first”: Jobs, (FN), in a historical context? social benefits, housing programs, etc. must be kept for the French. Beyond this basic principle, the platform has evolved. Nonna Mayer: Incredibly significant. Jean-Marie Le Pen’s enemy was primarily communism; Marine No party has ever successfully united Le Pen’s enemy is Islamic fundamentalism. She is more the French far-right in its long history, socially liberal than her father on issues such as sexual which dates back to the French orientation and women’s rights. And economically, she is more revolution of 1789. Marine Le Pen’s interventionist, stridently calling for the state to do more. She father, Jean-Marie Le Pen, tried to in and the party are also more focused on the European issue. In 1972 when co-founding the FN. But it was only in 1984, when 2002, her father advocated for EU exit and rejection of the it drew nearly 11% of the vote in European Parliament euro. But at the time, the majority of his voters didn’t share this elections, that its success story began. Everyone said at the view. They do today and restoration of French sovereignty vis- time that this support wouldn’t last. They were wrong. à-vis the EU is a centerpiece of Marine Le Pen’s platform, When Marine Le Pen became chair of the FN in 2011, she despite less emphasis on it in her latest official policy launched an unprecedented electoral dynamic for the party. In program—probably to appease elderly voters afraid of the 2007 presidential election, her father hardly drew 10.5% of abandoning the euro. the valid votes; in 2012, Marine Le Pen received nearly 18%. Allison Nathan: If Marine Le Pen continues to soften her The FN’ share of the vote has since progressively increased to Euroskeptic message to win votes, would this softening almost 28% in the last regional elections in December 2015. stick should she win the election, considering that the Today, voting intentions for the upcoming presidential election broader electorate does not seem to support Frexit? suggest Marine Le Pen will take 25-27% of the vote—far above the levels her father ever reached. Nonna Mayer: No, I think she would move more aggressively toward Frexit eventually. In an interview before presenting her Allison Nathan: Is support for Le Pen about economic official program she said clearly that if she were elected her disenfranchisement? About culture? About security? first move would be to pursue constitutional reforms and to Nonna Mayer: The issue galvanizing support for FN has not negotiate with Brussels to restore the sovereignty of the changed much over time, and it comes down to one word: French nation on all levels; if those negotiations failed, she immigration. Many people in France feel that there are too would pursue a referendum on Frexit. She hasn’t abandoned many immigrants, but an exceptionally large share—90-98%— this idea, and she saw Brexit as proof that Frexit was possible. of FN voters feel this way. Anti-immigrant sentiment is There are some cleavages within the party; her niece, Marion basically a necessary condition to vote for the party. Maréchal Le Pen, thinks she is turning too radical. But 77% of In France the word “immigrants” refers first of all to Marine Le Pen’s supporters think the bad outweighs the good maghrébins from North Africa, evoking painful memories of our on EU membership. They see the EU as an open door to colonial history and the Algerian War of Independence. And it immigration that they want closed. So I think her slight evokes Islam because most maghrébins are Muslims. Marine retrenchment from Euroskepticism is purely cosmetic. Le Pen just needs to say the word “immigrant” to play to her Allison Nathan: How would you characterize FN voters? constituency’s worries. For FN voters, immigration is a package deal, capturing all of their concerns: In their minds, immigrants Nonna Mayer: Contrary to what one often hears, there has are the main threat to France’s national identity and culture; the never been a “typical” FN voter. Since the beginning, the party key security concern because they are the main source of has drawn votes from all corners of the population, albeit from terrorism; the primary economic concern because they take some more than others. Jean-Marie Le Pen gradually expanded away jobs and take advantage of social benefits. his strongholds from small shopkeepers and artisans to blue- collar workers and eventually to farmers. But the key factor is Allison Nathan: How has anti-immigration translated into education. FN voters triple as one moves from those with a the FN’s platform, and how has the platform evolved? university degree to those who did not finish high school.

Goldman Sachs Global Investment Research 10 Top of Mind Issue 55

El

Marine Le Pen has diversified the voter base even further, more elected representatives. The party is very focused on the especially in terms of women. Historically, Jean-Marie Le Pen goal of securing at least 15 deputies in the National Assembly, attracted 5-7pp more men than women voters. In 2012, with the threshold to form a political group that would provide the Marine Le Pen, this so-called “radical-right gender gap” party more visibility, money and weight. Based on the regional disappeared. This is important because women represent 53% elections, that goal seems to be within reach. of the registered French electorate. The real question is But if the FN does not make meaningful gains, resentment whether she will manage to repeat this in the upcoming within the party would likely set in, exacerbating current election. In all the midterm elections since 2012, European, divisions. As I mentioned, Marion Maréchal Le Pen takes a local and regional, the gender gap reappeared; turnout among more traditional, conservative line than her aunt and there is women slipped relative to men. Since presidential elections are also some discontent with Florian Philippot—the number two in so crucial, she hopes that she will be able to draw back female the party—who some see as an outsider who does not voters, which she has made concerted efforts to do by embody the FN’s core beliefs. So the failure to make gains in producing special leaflets and slogans targeting women. June could be a blow to Marine Le Pen’s power in the party Allison Nathan: Would mobilizing women be sufficient for and its effectiveness overall should a leadership battle ensue. her to win the election? What would it take for her to win? Allison Nathan: If Marine Le Pen unexpectedly wins the Nonna Mayer: Even if women vote for her as often as men do, election, would that necessarily be a good thing for FN? it will be difficult for her to win the second round. Le Pen hasn’t Nonna Mayer: It could backfire because her “national priority” gained enough credibility; only one-fourth of the electorate platform goes against the equality of French citizens enshrined thinks she has the capacity to be the president of the Republic. in the French constitution. Even if the FN manages to make And perhaps even more importantly, the FN still has a negative substantial gains in parliament, she is very unlikely to have image; a recent poll showed that 58% of people see the party sufficient support to implement the constitutional reforms that as a danger to democracy, and two out of three say Marine Le would be required. And she would likely end up in a Pen actually frightens them. No other party wants to ally with government of “cohabitation”, with a parliament that does not the FN, which is critical in two-round elections and explains support her program. This suggests her first months in office why the FN has a history of performing strongly in the first- would probably be an ordeal rather than a honeymoon. round but losing the second round. Allison Nathan: Observers often like to compare leaders Marine Le Pen’s chances of winning hinge on her ability to like Marine Le Pen and Donald Trump. What’s your take? mobilize voters versus her opponents’ ability to do so. In this regard, developments that could favor her include a terrorist Nonna Mayer: The common thread between all of these attack, given her strong stance on law and order, or a new leaders and movements is their ability to present themselves scandal that would erode support for her opponents. Should as defenders against globalization, which they frame Marine Le Pen face Emmanuel Macron in the second round, ideologically as a triple economic, cultural, and political threat. there is also the potential for left-wing voters to abstain if they In that regard, Marine Le Pen and Donald Trump are like- decide that he is not sufficiently leftist. In short, it is not minded; they are both nationalist, protectionist, anti-immigrant, impossible for her to win, but I believe it is very unlikely. And if anti-Islam, and anti-elite. And they both have a way of Fillon restores his image, she might even be excluded from simplifying things into black and white. That said, some of their the second round. But uncertainty remains high. Only 60% of ideas differ; Marine Le Pen is far more interventionist on the voters have decided who they will vote for in the first round—a economy, for example. But their biggest differences relate to record low this close to the election. their political legitimacy. Although Donald Trump says he is an outsider, he is not. He was the Republican candidate even if Allison Nathan: Recent experience in the UK and US have some Republicans were behind him more than others. And cast serious doubt on opinion polls. Could the polls, which today, his party has the majority in Congress. You simply can’t all show Le Pen losing in the 2nd round, be wrong again? compare his situation to that of Marine Le Pen, who is still Nonna Mayer: I’m very cautious about opinion polls, especially struggling to overcome the legacy of her father and whose when so many voters remain undecided. But I’ve been party is still not seen as capable to govern. studying the FN since 1984, and despite its spectacular Allison Nathan: Given that Marine Le Pen would have electoral gains, I still see some limitations to its popularity, not difficulty governing as you say, would her unexpected only in polls but in face-to-face interviews. Marine Le Pen is still election be as traumatic for the EU as many are claiming? seen as the daughter of Jean-Marie Le Pen, despite excluding him from the party. And Jean-Marie Le Pen remains a highly Nonna Mayer: Yes, symbolically it would likely be the start of controversial figure, associated with anti-semitism among other the un-knitting of the Euro area. It would probably end the things. I just don’t see her overcoming that legacy at this point. German-French alliance, would open the door to other nations leaving, and would give legitimacy to other far-right political Allison Nathan: Assuming Marine Le Pen loses this movements. And economically it would be a mess, likely election, will she continue to gain momentum? leading to a sharp sell-off in stock markets and capital flight. Nonna Mayer: The story doesn’t end with round two. The Even if there is broad recognition that she won’t be able to parliamentary elections in mid-June are perhaps even more achieve her nativist and anti-Europe agenda, just the notion of important. Currently, the FN has just two deputies in the somebody like her having enough popular support to be elected National Assembly and two senators; it desperately needs in a country like France would be truly a shock.

Goldman Sachs Global Investment Research 11 Top of Mind Issue 55 TheEl populist pull in France

geographic concentration of economic activity (and, for large Pierre Vernet finds that Marine Le Pen’s pull is open cities, globalization) has deep-seated links to populism. strongest in areas that are (1) farther from For example, the geographic mismatch in France’s distribution major cities, and have (2) smaller economies of job creation/destruction in recent years has likely increased concerns about globalization in urban and rural peripheries. and (3) high socio-cultural heterogeneity Moreover, the process of gentrification of large cities (via higher housing prices) has likely discouraged low-earning France is no exception to the ongoing political realignments households on the periphery from relocating towards the more along a mainstream/populist spectrum seen in many advanced dynamic job-creating urban centers. The outcome is a lifestyle economies. Over the past two decades, two main drivers— that feels at odds with the promises of globalization. globalization and technological change—have exacerbated a long-standing political fissure between France’s biggest cities, France’s jobs mismatch well plugged into the global economy and benefiting from the Net job creation/destruction by French municipality, 1999-2013 most job creation (e.g., Paris, Lyon, Toulouse), and urban or Net job creation rural peripheries hit by deindustrialization and/or faced with (size: number of jobs) Lille persistent socio-cultural or demographic concerns. Net job destruction This latter set of voters is likely to see the upcoming (size: number of jobs) presidential election as the most effective way to “reset” Paris French politics. While checks and balances exist in the French system, they are lower than in many other parliamentary Nantes democracies, affording the president perhaps greater power to act on his/her platform. This setup likely accounts for the Lyon remarkably high voter turnout witnessed in French presidential Bordeaux elections over the past 50 years, at around 80%. Toulouse Presidential elections: A chance to reset French politics? Voter turnout in French elections under the Fifth Republic (1958- Marseille 2015) Source: Goldman Sachs Global Investment Research, INSEE. 100 100 The story doesn’t end here 90 90 Turning to the upcoming election, our analysis suggests Le Pen 80 80 could win close to 30% in the first round, 5pp above her 25-30% 70 70 wedge showing in recent polls. That said, we continue to think that she is unlikely to win the run-off in May. A key reason for this is 60 Presidential* 60 the high degree of state intervention within the French 50 Legislative* 50 Regional* economy, which has insulated large segments of the electorate 40 40 Departmental* from the impacts of globalization. This safety net should 30 Municipal* 30 ultimately cap Le Pen's electoral base. 20 European 20 However, the story doesn’t end there. The socioeconomic and Trend Presidential elections 10 10 cultural drivers of populism and Euroskepticism are unlikely to Trend non-Presidential elections reverse anytime soon; as such, the ongoing realignment of 0 0 French politics into a competition between urban, socially 58 63 68 73 78 83 88 93 98 03 08 13 18 *First and second rounds. Source: Ministère de l’Intérieur (France). liberal, and pro-European elites versus rural or peri-urban So far, the populist Front National (FN) candidate Marine Le conservative populists will likely remain incomplete in this Pen has been the most successful at connecting with the election cycle. Ironically, the set of structural reforms promised growing pool of French voters seeking to change the status by Le Pen’s mainstream opponents (Emmanuel Macron and quo. Where exactly is she drawing her support? Matching François Fillon) may weaken the social safety net and further election results for most of France’s 30,000 municipalities with concentrate economic activity in urban areas, further fueling our unique set of data on socio-demographic variables and populism over the medium term. On that basis, we expect the income levels—using satellite-recorded nighttime light intensity populist pull in France to continue well beyond this election. as a proxy for economic activity—helps answer this question. Pierre Vernet, European Economist Mapping the populist pull Email: [email protected] Goldman Sachs International Specifically, Le Pen’s pull appears strongest in areas that are (1) Tel: +44-20-7552-0428 farther from major cities, and have (2) smaller economies and For more, see European Economics Analyst: Populist pull likely to (3) high socio-cultural heterogeneity. This suggests that the persist beyond French elections (10 March, 2017).

Goldman Sachs Global Investment Research 12 Top of Mind Issue 55 El

Right wing in the north and south backs FN Absolute difference in the number of votes for the FN between the second round of the 2015 regional election and the 2012 presidential election; size of bubble indicates number of FN ballots

Net decline in FN vote (size: number of FN ballots)

Net increase in FN vote (size: number of FN ballots)

Marseille (largest net increase) Source: Goldman Sachs Global Investment Research, Ministère de l’Intérieur (France).

Breaking down the FN’s pull Share of the local vote for Marine Le Pen in the 2012 presidential election (y axis) along the Paris-Lyon corridor, sorted by driving time to either city (x axis); economic activity measured by satellite-recorded light intensity (bubble size); and cultural heterogeneity (coloring) Le Pen support, 2012 Presidential election, % local votes 50 50 Cultural heterogeneity* Bubble size: 10% > The steep increase in support for Le Pen nighttime light-based 45 15% - 10% 45 outside of Paris despite a decent scale of economic activity 20% - 15% economic activity suggests a sharp “pull” 25% - 20% 40 towards populism owing to cultural factors 40 > 25% Peri-urban Peri-urban 35 areas Rural municipalities areas 35

30 30

25 25

Suburb 20 20

15 15

10 10 Orléans Dijon LYON Post-industrial medium-sized cities 5 PARIS 5 Hypercenter Driving distance to Paris or Lyon (Hours) 0 0 0 20 40 601h 80 100 2h120 140 2h 160 180 2001h 220 240 2600

Source: Goldman Sachs Global Investment Research, Ministère de l’Intérieur (France), Google Maps, NASA Earth Observatory/NOAA NGDC, OpenStreetMap. *Cultural heterogeneity refers to INSEE’s 2013 Census survey count of immigrants at the municipality level. Methodology available at the link above.

Goldman Sachs Global Investment Research 13 Top of Mind Issue 55 Q&A:El president, parliament, and Le Pen

Q: If Marine Le Pen unexpectedly won the French election, how much power would she have to implement policy? A: This is difficult to predict. A Le Pen victory would have profound effects, potentially upending the Fifth Republic’s institutional and political dynamics. In addition, much would depend on perceptions of Le Pen’s mandate; for example, if her win owes largely to a low participation rate rather than an increase in electoral support, her legitimacy could be weakened. In theory, the French president is very powerful, but in practice this power depends on the strength of the president’s party in the National Assembly, the lower house of parliament. The lower house’s support is necessary to pass legislation, but it is also important for the prime minister, who signs off on most orders from the president. While the president selects the prime minister—in principle, anyone can be nominated—the lower house can force the prime minister and his/her cabinet to resign. Currently, the Front National (FN) has 2/577 seats in the lower house and 2/348 in the Senate, the less powerful upper house. Q: Aren’t there legislative elections coming up? Could the FN win more seats? A: Elections to the lower house will take place in two rounds on June 11 and 18. However, the FN is very unlikely to gain enough seats for a majority, and its extreme positions make it difficult to form a coalition with other parties.1 The FN has strong support in France’s south and northeast, but the two-round election system tends to restrain extreme political parties/platforms by design; voters must choose among a smaller set of options in the second round, and parties are free to form alliances to stave off competition. Indeed, the FN did not take control of a single regional government in 2015 elections despite winning the largest share of the vote—with a significant lead—in half of the regions during the first round. The party’s strong performance both mobilized voters (leading to increased participation in the second round) and encouraged more mainstream parties to form alliances to avoid splitting the vote. Not surprisingly, Marine Le Pen has advocated for switching to a one-round voting system. Q: What would happen if Le Pen were elected president but didn’t have a majority of support in the lower house? A: In principle, there is a historical precedent for “cohabitation” in France, whereby a president and prime minister from different parties share power. This arrangement curtails presidential authority over domestic issues, limiting it to foreign affairs and defense. Cohabitation has happened three times before (1986-1988, 1993-1995, and 1997-2002), with varying degrees of cooperation and competition. However, as mentioned above, the potential disruptive effects of a Le Pen win could render these examples irrelevant; in other words, past periods of cohabitation would hardly be reliable models for what to expect. Q: Would Le Pen be able to call a referendum on France’s membership in the EU? A: Le Pen has proposed to hold six months of negotiations with the EU in the pursuit of restoring some of France’s national sovereignty over economic, fiscal, monetary, and immigration policy. If the negotiations are considered unsatisfactory, she intends to organize a referendum on France’s EU membership. The French Constitution indeed allows for such a referendum under Article 11 of the chapter dealing with the powers of the president. A referendum in France is powerful: If the measures proposed under the referendum are accepted by the French people, even if only by a small margin, the president must sign them into law within 15 days of the referendum results without any debate and possible recourse from parliament. Although the president has full discretion to accept or reject a proposal to hold a referendum, she/he cannot initiate such a proposal; to balance the powers between the executive and legislative powers, Article 11 foresees only two specific cases in which such a referendum could be organized:

1. On a proposal of the government while parliament is in session, or on a joint proposal from both houses of parliament. 2. Or, per a constitutional revision made in 2008, on the initiative of at least one-fifth of the members of parliament (namely 185 out of 925 members) and of at least 10% of registered voters (4.6 million people). As per above, it is unlikely that Le Pen would have sufficient support in parliament to use either of these procedures. (See also European Economics Daily: French Elections, 6 February 2017.) Q. What would happen if she attempted to call a referendum anyway? A: First, it is not certain that French citizens would support such a referendum given their attachment to the euro.2 Second, any deviation from these constitutional provisions (e.g., if the referendum proposal came from Le Pen or from a government without parliamentary legitimacy) would create an institutional impasse, as the Constitutional Council and the Council of State would question the referendum’s legality. But these legal considerations may be of secondary importance as, again, the election of Le Pen would likely disrupt existing institutional dynamics, creating a highly uncertain environment. In particular, it would endanger the Franco-German axis, a cornerstone of the European project and the euro (see pg. 18). Alain Durré and Marina Grushin

1 Based on voting patterns in 2015 regional elections, a June 2016 study conducted by OpinionWay estimated that the FN could take 58-64 seats in the National Assembly, far short of the 289 needed for a majority. See Législatives 2017: vers une recomposition inédite?, June 2016. 2 In a recent survey conducted by Elabe, 72% of surveyed French citizens are opposed to an exit of the Euro (out of which 44% are strongly opposed, especially among retired people).

Goldman Sachs Global Investment Research 14 Top of Mind Issue 55 AEl snapshot of our views

How are European political risks affecting your asset class? How might the outcome of the French presidential election impact your asset class?

DM FX • Our baseline of a “muddling through” in the Euro area supports a decline in EUR/USD to parity over the next 12 months, mainly due to an unchanged monetary policy stance by the ECB and more Fed Silvia Ardagna tightening than the market is pricing. However, the French election creates fat tails around this outlook. • If Marine Le Pen wins the election (not our base case), sizeable EUR redenomination risk could build, likely moving EUR/USD below parity much faster than our forecast implies. On the other hand, EUR/USD could move above the 1.10 range if Emmanuel Macron wins and discussions around ceding some fiscal sovereignty to Brussels gain traction while Euro area growth remains well above trend.

DM Rates • Our analysis suggests that France displaced Italy this year as the dominant force pulling EMU yields higher, reflecting a build-up of risk premium ahead of the French elections. We estimate that close to Francesco half of the 65bp spread of 10-year French OAT yields over German Bunds represents an election risk Garzarelli premium. However, there is little evidence of a rise in systemic EMU risk to the extent seen in 2012. • The elevated risk premium on OATs is likely to persist—potentially widening to as much as 80-100bp— at least up to the first round of voting on April 23. Thereafter, the direction of the market will depend on the gap between the share of vote going to the FN and the polls; any shift in Le Pen's platform in order to attract voters; and which candidate she faces in the run-off. As market tensions rise, we would expect the ECB to adjust its bond purchases in favor of non-core markets (as in the wake of Brexit), but not to be able to contain selling pressures on prices fully. • Should Le Pen lose to a moderate, reformist, and pro-European candidate, we would expect the 10-year OAT-Bund spread to head back to 40-50bp, driven in large part by a rise in Bund yields. If Le Pen were to win, the dislocations in EMU bond markets could be severe, at least initially (see pg. 17).

EM • With EM assets generally towards the high-beta end of the risky asset spectrum, the overall drawdown risk associated with European political issues remains a key headwind for EM during 2017. However, Caesar Maasry we note that EM valuations (in equity, FX, and credit) appear less-stretched than their DM counterparts. • Political risks likely manifest most clearly in peripheral spreads, which in turn can pressure EM rates Kamakshya higher. Again, compared with the rate shock associated with the “taper tantrum,” EMs have largely Trivedi rebalanced (mainly from a current account perspective) and EM assets are less sensitive to DM shocks. • Fundamentally, CE-3 is the most exposed to European political risks due to strong trade linkages and institutional ties, and regional economies such as Turkey and Russia are closely linked as well. An escalation of political risks—such as an unexpected win by Marine Le Pen—would likely drive $/CE-3 higher, though it is less clear that Euro/CE-3 would necessarily move higher. With EM equities and credits coming off a very strong performance since late 2016 (and CE-3 equities in particular), we would be more cautious on these assets should European risks escalate.

Credit • Upcoming elections have injected meaningful uncertainty into the EUR credit markets, driving EUR IG spreads wider and increasing their underperformance vs. their US counterparts. EUR 5-year IG spreads Lotfi Karoui currently trade 24bp wider than their US IG counterparts, vs. an 11bp average over the past 12 months. • Uncertainty will likely continue to weigh on risk appetite as voters head to the polls in the coming Bridget Bartlett months. That said, in the absence of a tail-risk election outcome, we think the combined effect of improving macro fundamentals, the ECB’s support, low new issue volumes, and strong “incompressible demand” from future coupon and principal payments will likely put a ceiling on any spread widening.

Equity • Political risk appears to be holding back European equities. Assuming market-friendly outcomes in the French and Dutch elections, we would expect European equities to enjoy a bounce and a period of Peter outperformance vs. the US (at least in local currency terms), supported by better global growth, positive Oppenheimer earnings revisions, and attractive valuations (for more, see pg. 16). • In contrast, if Marine Le Pen were to win the French election, the result would likely be a steep rise in Sharon Bell the Equity Risk Premium and a large sell-off in European risk assets. We would expect to see the greatest impact on assets directly threatened by concerns about the existence of the euro. Bank-heavy Christian indices (MIB, IBEX) would likely be hardest-hit given their exposure to redenomination risk, while Mueller- defensive indices or indices outside the Euro area (DAX, SMI, FTSE 100) would do better in Glissmann relative terms. That said, much would depend on Le Pen’s rhetoric and her ability to execute on policy priorities.

Commodity • If Marine Le Pen loses the French election, we are relatively agnostic on the outlook for gold from here, with 3/6/12-month targets of $1200/$1200/$1250/oz. In contrast, a victory by Le Pen could result in an Jeff Currie increase in financial market volatility, potential monetary easing by the ECB, and a strengthening of the USD. We believe gold prices would rise, given that any flight to safety and ECB easing would likely push Max Layton down long-term US real rates, which in turn could offset the impact of the stronger dollar. A victory by Le Pen may also pose major downside risks to global equity markets and household wealth, not just in Europe but in other DMs, which would be bullish for gold demand as a hedge against wealth shocks.

Goldman Sachs Global Investment Research 15 Top of Mind Issue 55 EquitiesEl and elections

P/B for the S&P 500 is 3.1x (in the 83rd percentile), while for Peter Oppenheimer expects a bounce in the Stoxx 600 it is 1.8x (in the 63rd percentile for its respective European equities if tail-risk outcomes do not history). materialize in upcoming elections European valuations: relatively cheap NTM P/E ratio for the S&P 500 and Stoxx 600 There are several reasons to think that European equities have 25 ECB Italian been held back by political concerns. Europe is no longer seen Chinese announced referendum 23 ECB growth / as much of an economic risk; after all, European growth has QE Brexit TLTRO RMB risks been above trend for some time. The composite PMI for 21 February was well above expectations at 56, a 70-month high. 19 And the bank sector, which has long been the source of risk 17 US and concern for investors in Europe, has performed better as 15 fears about capital shortfalls have moderated. Nonetheless, the 13 Europe Stoxx 600 and Eurostoxx 50 are up about 3.3% so far this year, Trump while the S&P 500 is up by over 5.5%. 11 Greek Election Crimea Crisis 9 2nd Fed annexation st Much of this underperformance seems to relate to political 1 Fed Hike concerns, which are even more visible in volatility markets; 7 Scottish independence Hike referendum volatility term structure is currently showing a kink for April and 5 May (around the French elections) for Eurostoxx 50 while Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Source: Datastream, IBES, Goldman Sachs Global Investment Research. remaining relatively flat for the S&P 500. And the ratio of Fifth, European banks are performing better and have been less VSTOXX vs. VIX April futures is already comparable to pre- impacted by the recent political risk and rise in sovereign Brexit and Euro area crisis levels. If elections in the Netherlands spreads; banks are the biggest sector in the Stoxx 600 (12.6%) and France do not result in tail risk outcomes, this should and the Eurostoxx (14.6%) and make up an even larger share of remove a major source of investor fears; we would therefore the IBEX and MIB (35% and 25% in Spain and Italy, expect European equities to enjoy a bounce and a period of respectively). Typically, when banks outperform in the relative outperformance (at least in local currency terms). European market, the European market outperforms the US. Reasons for equity election relief Lastly, political concerns have already pushed investors away First, European equity markets are geared to global growth and from Europe; 2016 was a year of large selling of European typically outperform at times when global growth accelerates. equities by both European and US investors. All told, if political We estimate that a 1% rise in global GDP weighted by the risk moderates in line with current polling, European equity sales destinations of companies would boost European profits fundamentals are likely to reassert themselves in a more by 11%, all else equal. Europe is more operationally levered positive way. That said, we caution that an unexpected win by than the US or the UK; for each 1% rise in top-line growth we Marine Le Pen in France would raise serious redenomination would expect a 1.8% rise in US earnings but a 2.9% rise in risks and, as a consequence, potential systemic risk. Thus, it European earnings. But recent stronger global growth—let would be dangerous to view the substantial rally in US equities alone better European growth—has yet to translate into better post the unexpected election of Donald Trump as a precedent; European equity performance. in our view, a sharp and potentially prolonged sell-off in Second, while less important than growth, weakening European equities would very likely ensue. domestic currencies are a tailwind to Europe’s foreign-exposed companies. This is very obvious in the case of the FTSE 100 Serious selling in 2016 (where 80% of the revenues are non-domestic), but true to US-based flows in European mutual funds (including ETFs), $bn some degree for the rest of Europe too. While a fall in political 30 2011 2012 2013 2014 risk could push the euro higher temporarily, our currency 2015 2016 2017 strategists’ fundamental view is that the euro will weaken over 20 time, as US policy rates are expected to rise more than the 10 market is currently pricing over the next several months while Euro area rates remain unchanged on our forecasts until 2019. 0 Third, for the first time since 2010 earnings revisions in Europe have turned positive. While this is largely a function of the -10 commodity sectors (and to a lesser extent financials), it is nonetheless a big turnaround from recent years. Even the -20 absence of downgrades should be welcome. -30 Fourth, valuation in Europe is starting to look unusually cheap Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec relative to the US. The 12-month forward PE of the Stoxx 600 Source: AMG, Goldman Sachs Global Investment Research. is 14.9x—more or less in line with recent years—compared to Peter Oppenheimer, Chief Global Equity Strategist 18.1x for the S&P 500, which has increased since the Fed rate hike in 2015. Note that the median stock in the S&P 500 now Email: [email protected] Goldman Sachs International Tel: +44-20-7552-5782 trades in the 99th percentile of historical ranges over 40 years. Goldman Sachs Global Investment Research 16 Top of Mind Issue 55 Rates:El no sign of systemic risk

priced mostly in the options market, with EUR/USD options Francesco Garzarelli finds little evidence (so discounting a 1.5% “gap risk” in the first round of the election. far) of systemic risk based on market pricing France in the driver’s seat ahead of the French presidential elections Cumulative “ shocks” originating in each sovereign bond market 6 Twice bitten, thrice shy. After the surprise outcomes of the UK 4 referendum and the US presidential election, investors are 2 following opinion polls for the French presidential election with 0 uneasiness given the popularity of Marine Le Pen, leader of the -2 Euroskeptic and anti-immigration Front National (FN). Although -4 the odds of Le Pen winning in the second round appear slim, -6 the market impact that would follow her victory could be -8 Germany severe, at least initially. Even if Le Pen’s plan for “Frexit” faces -10 France institutional hurdles (see pg. 14), majority support for her Italy Bullish -12 Shocks “France First” policy agenda would be a blow to the monetary Spain union at a time when deeper economic integration and risk- -14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 sharing among EMU members are needed. Should Le Pen win Based on Rigobon (2003). Source: Bloomberg, Goldman Sachs Research. against the odds, expectations of reintroduction of national Other than the relatively low probability assigned to Le Pen currencies would rise, market dislocations could potentially winning, this muted response probably reflects supportive emerge, primarily in EMU sovereign bonds, and bank and underlying macro forces at play. The Euro area is currently international spillovers would likely follow. enjoying strong economic performance, expanding at around Muted market response, so far twice its 1% trend rate. And expectations of fiscal easing by the new US administration have buoyed confidence in Considering what’s at stake, the market response has so far continued expansion of the business cycle. Against this been remarkably orderly and, overall, quite muted. As would be backdrop, cyclical stocks and corporate bond returns remain expected, French government bonds (OAT) are showing some attractive, and the yield curve is steepening, generating a better signs of anxiety. Their return correlation to German Bund yields environment for bank lending. Again, there is no evidence of a has declined to the low 70% range, compared to an average of rise in systemic risk to the extent seen in 2012. around 90% since the start of the ECB's quantitative easing (QE). At the same time, our analysis isolating the “rate shocks” What’s ahead driving EMU bond markets suggests that France displaced Italy We estimate that close to half of the current 65bp spread this year as the dominant force pulling EMU yields higher, between French and German 10-year bond yields represents an reflecting a build-up of risk premium ahead of the elections. election risk premium. We expect the overall spread to remain elevated—possibly widening to as much as 80-100bp—at least Little sign of “ flight to quality” up to the first round of the presidential elections. From there, Daily pairwise correlation with 10-year German Bund yields, % the direction of the market will be dictated by the gap between Italy Portugal Spain France the share of the vote going to the FN and the polls (which will 1.0 likely influence the confidence level around voting intentions for 0.8 the second round); any shift in Le Pen's stance in order to 0.6 attract voters; and which candidate she faces in the May run- 0.4 off. Should market tensions rise, we would expect the ECB to 0.2 moderate price action by shifting its QE bond purchases in favor of non-core markets under pressure, as was the case in 0.0 the wake of Brexit. However, we do not think that ECB action -0.2 would be able to fully contain selling pressures. -0.4 In our central case of the election of a moderate, reformist, and -0.6 pro-European candidate, we expect the 10-year OAT-Bund -0.8 spread to head back to 40-50bp. A large chunk of the Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Source: Bloomberg, Goldman Sachs Global Investment Research. compression would come from a rise in Bund yields. Italian Meanwhile, riskier Italy, Spain, and Portugal government bonds BTP spreads to Bunds, meanwhile, could come down from are trading at a higher positive correlation to Germany than the 180bp to around 150-160bp. Lastly, Spanish Bonos should average of the past two years. And Spanish government bonds continue to perform well—though we would caution that have continued to outperform, keeping the EMU rate complex investor positioning is already quite bullish, and they would in check. These price patterns have none of the hallmarks of underperform as core yields rise. past “flight-to-quality” episodes, suggesting that sovereign bond markets are far from pricing in a serious increase in EMU Francesco Garzarelli breakup risk. This is consistent with market pricing in FX: the Co-Head of Global Macro & Markets Research euro has traded well over recent weeks. French risk is being Email: [email protected] Goldman Sachs International Tel: +44-20-7774-5078

Goldman Sachs Global Investment Research 17 Top of Mind Issue 55 TheEl question for Germany: how pro-EU?

there is no reason to expect a shift from the current Alain Durré writes that further progress on stabilization policies in the Euro area. But under Schulz, the EMU integration hinges in large part on the Grand Coalition would likely take a more pro-European tilt. September 2017 German elections Indeed, despite criticism in Germany against Chancellor Merkel for her “generosity” vis-à-vis Europe, SPD’s choice of Schulz The rise of Euroskeptic populism has touched Germany since signalled a willingness to embrace a more pro-European/ 2013 with the Alternative für Deutschland (AfD) party, which ”federalist” stance. Case in point: On announcing his decision emerged just four months ahead of the 2013 general elections to withdraw his candidacy and presenting Schulz as the SPD with a program that focused on “leaving the Euro to save candidate with "the best chance of winning the election," Vice- Europe.” The party narrowly missed garnering enough votes to Chancellor Sigmar Gabriel openly criticized Merkel, arguing that pass the 5% threshold required to enter the German the policies under her leadership have contributed "decisively to parliament, and its popularity stagnated following this setback. the ever deeper crises in the European Union since 2008, to But support for AfD rose again after it took a more forceful anti- the isolation of the German government, seen as increasingly immigration stance in the wake of Chancellor Merkel's dominant, ruthlessly clinging to the austerity policy, and to the controversial September 2015 decision to open the German high level of unemployment outside Germany." border for refugees stranded in Hungary, which triggered a Given this set-up, Schulz’s leadership could even some surge in immigration. progress on EMU integration, perhaps in the area of the Notwithstanding the recent boost in AfD support amid the deposit insurance scheme and/or Eurobonds, which have refugee influx, the stated refusal of mainstream parties to essentially been non-starters to date. But any steps toward cooperate with the AfD takes a coalition government that further integration would likely reassure the market about the includes the party off the table. Thus, in contrast to concerns future of the euro. So far, German voters seem to be on board, about the risk of more Euroskeptic governments in other as Schulz’s designation as the SPD candidate coincided with countries (think France), the real question surrounding the increased support for the SPD in opinion polls at the expense September 24 German elections is how pro-European the next of Merkel’s Christian Democrats (CDU/CSU). German government might be, and how much of an impulse Such a vote could not be coming at a more important moment that would give to the European project. Indeed, the only way for European integration. The impatience of European voters to guarantee the longevity of the euro is to complete the who feel “left behind”—as illustrated by the growing success institutional framework of the Economic and Monetary Union of Euroskeptic parties—reminds us that the development of a (EMU), likely starting with the completion of the banking union real and effective economic union within the EMU is more and the acceptance of the mutualization of some urgent than ever if the EMU is to succeed. Once again, this macroeconomic risks. Progress in these areas will no doubt necessary new impulse to the EMU must come from the hinge on the next German chancellor. leaders of the Franco-German axis, the historical motor of Schulz more pro-European than Merkel European integration—raising the stakes for forthcoming elections in both countries. Polls suggest that the most likely election outcome remains a repeat of the current Grand Coalition. The key question is under Alain Durré, Senior European Economist whose leadership. Chancellor Merkel and Martin Schulz, the Email: [email protected] Goldman Sachs International Social Democrat (SPD) candidate, will compete on various Tel: +33-1-4212-1127 dimensions in the election. But in the specific context of the For more, see European Economics Daily: German elections: Polls point EMU, Schulz could ultimately be more “market-friendly” from to market- and Euro-friendly outcomes (15 February, 2017). the point of view of Euro area stability. Indeed, with Merkel,

Germany’s vote of confidence Average German voting intentions based on five main opinion polls, % 2009 2013 60 2002 2005 General General General General Elections Elections Elections Elections 50

40

30

20

10

0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

CDU/CSU SPD Grüne FDP Linke AfD Source: Wahlumfragen.de, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 18 Top of Mind Issue 55 FastEl facts on the backdrop to politics ) 6.5 yoy 44% 36% 0.1% - 23.1% ) 4.8 yoy 14% 10% 1.8% 3.8% 22pp vs. 2003) - growth (+64% (+64% GDP ratio 52 (+34% (+34% 52 ratio growth EU immigration - immigration EU - GDP ratio 92 ratio EU immigration - immigration EU 2016 real Unemployment Inequality ratio Refugee Net view positive/neg. non of 41% life Overall ( satisfaction Greece - 2016 real Unemployment Inequality ratio Refugee Net view positive/neg. non of 92% life Overall 2003) vs. (+19pp satisfaction Germany LATVIA FINLAND GREECE AUSTRIA ) 3.8 yoy 15% 8% 2.1% 5.3% ) 5.8 yoy 28% 48% 1.0% 11.9% growth 11pp vs. 2003) - growth GDP ratio 70 (+29% (+29% 70 ratio EU immigration - immigration EU - FRANCE GDP ratio 29 (+28% (+28% 29 ratio EU immigration - immigration EU - 2016 real Unemployment Inequality ratio Refugee Net view positive/neg. non of 97% life Overall 2003) vs. (+7pp satisfaction Netherlands 2016 real Unemployment Inequality ratio Refugee Net view positive/neg. non of 65% life Overall ( satisfaction Italy IRELAND SPAIN ) 5.2 yoy 13% 1.8% 4.7% ) (+9% 4.3 yoy 26% 26% 1.1% 10.0% growth GDP ratio 26 ratio EU immigration +6% immigration EU ) - growth Support for main populist party: average party: populist main for Support or elections last 10 upcoming of for polls in last election vote of the share 6.9 (Germany), SYRIZA (Greece), M5S (Italy), M5S (Greece), (Germany), SYRIZA yoy 21% 3.2% 18.2% GDP 2016 real Unemployment Inequality ratio Refugee Net view positive/neg. non of 92% life Overall 2003) vs. (+5pp satisfaction AfD UK ratio 51 (+8% 51 (+8% ratio EU immigration - immigration EU - 2pp vs. 2003) - 90% 2016 real Unemployment Inequality ratio Refugee Net view positive/neg. non of 83% life Overall 2003) vs. (+8pp satisfaction France growth 80% GDP ratio 4 (+28% 4 (+28% ratio EU immigration +19% immigration EU - 70% Analytics, Goldman Sachs GlobalInvestment Research. 60% 2016 real Unemployment Inequality ratio Refugee Net view positive/neg. non of 81% life Overall ( satisfaction Spain Haver UNHCR, Eurostat UNHCR, 50% Refugee ratio (2015): ratio (2015): Refugee refugees of number per 10,000 residents Source: (Spain), (France). FN Election results (2015), are shown for UK Greece (2015), (2016); and Spain 40% Eurobarometer : Unidos Inequality ratio (2015): (2015): ratio Inequality disposable the compares 20% of top the the of income disposable the to population 20% bottom the of income Eurostat Source: 30% Survey (Nov. ‘16) asking ‘16) (Nov. Survey from immigration whether evokes EU the of outside negative or positive is shown figure feelings; of net % positive total negative % total Net of responses know” “don’t Source Shading indicates support for the euro: the for support indicates Shading 20% “Mainpopulist party” refers (UK), (Netherlands), UKIP to PVV Podemos election.averagesnext for pollingothersare all Unemployment latestrate is available harmonized rate. Source: Eurostat, UNHCR,

Goldman Sachs Global Investment Research 19 Top of Mind Issue 55 EuropeanEl politics in pics

Globalization: where they stand Did somebody say fragmentation? Share that sees globalization as a threat, % (shown for each country Largest party’s % of the vote in parliamentary elections (lhs) vs. number overall and for supporters of parties in power vs. populist parties) of parties that won seats in the same election (rhs), period average

90% Germany France Italy Netherlands 45 Percent of the vote received by 11 80% Red indicates populist/anti- largest party establishment party No. of parties winning >1 seat (rhs) 10 70% 40 60% 9 50% 35 8 40%

30% 7 20% 30 6 10%

0% 25 5

Source: Bertelsmann Stiftung Eupinions: Fear Not Values (November 2016). Covers current EU members that held elections during the 1951-1955 period. Source: Döring, Holger, and Manow, 2016, ParlGov; Goldman Sachs Research.

Populists’ progress Tracking the Le Pen trend Select parties’ % of the vote in last election vs. previous election France’s interest in “Marine Le Pen” based on Google searches

Last Election Second-to-last election Party did not yet exist 120 2012 2017 presidential presidential Greece: SYRIZA elections race Switz: Swiss People's Party 100 2015 regional elections Italy: Five-Star Movement Denmark: Danish People's Party 80 Spain: Unidos Podemos Hungary: Jobbik 60 Finland: Finns France: Front National UK: UKIP 40 Netherlands: PVV Greece: Golden Dawn 20 Germany: AfD Italy: Northern League 0 0.0 10.0 20.0 30.0 40.0 10 11 12 13 14 15 16 17

Source: Government websites, various news sources. Source: Google Trends.

Uncertain times No stranger to surprises France news-based Economic Policy Uncertainty index Opinion polling and results for 2002 French presidential election, % 2017 election campaign 4085 500 Opinion polling for Round 1 82.2% Brexit vote Round 1 (71.6% 450 8035 turnout) Euro crisis 400 European bank 30 Round 2 350 problems; (79.7% Lehman 25 turnout) 300 ERM crisis 2nd Gulf 19.9% 250 Jean-Marie War 20 17.8% Le Pen makes 200 16.9% 2nd round of 15 elections 16.2% 150 10 100 Terror Lionel Jospin attacks 5 50 Jacques Chirac Jean-Marie Le Pen 0 0 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 Jan-02 Feb-02 Mar-02 Apr-02 May-02 Source: www.policyuncertainty.com, Goldman Sachs Global Investment Source: Sofres / LCI / Politique Opinion / Le Nouvel Observateur. Research.

Goldman Sachs Global Investment Research 20 Top of Mind Issue 55 AEl reference on European integration in focus force are set out - Jun 23, 2016 Brexit UK votes to leavethe EU. 2017 Euroskepticism Euroskeptic to play a keyrole in several national elections, including France. joins 2015 Jul 1, 2013 Croatia the EU 2012 ~2010 - areasovereign Eurocrisis Greece,Ireland, Portugaland Cyprus participate in bail programs; as of March 2017, only theprogram. in Greece remains 2010 2011 Estonia adopts the euro 2009 Slovakia adopts the euro 1, 2007 2008 Cyprus and Malta the adopt euro Jan and Bulgaria join Romania the EU 2007 Slovenia adopts the euro May May 1, 2004 Cyprus, the Czech Estonia, Republic, Latvia, Hungary, Malta,Lithuania, Poland, Slovakia and Slovenia the EUjoin – 2002 of Introduction euro coins and banknotes in 12 EU countries Jan 1, 1999 present EMU: Stage 3 Irrevocableconversionfixing of introductionrates; theof euro; conduct of the singlemonetary policy the by European System of Central Banksmade(ESCB) up of the national central bankstheand ECB. 2000 – force negotiations May/Jun 1998 May/Jun Conversion rates set countries11 thatwill participate in Stage 3 selected are minus (12 the UK); the conversion rates set. are , 1993 Dec 1995 Dec nameThe for the new currency: “euro” is chosen 1995 Austria, Finland and Sweden join the EU Jan 1, 1994 Dec Dec 31,1998 EMU: Stage 2 Strengtheningof cooperation central between banks, aided by thecreation of the European Monetary (EMI), Institute theforerunner of theECB. Nov 1 Maastricht Treaty entersinto – - 7, 1992 stage st Feb Feb Maastricht Treaty ree useree of the Jul 1, 1990 Dec 31, 1993 EMU: Stage 1 Freedom of capital flows; f European currency Unit (ECU; pre cursor to the euro). need forneed movement Dec 1989 Dec Start of Maastricht Treaty The Treaty establishesthe European Union and (EU)amends the Treaty establishing the European Community. It includes provisions on the introduction of the and EMU the establishmentof the ECB.Includes additional intergovernmentalon measures cooperation. stage 1990 1989 EMU Jun Jun 1 of Launch of Full liberalization of capital must be achieved by July 1, 1990. monetary policy: the Report tasked with by Jacquesby . A committee Apr 1989 Apr Delors Proposes a three - transition processto accomplish EMU, stressing the bettercoordination economic on policies, rules covering national budget deficits, and the establishment of an independent institution that would be responsible for the Union’s European Central Bank (ECB). . , President of 1988 EC, Is EC, EMU Jun Jun European Hanover Council The European Council confirms the objective of chaired Delors the examiningof ways implementing EMU. . become 12 1986 Single European Act(SEA) theRevives ideaof an economic and monetaryunion. 1986 10 SpainPortugaland join the EEC EEC become 10 1981 9 Greecejoins the EEC EEC 1980 1979 . Mar European the of Creation (EMS)System Monetary The governments and central banks of the 9 members create the EMS. Its mainfeature is the exchange ratemechanism (ERM), which establishes but fixed adjustable exchange rates between the currencies of the participating countries. EEC become 9 1972 1973 6 Denmark, Ireland join theand UK the is halted Mar Snake in the tunnel An effort to revive progress toward EMU; a mechanism for the managed floating of currencies (“the snake”) narrow with margins around the dollar (“the tunnel”);planthe lost most of its members within years.two to FX brings is Research . 1970 pursuit 1971 EEC Six give give Six EEC a new a new ) markets. Collapse of Bretton Woods instability Aug 1971 Aug EMU project EMU Mar EMU The their approval in principle to the introduction of EMU in several stages. theWerner define the members six down the down . Euratom form 1970, report lays and EEC, EEC, blueprint foran comprising of the EEC objective of Economicand Monetary Union (EMU). Pierre Werner, Prime Minister of Luxembourg, drawing up ofgiventhe task goalthis reporthow on a reachedbe 1980; mightby in October report 1969/1970 Hague Summit; EMU objective is defined; Werner Atthe insummitthe Hague, theHeads of State and Government Commission (EC), 1967 institutions Current The institutionsof the three European Communities (the ECSC, the merged.Three are new institutions are formed: the European theCouncil of Ministersand the EuropeanParliament. 1960 treaty Rome ) and ) the 1957 Euratom Treatiesof Create the European Atomic Energy Community ( EuropeanEconomic Community (EEC). The objective of the Member States is to remove trade and tariff barriers between thosecountries and forma common market. Mar 1950 18,1951 Union and its precursors its and Union Apr Coal Steel and European Community(ECSC) Includescountries six (Belgium, France, Italy, Luxembourg, the Netherlands and West Germany). theLeague of Key: European Union Monetary Economic and SourceEuropean: CentralEuropa,Bank, Sachs Goldman GlobalInvestment Sep 9 , 1929 firstThe suggestion German politician Gustav Stresemann asks Nations “Where are theEuropean currency theand European stamp that we need?” 1930

Goldman Sachs Global Investment Research 21 Top of Mind Issue 55 SummaryEl of our key forecasts Revision Notes Revision On March 3, we raised our 2017 GDP growth forecast to 1.6% from 1.4% previously, reflecting robust activity data that raised have our growth estimate for Q1. On March 10, we raised our 6- and 12-month Eurostoxx 50 targets to 3500/3600 from 3400/3450—largely a roll forward, but also incorporating some underlying growth improvement. We maintained our 3-month target at 3400. On March 3, we raised our 2017 GDP growth forecast to from 1.5% yoy 1.4% previously, reflecting robust activity data that raised have our estimate of growth in Q1. On March 10, we raised our 2017 GDP growth forecast to 6.6% from 6.5% previously, reflecting a larger- than-expected rebound in fiscal spending and ongoing upside surprises to global activity that raised have our growth estimate for Q1. We also changed our end-2017 and end-2018 7-day repo rate forecasts to 3.00% from 2.10% and 1.75%, respectively, reflecting the PBOC's bias towards tighter policy and recent action to push up the rate. On March 13, we upgraded China equities to overweight and raised our 12-month MXCN target to 73 from 68, based on the better-than-expected economic momentum in Q1 (boosting our EPS forecasts) and supportive policy dynamics, among other factors. On February 10, we revised our 3/6/12-month $/BRL forecasts to 3.00/3.10/3.25, respectively, from 3.20/3.30/3.40 previously, reflecting still-attractive fundamentals (e.g., generous carry, strengthening external balances, inflation on a declining trajectory) and the BRL's recent strengthening along our forecast path. Following the Copom's 75bp rate cut on February 22, as well as dovish policy guidance, we lowered our end- 2017 and end-2018 Selic policy rate forecasts to 9.25% and 8.75%, respectively, from 10% and 9% previously. On March 7, we lowered our 2017 GDP growth forecast to 0.6% from 0.9%, reflecting a larger- than-expected contraction in real activity during 4Q16 and our continued expectations for a shallow recovery. - - - - - 3.50 0.50 1.35 2018 Cons 10-yr 12-mth - - - - GS 335 3.00 0.20 0.80 2017 - - - to 3.00 0.00 8.75 2.25 2.50 2018 -0.10 Cons Rates (%Rates eop) Corn (cent/bu) Corn 3-mth Policy* - - to GS 350 3.00 0.00 9.25 1.25 1.50 2017 -0.10 ------Cons Cons TOPIX MXCN SP500 12-mth 12-mth DAX 30 - - - BOVESPA 73 GS GS 1250 2300 3600 1660 Eurostoxx 50 Eurostoxx Equity ------Gold ($/toz) Cons Cons 3-mth 3-mth MXCN SP500 TOPIX DAX 30 - - - - BOVESPA GS GS 1200 2400 3400 1600 Eurostoxx 50 Eurostoxx - - + 119 1.03 1.03 7.12 3.35 1.03 Cons Cons $/JPY EUR/$ EUR/$ EUR/$ $/BRL 12-mth 12-mth $/CNY - GS GS 125 1.00 1.00 7.30 3.25 1.00 5500 FX - - + 116 1.03 1.03 1.03 6.98 3.20 Copper ($/mt) Copper Cons Cons 3-mth $/JPY 3-mth EUR/$ EUR/$ EUR/$ $/BRL $/CNY - GS GS 118 1.08 1.08 1.08 7.00 3.00 6200 58 1.5 0.9 6.2 2.2 1.6 3.4 2.3 Cons Cons 2018 12-mth 58 GS GS 1.1 6.3 2.6 1.4 1.4 3.7 2.2 57 1.1 6.5 0.8 1.6 1.5 3.2 2.3 Cons Cons GDP Growth (% yoy) Growth GDP 2017 Brent crude oil ($/bbl) oil crude Brent 3-mth 59 1.3 6.6 0.6 1.5 GS GS 1.6 3.6 2.2 * Euro rate area is MRO rate. China rate is 7-day rate. repo US Global CHINA JAPAN BRAZIL GERMANY EURO AREA EURO Commodities CNY daily fix daily CNY + Source: Bloomberg, Thomson Reuters, Goldman Sachs Global Investment Research. Note: Recent revisions marked in red; GDP consensus is Bloomberg; all other consensus is Reuters; commodity 12-mo consensus is Reuters 2017 average. for

Goldman Sachs Global Investment Research 22 Top of Mind Issue 55 GlossaryEl of GS proprietary indices

Current Activity Indicator (CAI)

Measures the growth signal in the major high-frequency activity indicators for the economy. Gross Domestic Product (GDP) is a useful but imperfect guide to current activity. In most countries, GDP is only available quarterly, is released with a substantial delay, and initial estimates are often heavily revised. GDP also ignores important measures of real activity, such as employment and the purchasing managers’ indexes (PMIs). All of these problems reduce the effectiveness of GDP for investment and policy decisions. Our CAIs are alternative summary measures of economic activity that attempt to overcome some of these drawbacks. We currently calculate CAIs for the following countries: USA, Euro area, UK, Norway, Sweden, China, Japan, Hong Kong, India, Indonesia, Malaysia, Philippines, Singapore, South Korea, Taiwan, Thailand, Australia and New Zealand.

Financial Conditions Index (FCI) Financial conditions are important because shifts in monetary policy do not tell the whole story. Our FCIs attempt to measure the direct and indirect effects of monetary policy on economic activity. We feel they provide a better gauge of the overall financial climate because they include variables that directly affect spending on domestically produced goods and services. Each FCI is calculated as a weighted average of a policy rate, a long-term riskless bond yield, a corporate credit spread, an equity price variable, and a trade-weighted exchange rate; in the Euro area we also include a sovereign credit spread. The weights mirror the effects of the financial variables on real GDP growth in our models over a one-year horizon.

Global Leading Indicator (GLI) Our GLIs provide a more timely reading on the state of the global industrial cycle than the existing alternatives, and in a way that is largely independent of market variables. Global cyclical swings are important to a huge range of asset classes; as a result, we have come to rely on this consistent leading measure of the global cycle. Over the past few years, our GLI has provided early signals on turning points in the global cycle on a number of occasions and has helped confirm or deny the direction in which markets were heading. Our GLI currently includes the following components: Consumer Confidence aggregate, Japan IP inventory/sales ratio, Korea exports, S&P GS Industrial Metals Index, US Initial jobless claims, Belgian and Netherlands manufacturing surveys, Global PMI, GS Australian and Canadian dollar trade weighted index aggregate, Global new orders less inventories, Baltic Dry Index.

Goldman Sachs Analyst Index (GSAI)

Our US GSAI is based on a monthly survey of Goldman Sachs equity analysts to obtain their assessments of business conditions in the industries they follow. The results provide timely “bottom-up” information about US economic activity to supplement and cross-check our analysis of “top-down” data. Based on their responses, we create a diffusion index for economic activity comparable to the ISM’s indexes for activity in the manufacturing and nonmanufacturing sectors.

Macro-data Assessment Platform (MAP)

Our MAP scores facilitate rapid interpretation of new data releases. In essence, MAP combines into one simple measure the importance of a specific data release (i.e., its historical correlation with GDP) and the degree of surprise relative to the consensus forecast. We put a sign on the degree of surprise, so that an underperformance will be characterized with a negative number and an outperformance with a positive number. We rank each of these two components on a scale from 0 to 5, and the MAP score will be the product of the two, i.e., from -25 to +25. The idea is that when data are released, the assessment we make will include a MAP score of, for example, +20 (5;+4)—which would indicate that the data has a very high correlation to GDP (the ‘5’) and that it came out well above consensus expectations (the ‘+4’)—for a total MAP value of ‘+20.’ We currently employ MAP for US, EMEA and Asia data releases.

Real-Time Inflation and Activity Framework (RETINA)

RETINA provides a comprehensive econometric methodology able to filter incoming information from the most up-to-date high frequency variables in order to track real GDP growth in the Euro area. Along with a GDP tracker, RETINA also captures the interrelated mechanisms of the area-wide pricing chain, providing a short-term view on inflation dynamics.

Goldman Sachs Global Investment Research 23 Top of Mind Issue 55 TopEl of Mind archive – click to access

Issue 54 Issue 39 Trade Wars Picking Apart the Productivity Paradox February 6, 2017 October 5, 2015

Special Issue Issue 38 2016 Update, and a Peek at 2017 What’s Going on in China? December 19, 2016 September 24, 2015

Issue 53 Issue 37 The Return of Reflation A Look at Liquidity December 7, 2016 August 2, 2015

Issue 52 Issue 36 OPEC and Oil Opportunities Greece, China and Grey Swans November 22, 2016 July 9, 2015

Issue 51 Issue 35 US Presidential Prospects Valuations—Dangerous Territory? October 18, 2016 May 29, 2015

Issue 50 Issue 34 Central Bank Choices and Challenges Politics, Parties, Populism October 6, 2016 April 21, 2015

Issue 49 Issue 33 Trade Trends Wage Worries September 29, 2016 March 26, 2015

Issue 48 Issue 32 Breaking Down “Brexit Means Brexit” Negative Interest Rates: Helpful or Harmful? June 23, 2016 February 27, 2015

Issue 47 Issue 31 Political Uncertainty Oil and Assets June 23, 2016 January 26, 2015

Issue 46 Special Issue Factoring in Financial Conditions 2014 Update, and a Peek at 2015 May 26, 2016 December 18, 2014

Issue 45 Issue 30 Brazil at a Crossroads Dissecting Dollar Strength April 27, 2016 December 17, 2014

Issue 44 Issue 29 Policy Stimulus: Running on Empty? Is Europe the Next Japan? March 23, 2016 November 13, 2014

Issue 43 Issue 28 Credit Tremors China Property Problems March 2, 2016 October 21, 2014

Issue 42 Issue 27 China Ripple Effects Exploring Exit February 9, 2016 September 19, 2014

Special Issue Issue 26 2015 Update, and a Peek at 2016 Abenomics: A Moment of Reckoning December 23, 2015 September 2, 2014

Issue 41 Issue 25 Liftoff Geopolitics and Oil – What’s Changed? December 10, 2015 July 22, 2014

Issue 40 Issue 24 Reserve Reversal Rundown Volatility: Lower for Longer? November 3, 2015 June 25, 2014

Source of photos: www.istockphoto.com, www.shutterstock.com, NOAA-NASA GOES Project.

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Disclosure Appendix Reg AC We, Allison Nathan, Marina Grushin, Alain Durré, Francesco Garzarelli, Huw Pill and Pierre Vernet, hereby certify that all of the views expressed in this report accurately reflect our personal views, which have not been influenced by considerations of the firm's business or client relationships. I, Peter Oppenheimer, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division.

Disclosures Global product; distributing entities The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs on a global basis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs Australia Pty Ltd (ABN 21 006 797 897); in Brazil by Goldman Sachs do Brasil Corretora de Títulos e Valores Mobiliários S.A.; in Canada by either Goldman Sachs Canada Inc. or Goldman, Sachs & Co.; in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W); and in the United States of America by Goldman, Sachs & Co. Goldman Sachs International has approved this research in connection with its distribution in the United Kingdom and European Union. European Union: Goldman Sachs International authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, has approved this research in connection with its distribution in the European Union and United Kingdom; Goldman Sachs AG and Goldman Sachs International Zweigniederlassung Frankfurt, regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht, may also distribute research in Germany. General disclosures This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst’s judgment. Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have investment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research Division. Goldman, Sachs & Co., the United States broker dealer, is a member of SIPC (http://www.sipc.org). Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. 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Disclosure information is also available at http://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY 10282. © 2017 Goldman Sachs.

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