Based on the latest opinion polls, the most likely outcome of the French election on 7 July is a hung parliament with a minority government led by the far-right Rassemblement National (RN), increasing the risk of political impasse.
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Towards a hung parliament in France?
Currently, the polls (see Exhibit 1 below) suggest a hung parliament as the most likely outcome of the election with the RN becoming the largest party in parliament, although without a majority.
The polls are leading political analysts to conclude that it is likely the final round of voting will leave voters facing a choice between the leftwing alliance (Nouveau Front Populaire – NFP) and the RN, with an insufficient number of the more moderate centrist parties winning enough votes in the first round to make it to the second (candidates need to achieve a threshold of 12.5% of registered voters to qualify for the run-off vote on 7 July).
President Macron’s centrist alliance Ensemble pour la République (Ensemble) is currently significantly trailing its far-right and leftwing rivals heading into the first-round vote on 30 June.
Under the scenario of a hung parliament, President Macron could pick Jordan Bardella, the RN leader, as prime minister. Bardella has however previously said he would not accept this role unless the RN held a majority. The risk is that any prime minister, whose party, or coalition of parties, does not hold a clear majority will be vulnerable to swift dismissal via a no confidence vote.
An alternative scenario could see the RN managing to form a majority by winning support from centre-right members of parliament. In this case, political uncertainty would perhaps be reduced, although it would lead to an uncomfortable cohabitation between President Macron and such a majority.
Far-right sets out economic platform
On 24 June, Bardella presented the party’s key economic pledges to the media.
Bardella said the RN intends to return France’s deficit/GDP ratio to 3% by 2027. His statement echoed an interview broadcast recently with Jean-Philippe Tanguy, his potential finance minister.
However, Bardella did not elaborate on the exact steps to achieving this objective.
Expansionary fiscal policy?
Both the RN and the leftwing NFP are in favour of expansionary fiscal policies which are unlikely to correspond to an approach financial markets would consider as acceptable, given France’s current debt burden (on 18 June, the European Commission launched an Excessive Deficit Procedure against seven European Union member states, including France).
Olivier Blanchard, former chief economist of the International Monetary Fund, is quoted as describing both the NFP and the RN’s plans as ‘fiscally irresponsible’ (Financial Times 24 June).
A risk-off mentality prevails
In the absence of major headlines over the 22/23 June weekend, markets reverted to a more risk-on attitude across assets on 25 June. The result was a partial reversal of last week’s risk-off price action.
The key spread of 10-year French Obligations assimilables du Trésor (OAT) government bonds over to German Bunds ended 24 June at around 3 basis points (bp) tighter, stabilising around the 76bp level (compared with Friday, when the spread closed at just under 80bp). The 10-year OAT asset swap tightened by around 3bp on the day (but remains around 11bp wider since the announcement of the snap elections).
French stocks and the Euro Stoxx bank index look likely to remain volatile in the run-up to the elections.
Our investment teams remain cautious at this stage, trimming back risk positions. The next several days will likely confirm the old adage about a week being a long time in politics.
In our view, France’s cyclical recovery should continue, but economic growth may dip. On 21 June, French companies reported the biggest drop in new orders since the start of the year, with the Purchasing Managers’ Index (PMI) falling from 48.9 to 48.2, partly, it seems, due to concern over the elections.
The recent tightening in financial conditions in France might outweigh support coming from any stimulative fiscal policy. There is a risk of lower impetus for structural reforms hampering potential GDP growth and exacerbating the fiscal challenges.
If you have questions on the forthcoming parliamentary elections in France or require further information, please contact your client relationship manager.
