The spotlight is on France and Europe for the outcome of the second round of the legislative elections today, July 7. Markets and businesses are looking with concern at the potential alliances that could emerge in the aftermath of the vote, between a right-wing government, a coalition with the far left or a possible stalemate. With the game of ‘withdrawals’ an absolute majority for the Rassemblement National of Jordan Bardella and Marine Le Pen should be excluded despite the fact that the RN will most likely confirm itself as the first party after having won 33.1% of the votes in the first round together with its ally Eric Ciotti. But it is not only the RN that worries the markets, there is also the New Popular Front (NFP) and its program judged by the markets as too “spendthrift”.
“What will happen in France? Nobody knows, we are waiting for the 7th because in my opinion the game is very open”, observed the Minister of Foreign Affairs, Antonio Tajani. “The only real concern that I have – he explained – is of an economic nature. A situation of instability in France could provoke reactions on the markets that could also have repercussions on our country, on the other EU countries. At the community level not much changes, the only dilemma is who will choose the French commissioner”.
Economic circles, in fact, are waiting to see how the situation will evolve, also because the second round is also weighed down by the unknown abstentionism after the ‘boom’ in participation in the first round: “The risk of strong instability at the outcome of the second round of the legislative elections generates both concern and a wait-and-see attitude on the part of French and foreign investors”, writes ‘Le Monde’.
With Macron an attractive country
“We are in a ‘wait and see’ situation,” explains Pascal Cagni, director of the investment fund C4 Industries, adding that “since President Emmanuel Macron came to power, France has become an attractive country for investors again. We should not lose in a few months what we spent seven years building.” “Political instability can disrupt financing and business continuity, making France less attractive. Investors prefer predictable and stable conditions,” observes Antoine Moyroud, partner at Lightspeed Venture Partners, also to the French newspaper.
But French SMEs are also particularly worried. According to a survey published by the French economic daily ‘Les Echos’ on June 27, 35% of 1,066 managers of SMEs and small businesses consider political stability a priority and 47% fear a decline in activity in the coming months.
Risk of political paralysis
It now looks unlikely that the Rassemblement National will win an absolute majority, despite being the largest party in parliament. Macron may be happy that a ‘cordon sanitaire’ against the far right has blocked Le Pen’s path to power. However, it will be a rather hollow victory and, as investors look to the 2027 presidential vote, Le Pen and her party appear to have emerged from this campaign stronger”, explains Mark Dowding, Fixed Income CIO, Rbc BlueBay Am, in a report. “A paralysed government, with parties squabbling in a less than virtuous coalition, is likely to do little to win support for the incumbents. This could easily lead to rapid defections and an administration in crisis. In that case, Macron will be blamed for the petulant decision to call elections that led to political paralysis”, notes the analyst.
In the French political system, another legislative election is not allowed until July 2025 and “so, for now, there may not be much to discuss. However, there is a sense that the genie has been let out of the bottle. Political risk in France has been unleashed and is unlikely to go away any time soon,” Dowding continues. “In the short term, we think some short-term hedging may continue to take place in France, on relief that the RN has failed to win power. However, given that 10-year French OAT spreads have fallen from 80bps to 65bps, we are not confident that this can continue for long. We believe a return to the stress levels of close to 50bps is unlikely and so any further rally in French assets, with investors uncovering once this weekend’s vote is over, is likely to be an interesting selling opportunity in French assets,” he explains.
The public accounts issue
The markets’ attention, Carlo Benetti, Market Specialist at Gam (Italia) Sgr, observes in a report, “is naturally on the public accounts of France and the halo effect that any tension on a European debt would extend to the large debtor countries. The deficit of Paris is around 5.5% and the public debt is 110% compared to GDP, the Italian one is around 140%, to pay the price of a debt alarm would be the costs of financing the debt itself and the euro. A European debt and euro crisis like the one in 2011 is not probable, but there is the serious risk of political paralysis in the European leaderships at a historical moment in which inaction is not allowed”.
In contrast to the British certainty, underlines Gabriel Debach, market analyst at eToro, “France faces uncertainty”. Investors, he observes, “are worried about potential alliances, between a right-wing government, a coalition with the far left (rejected by Macron) or a possible stalemate. Since June 10, the day of the elections, the French index has lost about 3.4%, with sharper drops at times. However, the market seems to be trying to return to normality, underlining how politics generates volatility but does not alter the underlying direction”.
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