The overall outcome of the French legislative elections came as expected: a hung parliament where no party/alliance managed to secure the absolute majority of 289 seats. But it came with a twist. While the right-wing alliance, Rassemblement National (RN), won the first round and was expected to win most seats in the second one, the left-wing alliance came first, followed by the group supporting President Emmanuel Macron, and then RN. The new political landscape in France is fragmented, and, at the time of writing, it’s unclear who’s going to be the new Prime Minister (PM) after the unsurprising resignation of Gabriel Attal, the current PM. However, a hung parliament has three key implications for markets. First, parties need to compromise to implement policy. Second, as a consequence, the risk of unorthodox or market-unfriendly policies gets diluted. And third, also as a consequence, the market impact across assets in France and Europe is likely to be limited too, apart from a possible initial kneejerk reaction while things settle.
What’s next in French politics?
Over the coming days, French political leaders will meet to seek common ground to build potential coalitions. Meanwhile, outgoing PM Attal will stay until President Macron nominated a new PM. The political landscape in France is fragmented, given that seats across the different political parties (outside of the current group supporting Macron) are quite balanced. Alone, the RN is projected to win around 120 seats, Macron’s Renaissance (the largest party supporting the President) around 100 seats and, within the left-wing alliance, Mélenchon’s France Insoumise is almost on par with the Socialists with around 70 seats.
A political gridlock may make policy implementation difficult, which of course isn’t positive from a medium-term perspective. But, given that markets feared a right-wing (or left-wing) absolute majority capable of implementing unconventional policies, a stalemate where no one can govern alone (and where the groups supporting Macron did better than expected) is a better-than-expected outcome, as it mitigates the probability of non-mainstream policy changes.
Less of a change than you think
As per tradition, next PM is likely to come from the left-wing alliance (the largest group in parliament). Some of its policies, if implemented in full (which is unlikely, given the need to form coalitions and, therefore, seek compromise), could have a significant impact on the direction of the French economy at longer horizons. But the most unconventional policies, which could negatively impact France’s fiscal outlook, are unlikely to go through. Even if the left-wing coalition was to hold (see below), the more moderate socialists are likely to balance the more radical left-wingers. And, again, the left-wing alliance will have to find common ground with at least some of the more moderate groups supporting Macron.
In any case, the new government will be fiscally constrained. With a public deficit of around 5% of GDP, France recently received an official warning from the European Commission (EC) for exceeding the European Union (EU) deficit limit of 3% of GDP (the so-called Excessive Deficit Procedure). In addition, a political stalemate, de facto, limits the risk of a fiscal slippage as it will be difficult to pass significant spending plans, which could have caused some stress on France’s sovereign market and financial system. But the road to fiscal consolidation wanted by the EC may be bumpy and delayed under a hung parliament.
From an economic perspective, after years of pro-growth policies implemented by Macron’s Government, the result of the elections marks a change, possibly focusing more on distributive aspects. But we think the near-term direction of the French economy will likely remain steady as not much gets done (one way or the other). Alongside its European peers, France is on a gradual path to recovery, led by activity in services. We expect this to continue. The European Central Bank (ECB) started to cut interest rates in June and is likely to follow through in September and December this year. In turn, rates cuts are likely to be a renewed tailwind to credit and investment, as well as consumption, boosting overall growth.
Political uncertainty, yes, market implications less so
Those who follow closely French politics will note that the previous left-wing alliance, the so-called New Ecological and Social People’s Union (NUPES), didn’t hold that long after the elections of 2022. It ended due to geopolitical divergences in October 2023, following the events that took place in the Middle East. Geopolitical risks remain and could generate internal political tensions – hence we maintain a well-diversified strategic and tactical asset allocation, with a range of risk mitigators. And, within the left-wing alliance, there are significant divergences on policy, too, which could be another trigger for internal discord. This means that political volatility in France could stay elevated over the coming months. However, we think that it’s unlikely to have a significant market impact.
As we noted previously, the stalemate limits the risks of fiscal slippage and market-unfriendly policies. The economic outlook for Europe and France is also gradually improving (growth is recovering, inflation is getting closer to the ECB’s 2% target, and interest rates are falling). French stocks have already fallen, French-German government bond spreads have already widened, and the euro has fallen too. This means that markets have already adjusted to this hung-parliament scenario. Despite some political noise, and the occasional bout of market volatility, we think markets will now be driven by the improving fundamental picture of the European economy.
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Information correct as of 8 July 2024.
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