Share prices churn in France after uncertainty hangs over the country’s political future although bonds remain relatively steady.
French markets were unstable on Monday morning after France’s far-left coalition party swept to a surprise victory in Sunday evening’s legislative elections.
After a modest fall in early trading, shares in the CAC 40 showed a strong rebound, only to fall sharply just before 11am CET. Prices have since been fluctuating on a downward trajectory.
That’s despite surprisingly little movement in the French bond market, where the 10-year yield is at around 3.2%.
The latest poll projections suggest that the left-wing New Popular Front (NFP) alliance has won 182 of the 577 seats in France’s National Assembly following Sunday’s vote.
Incumbent President Macron’s centrist alliance is set to take 168 seats, while the far-right RN, meanwhile, is only predicted to secure 143 seats. This is contrary to earlier predictions that the party could gain an absolute majority.
“It looks like the anti-far right parties really got a lot of support,” said Simon Harvey, head of FX analysis at Monex Europe, cited by Reuters.
“But fundamentally from a market perspective, there’s no difference in terms of the outcome. There’s really going to be a vacuum when it comes to France’s legislative ability.”
Deadlock lies ahead for French politicians
After markets fell on the announcement of a snap legislative election last month, shares made some gains in the week preceding the election, bolstered by the prediction that the RN would not secure an absolute majority.
Now, while France stares ahead at a hung parliament, the market is battling against political uncertainty.
As none of the parties managed to secure a 289 majority, groups will need to form coalitions to avoid legislative gridlock.
In practice, this possibility seems unlikely, as politicians from the centrist Ensemble party will hardly be comfortable linking up with the far-left.
Writing on X on Monday morning, finance minister and Macron ally Bruno Le Maire was scathing of the NFP’s victory.
“The most immediate risk is a financial crisis and the economic decline of France,” he warned.
“Implementing the New Popular Front’s programme would destroy the results of the policy we have pursued for the last seven years, which has given France jobs, attractiveness and factories. Their project is excessive, ineffective and outdated. Its legitimacy is weak and circumstantial. It must not be implemented.”
Leftist leader of LFI Jean-Luc Mélenchon has expressed a similar distaste for his opponents. On Macron’s Ensemble, he said yesterday: “We refuse to enter into negotiations with his party to make compromises, especially after having fought against his failures for seven years.”
While a coalition between these two forces therefore seems unlikely, some also believe that the New Popular Front, formed hurriedly ahead of the election, may not even last the week.
Aside from the LFI, the NFP is made up of several parties including the more moderate Socialist Party, the green Ecologist party, and the French Communist Party – who all have their own agendas.
Could Mélenchon get the keys to the coffers?
Combined with this political conundrum, economic analysts are also conscious of Mélenchon’s promises of a spending spree.
The LFI has said that it wishes to progressively boost public expenditure by €150 billion, a plan it claims will be financed by greater taxes for the wealthy.
The Institut Montaigne estimates that the New Popular Front’s campaign pledges would require nearly €179 billion in extra funds per year.
Among other policies, the group wants to implement a 10% pay rise for civil servants, raise housing subsidies by 10%, hire more teachers and healthcare workers, and repeal Macron’s pension reform.
These pledges come at a time when France’s economic health isn’t in tip-top shape.
France’s budget deficit came in at 5.5% of economic output in 2023, well above the government’s target of 4.9%, and a result which was accompanied by a credit downgrading from S&P in March.
Despite the uncertain road ahead for French politics, certain analysts have nonetheless pointed out that the country’s impending gridlock could actually be appeasing some investors.
If the left struggles to secure a majority, Mélenchon won’t have easy access to the state coffers. This means his more radical policies could fall by the wayside.
