Beyond Bulls & Bears

Fixed Income

EU election ushers in uncertainty and volatility

The European Union (EU) parliament elections resulted in expected gains for far-right parties—and an unexpected decision by French President Emmanuel Macron to call a national election on June 30. David Zahn, Franklin Templeton’s Head of European Fixed Income, discusses why the campaign in France will contribute to market volatility and may be pivotal for the EU.

As widely predicted by pre-election polls, Europe’s far-right parties increased their share of votes and will gain seats in the European Parliament. Strong support for France’s National Rally party compelled French President Emmanuel Macron to make the unexpected announcement of national parliamentary elections on June 30. European stock and bond markets fell on the news of the outcome, which kicks off multiple levels of negotiations over forming a stable governing majority.

Gains for the far right reinforce what we had been seeing in Europe’s national elections over the past couple of years. Voters have been unhappy with the centrist political parties and wanted the more aggressive policies offered by the far right. Although outside France it was not a resounding victory, there was movement toward the right in Italy, the Netherlands and Germany.

We will no doubt see changes, with some rolling back of the policies of the past five years. The lack of policy clarity in the near term is likely to contribute to volatility in markets. Negotiations will be complicated. Far-right parties tend to focus on domestic concerns and often have friction with the EU as well as with other nationalist parties. Also, the European Commission has a complicated selection process that involves both building a parliamentary coalition and gaining the approval of current political leaders of 27 member states. Outgoing Commission President Ursula von der Leyen is seeking to retain office, but her previous coalition had only a nine-vote margin. It is not clear whether von der Leyen can hang on, or what policy concessions she might make to do so. It is also too soon to say whether other candidates might emerge.

One headline that I think is overstated involves the setback for Green parties. There may be some modification of environmental policy, making the work of investors more difficult, but I think there will also be continuity. Five years ago, the priority of green energy policy was reducing carbon emissions, which is important in the long term. More recently, though, Russia’s war on Ukraine has highlighted the risk of energy dependency, making energy security the priority. Diversifying energy sources with wind, solar and geothermal power produced within the EU’s borders is widely viewed as important. Even the far right has to tread carefully on this issue. Given this impetus, I believe the greening of the economy will continue and the green bond market will continue to grow.

It’s important to remember the EU has some degree of oversight for national budgets—a difference with the US federal system—and this will be an area of negotiation with deficit spenders like France and Italy. To keep this in perspective, I do not anticipate a return to anything like the problems of the euro crisis a decade ago. In policy matters outside budgetary issues, the far right will also probably introduce more anti-immigration policies, which is not what Europe needs, in my view. Also, some of the parties gaining ground tend to be more friendly to Russia.

The next few weeks will be consequential as France prepares to vote again. The National Rally party led by Marine Le Pen dealt a severe blow to President Macron, who then called a snap election, perhaps to slow the opposition momentum. France is the EU’s second largest economy, but its relative importance to the EU is even greater. It also has a budget deficit of at least 4.5%. Some polls indicate the National Rally could win a parliamentary majority, which would complicate both the national and regional policy outlook. Markets were not prepared for this political risk, in my view, and so we may see heightened volatility in June.

More broadly, Italy’s prime minister, Giorgia Meloni, is the only officeholder strengthened by the outcome. Meloni became prime minister two years ago and has often behaved more pragmatically than her campaign rhetoric suggested she would. She has shown responsiveness to concerns of bond markets. As EU-wide negotiations proceed, Italy’s budget deficit is above 5% and probably much larger. Meloni is likely to want budgetary flexibility, while the EU will want budgetary management.

Although the European election is concluded, I think we have just heard the starter’s pistol in the competition for the leadership of France and for negotiations over EU policy. I think the media may be underestimating Le Pen’s chances of victory. Historically, Le Pen of France and Meloni of Italy have not cooperated well, but if they were to find a way to work together, they could have meaningful impact on policy. We will have to watch how strategic they decide to be.



All investments involve risks, including possible loss of principal. 

Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.

Green bonds may not result in direct environmental benefits, and the issuer may not use proceeds as intended or to appropriate new or additional projects.

International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.


This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data.  Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Get Content Alerts in My Inbox

Receive email alerts when a new blog is posted.