Originally published in Stephen Dover’s LinkedIn Newsletter, Global Market Perspectives. Follow Stephen Dover on LinkedIn where he posts his thoughts and comments as well as his Global Market Perspectives newsletter.
On Sunday June 30, France held the first of two rounds of elections to determine the composition of the nation’s parliament, the National Assembly. While the final composition of Assembly and the determination of who will be France’s next prime minister will not be known until after the second-round vote on July 7, the results thus far confirm what pre-election polls had suggested: Macron’s centrist coalition has fared poorly, coming in third place, while more extremist parties at both ends of the political spectrum pulled ahead.
The clear winner was the far-right National Rally party with approximately 33% of the vote, followed by a coalition of left-wing parties with 28%. Macron’s centrist Renaissance party garnered around 20%.1
Under France’s political system, a power-sharing arrangement between President Macron and the new prime minister—referred to as cohabitation—or a minority government (with no single party enjoying an absolute majority in parliament) looks likely. Either way, governing France will become more difficult, and the future of French politics and policy will become more uncertain.
What does this mean for investors?
To begin, fears of an existential eurozone breakup, with stresses akin to Europe’s sovereign debt crisis of 2011-2012, are overblown, in our view. France is not on the verge of leaving the euro.
But markets are understandably unsettled. French government bond markets have slumped in recent weeks, with 10-year spreads over German Bunds widening on Friday to 86 basis points, the biggest gap since the eurozone crisis of 2012.2 Partly, this reflects concerns that a new French government may not be able to enact sustainable policies to reduce France’s government debt, which is presently 111% of gross domestic product. 3
And it could get worse. A populist French National Assembly and prime minister may be tempted to roll back fiscally stabilizing pension reforms and use other forms of fresh government spending to build political support in advance of the 2027 French presidential election. If so, bond markets convulse, particularly given memories of the UK “Gilt crisis” in 2022, which was also precipitated by deficit fears.
At this point, however, the election outcome is not decided. The outcome awaits the second round of voting, suggesting at least another week of uncertainty. Accordingly, this week we expect French government bonds, the French equity market (including French bank stocks) to remain under pressure until the political landscape becomes clearer.
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1. Source: Financial Times. “French parliamentary election tracker 2024.” July 1, 2024.
2. Source: Bloomberg. As of June 28, 2024.
3. Source: OECD. As of December 31, 2023.
