Beyond Bulls & Bears


Quick Thoughts: Surprise in France—What are the implications?

A major shift is happening in France, as the left-wing unity prevails in the Assembly elections, signaling potential changes ahead. Here’s a look at how this could reshape France’s political and economic landscape, from Franklin Templeton Institute’s Stephen Dover.

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.

French voters have demonstrated a resounding rejection to Marine LePen’s far-right party, which dropped to third place in the second (and final) round of elections to the Assembly (parliament).

No single party or grouping will have an absolute majority in the assembly. If that is the case, a prolonged period (lasting weeks or perhaps even months) of coalition building will now follow. The most likely constellation, however, appears to be a left-of-center plus centrist-led government, backing a new prime minister.

In France, the president (Emmanuel Macron) has power to make most foreign policy and national security policy decisions. The parliament, on the other hand, is responsible for most domestic policy decisions, including those affecting fiscal and other economic policies.

Market reaction has been muted, with little movement in French bond yields and the stock market. Our sense is that markets will greet the outcome of the election as positive for European risk assets, bond spreads, and the euro. The alternative outcome of a parliament hostile to the president would have delivered considerably greater medium-term uncertainty than what is now likely. With modest exceptions, today’s outcome is likely to produce broad continuity in French domestic and foreign policy, as well as in France’s approach to EU policies.

That said, we believe whatever bounce markets enjoy is likely to be contained. France still faces considerable medium-term challenges including fiscal consolidation, long-term sustainability of key pillars of the social contract (pensions, health care) and pressing needs to increase productivity. It is highly unlikely that a majority constructed out of necessity (to keep the far right out of power) will have the political capital to address France’s long-term challenges.


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