The gap between French and German government bond yields widened and the euro fell.
In short, investors fear a new political relationship that does not bode well for the European economy and unity. Are these fears exaggerated?
Macron seems to be betting that the elections will ultimately be characterised by Chaucer’s maxim that while “two dogs are fighting over a bone, a third dog snatches it away”.
He hopes that the recently formed left-wing coalition led by the New Popular Front and the Rally National will soon split apart and alienate French voters, allowing Macron and his Renaissance party to continue in power along with several centrist parties.
One French official recently told the Financial Times that the choice between the New Popular Front and the Rally National was like choosing between the plague and cholera.
Macron’s decision to let voters vote early was made in light of the events of 2022, when the left also formed a joint coalition to make Macron’s life more difficult, but soon the participants in this coalition found themselves more at odds with each other than with Macron.
Another factor for Macron may have been that he had to show he could govern with responsibility if the Rally National won, which in his view would be a dismal defeat and would see Marie Le Pen and her allies lose the 2027 presidential election.
In any case, French industry is already poised to take a gamble: the heads of the biggest companies are trying to curry favor with the Rally National to define and fine-tune the party’s still rather vague economic policy.
But what are the chances that either the left or the right will be able to win an absolute majority and take power?
The Rally National is leading in the polls but would need 289 seats to secure an absolute majority; it currently has 88. Even if Renaissance lost half its current seats and the once-powerful right-wing Republican Party lost all of its seats to the Rally National, Le Pen and Bardella would still fall 70 seats short.
Additionally, two factors that increase uncertainty must be taken into account when predicting the outcome of the national rally.
Voters may have expressed their discontent and given Macron the finger in the relatively inconsequential European elections, but may make a more moderate choice in national elections.
In 2022, the National Rally was predicted to win 20-30 seats in the polls, but ended up winning three times as many. So while voters may have been hesitant to publicly admit to voting for this controversial coalition at the time, once they entered the anonymous polling station, they still voted for Le Pen’s party. This could still happen now, although Le Pen has softened her tone significantly and her party has become much more acceptable in the eyes of many.
Thus was born the New Popular Front, a left-wing coalition made up of the Socialists, Communists, Greens, Jean-Luc Mélenchon’s radical left Indomitable France, and several other parties.
A dispute soon arose over Mélenchon’s possible appointment as Prime Minister, forcing him to declare that if the Left coalition won, someone else would become Prime Minister. The Left coalition lost to the Rally National and I believe it will soon come under pressure from within, as the differences between the parties are too great.
While Macron’s centrist ensemble of Renaissance and two other parties is unlikely to win the election, it can ensure that any winning coalition is far from an absolute majority. One way Renaissance plans to achieve this is by not fielding its own candidates in more than 10% of the 577 electoral districts, in order to increase the chances of a moderate coalition.
Keep in mind that if no candidate receives more than 50% of the votes in a constituency in the first round, the election will be held in two rounds. This is a completely different system to the European Parliament elections. In 2017, Macron’s party won only 32% of the votes in the first round, but ended up winning 61% of the seats.
Given the above, the two most likely scenarios are either a National Rally victory with Le Pen/Bardella just short of an absolute majority, or an outcome with no clear winner, as in 2022.
Given the high level of uncertainty, French stock markets are likely to remain on the sidelines in the coming weeks, as are investors in French government bonds.
By the way,French stocks plummetMacron’s election behavior after the European elections was shocking, because the French CAC 40 stock index and the MSCI France stock index are only about 15% dependent on the French market. In fact, the losses were mainly due to French companies.OwnThe sheer volume of government debt securities in the country.
Regarding French government bonds,A relatively large proportion(52%) are held by foreign investors, who will likely dispose of French government bonds more readily than French investors in the face of continuing political instability.
If after July 7 the Rally National proves to be less influential on French economic and foreign policy than feared, or if the Ensemble coalition surprises with better results than expected, it would not be surprising to see the emergence of a rescue party.The yield gap between 10-year German and French government bondsThey will probably fall, but French stocks (and other European stock markets) will rise and the euro may strengthen slightly.
If the national rally wins big, doubts about the sustainability of the euro may be rekindled, so we are likely to see the opposite outcome, with limited declines in French stocks (limited as some of the proposals are pro-business) and other European stock indexes. Moreover, the gap between French and German government bond yields is likely to widen further. This would undoubtedly send the euro lower further.
These moves could be partially reversed if the scenario for a national rally victory turns out to be less dire than thought.
As in 2022, I think a mixed outcome is slightly more likely than a clear victory for the National Rally. The Le Pen/Bardella combination is unlikely to win an absolute majority.
So, in France, it’s neither cholera nor plague, but a severe case of influenza is entirely possible.
Andy Langenkamp:ECR ResearchandICC Consultant.
