French equities and state bonds displayed uncertain movements on Monday, following unexpected outcomes in the parliamentary elections. The elections saw a stronger performance by left-wing groups than the far-right, potentially leading to a legislative deadlock.
The yield on the crucial 10-year government bonds decreased to 3.18% by the late afternoon, correcting an earlier increase. The difference in the risk premium demanded by traders for French bonds over the safer German bonds also lessened throughout the day, although it remained significantly higher than it was before President Emmanuel Macron called for early elections on June 9.
Since President Macron, leading the Renaissance party, unexpectedly initiated these elections after a defeat to the far-right in the EU parliamentary elections, the French markets have experienced instability. Macron, 46, known for his pro-growth reforms in France—the second-largest economy in Europe—faces the risk of seeing these reforms reversed by a newly configured parliament.
On Monday, French Finance Minister Bruno Le Maire expressed on X (formerly Twitter) that the most pressing dangers post-election were the potential for a financial crisis and economic downturn. He criticized the New Popular Front, the leading left-wing coalition, for their “exorbitant, ineffective and outdated” policies, which he claimed would undermine the economic progress made under Macron’s administration, including job creation and industrial expansion.
Analysts from Rabobank suggested that the uncertainty about the government’s future composition might maintain a high risk premium on French bonds compared to pre-election levels.
In a significant shift, the New Popular Front surpassed Marine Le Pen’s far-right National Rally, placing third and reversing their initial performance. However, lacking a majority with 289 seats and with a diminished president, the national assembly is anticipated to be more fragmented than ever, setting the stage for extended instability. Three diverse political groups will either attempt to form a coalition or find themselves in a deadlock.
Rabobank analysts noted on Monday that the so-called “Republican Front,” which involves cooperation among parties to prevent the far-right from gaining power, was effective yet left the parliament divided. This situation likely points to a period of policy standstill.
France’s CAC 40, comprising the top 40 listed companies in Paris, saw a minor increase of 0.13% by late afternoon, countering an earlier drop. Since the snap elections were announced, the index has fallen by 3.9%.
The euro remained relatively stable against the US dollar as of 9:43 a.m. ET, fluctuating slightly throughout the day. The currency, shared by 19 other EU nations, has seen significant volatility since June 9.
A stalemate in parliament raises concerns over the government’s ability to implement crucial reforms, including efforts to reduce France’s substantial public debt, which stood at 110.6% of GDP at the end of the previous year. The government’s budget deficit reached 5.5% of GDP last year.
The New Popular Front has proposed significant spending increases, such as raising the minimum wage and freezing prices on various essential items.
Holger Schmieding, Chief Economist at Berenberg Bank, labeled the coalition’s financial plans as “unaffordable” in a Monday note. He warned that the election results might worsen France’s fiscal issues, potentially complicating the passage of a compliant budget for the upcoming year within EU regulations. He also noted that the solid performance of the united left complicates any moderate left attempts to distance themselves from the far-left’s costly fiscal measures.
