Impact of French Election on Macron's Future
France's snap legislative elections have resulted in a significant shift in the political landscape, with the hard-right National Rally (RN) securing a record 33% vote share in the first round. The left-wing alliance, the New Popular Front, followed closely with 28%, while Emmanuel Macron's centrist coalition, Ensemble, trailed behind with 21%.
The first round of elections, which saw Marine Le Pen's victory in the European Parliament elections, led to an immediate announcement of a general election by President Macron. The CAC-40 index responded positively to the news, recording its best daily performance for two years, with bank stocks surging.
However, the election results could lead to a parliament packed with eurosceptics and politicians who 'despise the soft-left technocratic consensus that rules in Brussels'. The left-wing alliance failed to win an outright majority, leading to a hung parliament and potential political gridlock.
From a business and investor perspective, Macron's presidency has seen a 'sustained effort to remake France as a modern, business-friendly economy'. Reforms in labor laws, job creation, tax cuts, and improvements in education and the pension system have been implemented during his tenure.
The RN, on the other hand, proposes fiscal policies that include protectionism, welfare spending, unfunded tax cuts, and slashing VAT and exempting anyone under 30 from income tax. The fear is that a fiscally reckless RN government could cause a repeat of the crisis that hit the UK in the autumn of 2022, as suggested by Neil Shearing of Capital Economics.
In the second round, a 'Republican front' effort rose to stop the RN, resulting in the left-wing coalition winning the day, with the RN pushed into third place. Under the French electoral system, a candidate getting 50% wins outright. In the first round, the RN placed first in 296 seats, potentially giving it a parliamentary majority if it could repeat the feat in the second round.
The current French government deficit is more than 5% of GDP, and its credit rating has been downgraded twice in months. The spread of French government bonds over their German equivalents is close to multi-year highs, reflecting the fragility of investor sentiment.
The prospect of a lame duck president and either a 28-year-old hard-right prime minister or a centrist technocrat with no real mandate or authority means instability is looming. In contrast, the UK is moving from one majority government to another with a minimum of fuss, and suddenly seems an 'island of stability' compared to the political uncertainty in France.
The election results could have a significant impact on the entire EU, as France will have a parliament and potentially a government packed with eurosceptics. The political landscape in France is poised for a dramatic change, and the coming months will be crucial in determining the direction the country will take.
