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French election shock sparks euro slip after victory for the left

Far-left politician Jean-Luc Melenchon attends a demonstration on Thursday, April 6, 2023 in Paris.
Far-left politician Jean-Luc Melenchon attends a demonstration on Thursday, April 6, 2023 in Paris. Copyright AP/Christophe Ena
Copyright AP/Christophe Ena
By Eleanor Butler
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An unexpected victory for the leftist New Popular Front causes the euro to fall as markets fear a radical spending spree.

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The euro fell 0.3% in the early hours of Asian trading on Sunday after France's New Popular Front party emerged victorious in the country's legislative elections.

The latest projection on Monday morning suggested the left-wing New Popular Front alliance had won 182 of the 577 seats in the National Assembly.

Incumbent President Macron's centrist alliance, meanwhile, is set to take 168 seats. The result marks a humiliating defeat for the Ensemble group, and one which has sparked the resignation of Prime Minister Gabriel Attal.

While markets had recently rallied on the belief that the right-wing National Rally was not set to take an absolute majority in France, market uncertainty looks set to return.

The far-right RN is only predicted to secure 143 seats after Sunday's vote, although investors now have new faces to fret over.

"It looks like the anti-far right parties really got a lot of support," said Simon Harvey, head of FX analysis at Monex Europe, cited by Reuters.

"But fundamentally from a market perspective, there’s no difference in terms of the outcome. There’s really going to be a vacuum when it comes to France’s legislative ability."

Markets notoriously hate uncertainty, and France's political scene is currently far from stable.

With the likelihood of a hung Parliament and little clarity as to what form of coalition might be possible, some form of minority government or 'cohabitation' - where power is shared between a prime minister and a president from opposing parties - appears likely.

This could presage legislative gridlock.

Added to this, the leftist New Popular Front (NFP) alliance is not known for its fiscal caution.

As early as this summer, leader Jean-Luc Mélenchon has said that decrees could be issued to repeal Macron's pension reform and increase France’s minimum wage.

The group also wants to implement a 10% pay rise for civil servants, raise housing subsidies by 10%, and hire more teachers and healthcare workers.

Extra measures will mean progressively boosting public spending by €150 billion. The party says this will be financed by greater taxes for the wealthy.

The coalition's belief in state spending has spooked markets, particularly given the current health of France's finances.

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Melenchon's 'France Unbowed' party represents only part - albeit the largest tranche - of the NFP however. Whether the alliance will now hold together now that it has effectively shunted the National Rally into third place in the election remains to be seen. Moreover, any attempt to form a government might well look to by-pass France Unbowed altogether.

The country made headlines in March when it announced deficit figures for 2023, with public accounts showing a fiscal shortfall of 5.5% of economic output.

This is up from 4.8% the previous year and significantly more than the government's target of 4.9%.

Macron’s government had pledged to bring the deficit to under 3% of national output by 2027, which would allow it to stay in line with EU goals.

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Alexandre Ouizille, an official from the New Popular Front, said before Sunday’s vote that her party would not increase the deficit. "We won’t reduce it", she nonetheless added.

Trading in French bonds and stocks will begin on Monday morning in Europe.

Investors will be closely monitoring developments in Paris to see how this new political era could affect fiscal stability.

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