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French elections: Political and fiscal risks persist, experts warn

PM Gabriel Attal walks back into his residence on Sunday, 7 July after delivering his resignation speech. He is to stay on for the present.
PM Gabriel Attal walks back into his residence on Sunday, 7 July after delivering his resignation speech. He is to stay on for the present. Copyright Aurelien Morissard/Copyright 2024 The AP. All rights reserved.
Copyright Aurelien Morissard/Copyright 2024 The AP. All rights reserved.
By Piero Cingari
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France's legislative election results have left the political landscape fragmented. The left-wing New Popular Front's unexpected win shifts the National Assembly's balance, creating economic uncertainty.


The second round of the French legislative elections has averted the rise of the far-right, yet the political landscape remains fragmented, with no party securing an absolute majority, leaving France vulnerable to economic uncertainties.

The unexpected triumph of the left-wing New Popular Front, which secured the most seats (182), has shifted the National Assembly's balance towards the left.

Its leader, Jean-Luc Mélenchon, is demanding a mandate from President Emmanuel Macron to form a new government, but Macron has asked his current Prime Minister, Gabriel Attal, to remain temporarily to ensure stability.

Following the New Popular Front, Macron's centrist party obtained 161 seats, and the far-right National Rally gained 142 seats.

The fragmented parliament and potential for policy gridlock pose considerable risks to France's economic stability and growth.

Financial experts are concerned about France's ability to implement necessary reforms and maintain its sovereign rating, especially with the public debt-to-GDP ratio exceeding 110% and the European Union placing Paris under an excessive deficit procedure.

Risk of French sovereign rating downgrade rises

Pablo Zaragoza, head of European macro and rates at BBVA, notes that while there is less tail risk, the headwinds from mid-term fundamentals remain unchanged. "The picture in parliament is of a well-divided share of seats," Zaragoza says, highlighting the limited room for manoeuvre to enact bold structural reforms or fiscal consolidation.

He emphasises the uncertainty surrounding the type of government that will emerge, especially given the internal policy differences within the left bloc.

Zaragoza also mentions that France's mid-term economic outlook remains lacklustre. "This not only relates to the risks associated with growth and the public debt supply-demand balance but more directly to the outlook for France's sovereign rating," he explains. The potential for downgrades in France's sovereign rating has increased due to the slow progress on essential reforms.

Roberto Cobo, BBVA's chief strategist, remarks that the market reaction to the hung parliament scenario has been positive over the past week. However, he warns that an empowered left could lead to higher fiscal imbalances, negatively affecting the euro and widening French yield spreads.

Cobo adds, "The fiscal risks and political paralysis will reduce the likelihood of any meaningful action to tackle rising debt," leading to a probable weak growth scenario. He also notes the uncertainty about Macron's choice for the next prime minister, pending the new configuration of the National Assembly.

Simon Freycenet, interest rate strategist at Goldman Sachs, observes that the election results align with near-term market relief, as the new parliament is less extreme than anticipated.

Nevertheless, he points out significant challenges ahead, particularly in forming a government.

"A hung parliament would leave France only a slim path to address structural issues and deliver debt consolidation," Freycenet states. He suggests that the possibility of political volatility remains high, especially if the New Popular Front attempts to implement fiscally expansionary measures.

Budget risks more likely to get worse than improve

Freycenet further elaborates that even if budget risks are contained by political deadlock, they are still more likely to deteriorate than improve. He stresses that benign market conditions cannot be guaranteed in such a politically uncertain environment.


Philippe Ledent, ING senior economist, recalls that the announcement of the New Popular Front's radical programme previously caused instability in bond and equity markets.

"Today, the NFP claims victory, albeit relative, and the uncompromising application of its programme," Ledent remarks. He warns that if the NFP leaders' rhetoric does not change, it could reignite market volatility, even though it is unlikely that their programme will be fully implemented.

Ledent highlights two conflicting realities: French political parties' difficulty in making concessions and the socio-economic challenges facing the country, which demand reforms supported by a broad coalition.

"Failure to reconcile these two realities could lead to permanent instability that would eventually worry the markets," he concludes.

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