Macron’s ill-advised decision to call a snap election has plunged French politics – and its financial markets – into turmoil.
- French equity markets have recovered from their initial sell-off
- The election has exposed a significant fragility in the French economy
- Neither side appears willing to tackle France’s chronic indebtedness
While the UK has been distracted by its domestic politics, it is the squabbles over the Channel that have been occupying the world’s media. French President Emmanuel Macron’s decision to call a snap parliamentary election, in response to the far right National Rally’s showing in the European election, has brought significant volatility to French financial markets.
The initial response to Macron’s decision was a sharp sell-off in French bond and equity markets. After the first round of the election, the consensus is that a hung parliament appears more likely, and there has been a rally once again. Ahead of the final vote on 7 July, the projections are that the combined forces of Macron’s Renaissance party and a messy coalition of the left may be enough to thwart a National Rally majority.
Either way, it has exposed a fragility in France that many had overlooked. France’s debt is hovering at around 110% of GDP. While that is lower than the US (at 122%), it is far higher than many equivalent nations, even that of the indebted UK, which currently sits at 98%. France’s fiscal deficit, at 5.5%, has drawn the attention of the EU, whose rules are that countries should keep their deficit below 3%.
The worry is that neither side appears inclined to tackle the problem. As a result, the French 10 year bond yield has risen from 2.4% at the start of the year to 3.2% today. Worryingly, it has not moved lower in response to the ECB’s rate cut in June or the weakening inflationary pressures across the region. It is possible to see French bonds remain under pressure even if it turns out to be a hung parliament. This could create real economic pressures.
For the stock market, the considerations are different. There may be implications for the banking sector from increased funding costs, but for many French companies the health of the domestic economy is not crucial in their long-term strength. As such, the recent sell-off may provide opportunities. That said, other factors may prove important – the weakness in the Chinese economy may continue to weigh on the country’s luxury goods sector, for example.
For the time being, it appears the problems in France are isolated. Equally, the bark of the recent crop of far right politicians has generally been more dangerous than their bite, though this is a dangerous assumption to make in the longer-term. There may be more volatility ahead, even if a hung parliament is the final outcome.
