Markets do not like uncertainty and investors may have to wait for some time for the new French governments to clarify its intentions in terms of fiscal reform.

French president Emmanuel Macron has called snap elections to the National Assembly (the lower house of the French parliament) following the defeat of his centrist coalition at the latest European Parliament elections.

According to the polls1, the far-right Rassemblement National party is in the lead. If the polls are correct, the National Assembly elections could slow, or even stop, ongoing fiscal reforms – a prospect that has already led to a sell-off on European equity and fixed income markets. Given the political uncertainty, regional markets may continue to be more volatile in the coming months as investors reassess European political and fiscal risks.

However, it is important to note that a repeat of the eurozone debt crisis seems unlikely. Populist parties in France or elsewhere are no longer arguing to leave the EU or single currency. European Union (EU) institutions are now much stronger, the European Central Bank (ECB) is better equipped to deal with any sovereign debt concerns as they arise, and the European economy is in a much more robust position (Exhibit 1). In addition, history has shown that once in charge, populists tend to adopt a more pragmatic approach.

What can we expect?

The most recent polls2 point to a victory for the far-right Rassemblement National (36% of voting intentions in the first round). The far-left coalition, Le Nouveau Front Populaire, is also gaining traction (29.5% of voting intentions in the first round), while President Macron’s centrist coalition is lagging, with just 20.5% of voters currently saying that they intend to vote for the Ensemble pour la République in the first round.

However, at this stage, the polls only give an imprecise picture of the future composition of the National Assembly. Contrary to the European elections, which are based on a single-round proportional voting system, the National Assembly elections are based on a two-round non-proportional voting system, with elections taking place on 30 June and 7 July.

On 30 June, elections will take place in each of the 577 French constituencies. If a candidate receives 50% of the votes in a constituency (representing at least 25% of the electoral register), they will be automatically elected. In constituencies where no candidate receives 50% of the votes cast, all the candidates that received votes representing at least 12.5% of the electoral register will go into the second round of elections on 7 July. The second-round elections are generally a battle between just two or three candidates.

Historically, when a representative of the far right has made it through to the second round, other political parties have joined forces to form a “Front Républicain”. The idea has been to withdraw candidates from parties that are less likely to win against the far right, and/or to recommend that the supporters of these candidates vote instead for a candidate of a democratic party that is the most likely to win against the far right.

However, this time round the elections may be more complicated. France now has two strong parties from the political extremes: the Rassemblement National on the right, and La France Insoumise (one of the main parties within “Le Nouveau Front Populaire”) on the left. As a result, the centrist parties may need to fight against two extremes, reinforcing the probability of a populist victory in the second round.

Although neither the far right or far left parties seem likely to win an absolute parliamentary majority3, France’s next prime minister typically comes from the ranks of the majority party, or coalition, in the National Assembly. Consequently, President Macron may be forced to cohabit with a prime minister from the ranks of the far right or far left. In this eventuality, Macron would retain the lead on foreign policy, but the prime minister would lead on national policy decisions.

The policy agenda of the far-left Nouveau Front Populaire includes, among other things, the repeal of pension reform legislation, a higher budget for culture, an increase in the minimum wage, and a reintroduction of a wealth tax. According to the French think-tank IFRAP4, these policies would increase the French budget deficit by €193 billion per year.

The policy agenda of the far-right Rassemblement National includes a repeal of the pension reform, lowering value-added tax (VAT) on energy bills, and reducing France’s financial contribution to the European Union. IFRAP estimates that this programme would increase the French budget deficit by €8.5 billion per year.

If either of these policy programmes were to be implemented without compromise, they would likely lead to a loss of competitiveness for the French economy and higher financing costs for the French government.

A potential market over-reaction?

The market’s reaction to the snap elections in France demonstrates how fresh the eurozone sovereign debt crisis still is in investors’ minds. However, this time is different. French (and European) populist parties no longer want to leave the euro nor the EU, which makes a new existential EU crisis unlikely. Also, in our view the French electorate is expressing discontent about migration and austerity, similar to the trend we’ve seen elsewhere in Europe. The election is therefore about French fiscal risk, rather than euro break-up risk.

It should also be remembered that, once in charge, populists tend to adopt a more pragmatic approach when the realities of funding their ambitions become clear. The former UK prime minister Liz Truss provided a timely example of the dangers of losing the trust of international bond holders. In contrast, Italian prime minister Giorgia Meloni has demonstrated a more pragmatic approach. When Meloni was elected in October 2022, the spread between 10-year Italian government bonds and 10-year German Bunds widened to almost 250bps (Exhibit 2), but has since narrowed meaningfully as Meloni proved far less disruptive than anticipated.

In addition, even though we have seen some signs of risks spreading to other peripheral countries and European banks in recent weeks, a repeat of the EU debt crisis appears unlikely. EU institutions been reinforced since the crisis and member states, especially those targeted by the European Commission’s excessive deficit procedure, can now leverage mechanisms such as the Next Gen EU Fund to help cushion the required fiscal consolidation. The ECB is also better equipped to deal with any disorderly sovereign spread widening thanks to its Transmission Protection Instrument, while the ECB can better support the banking sector, thanks to its Single Supervisory Mechanism.


Volatility may be expected to remain relatively high in European financial markets in the coming months, and things could get worse before they get better. Markets do not like uncertainty and investors may have to wait for some time for the new French governments to clarify its intentions in terms of fiscal reform. They could have to wait until the autumn, when France – along with the six other countries targeted by the European Commission’s excessive deficit procedure – will have to provide more details on its plan to bring its public finances back into line with the stability and growth pact.

In the meantime, French and peripheral eurozone bond spreads could remain elevated, which would negatively impact investor sentiment towards European financial markets in general. However, the improving economic backdrop and attractive valuations, together with EU institutional and ECB monetary backstops, could yet transform any election-related sell-off into a buying opportunity.


1 Source: IFOP, LCI as of 24/06/2024
2 Source: IFOP, LCI as of 24/06/2024
3 289 seats
4 Source: Fondation pour la recherche sur les administrations et les politiques publiques
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