French stocks and the euro rallied on Monday after results from the first round of elections suggested the far-right will inflict a heavy defeat on President Emmanuel Macron but fall short of an outright majority in parliament.
France’s CAC 40 index, which represents 40 of the largest companies listed in Paris, rose 2.7% at the open. The index closed 1% higher on the day, but is still almost 6% below the level before Macron called early elections on June 9.
Bank stocks, a bellwether for the economy, pared some of the heavy losses they suffered in recent weeks. Shares in BNP Paribas closed 3.6% higher, while Societe Generale and Credit Agricole rose 3.1% and 2.8%, respectively.
The euro, which tumbled after Macron’s surprise election announcement, briefly reached its highest level against the dollar in more than two weeks on Monday.
Yields on French government bonds, or the returns investors demand for the risk of holding them, were largely unchanged after rising sharply in recent days compared with their ultra-safe German equivalents. On Friday, the risk premium on German government debt hit its highest level since the euro crisis more than a decade ago.
While Macron’s defeat is likely to be bad news for France’s precarious finances — a hung parliament could mean gridlock — worst-case scenarios appear to have receded for investors. Just two weeks ago, they were worried that France was heading for a financial crisis similar to Britain’s 2022 stock market crash, which was caused by unfunded tax cuts implemented by former Prime Minister Liz Truss.
After an unusually high turnout on Sunday, Marine Le Pen’s far-right National Rally party led the first round with 33.15% of the vote, while the left-wing New Popular Front coalition came second with 27.99%. Macron’s Ensemble alliance dropped to a dismal third place with 20.76%, according to final results published Monday by the French Interior Ministry.
“The outcome is likely better than feared (for markets), but not as good as the status three weeks ago before the elections,” Mohit Kumar, Jefferies chief economist for Europe, wrote in a note on Monday. “The immediate response is to hold a relief meeting.”
In the first round, investors feared that voters would elect a far-right or far-left parliament that would commit to more spending, further increasing the country’s already high public debt and budget deficit — the difference between what the government spends and what it collects in taxes.
At the end of last year, French national debt stood at 110.6% of gross domestic product. The budget deficit reached 5.5% of GDP, one of the highest among the 27 countries in the European Union.
Sunday’s vote may have tempered the risk of extreme fiscal policy in Europe’s second-largest economy, but investors remain concerned that a new, divided parliament will be unable to tackle the country’s debt problem.
“We could still face years of political paralysis in France, with a stagnation of the reform process,” Kumar said, referring to Macron’s policies aimed at boosting economic growth.
‘Fixation’ in store?
Several other analysts also see a hung parliament as the most likely outcome, which would mean no party has a majority of seats.
That could result in a “stalemate,” according to Berenberg chief economist Holger Schmieding. “In this case, a new administration would not get much done,” he wrote in a note on Monday.
Even worse than a stalemate would be if Le Pen’s National Rally were to join forces with sections of the left to cut taxes and undo some of Macron’s reforms, such as raising the retirement age to 64 for most workers.
The National Rally has pledged to cut VAT on electricity, fuel and other energy products from 20% to 5.5% and suspend it completely for dozens of basic needs. Meanwhile, the left-wing New Popular Front has pledged to raise the minimum wage and freeze prices on many essential goods.
A third scenario – dubbed “Marine Meloni” – could see Le Pen follow the example of Italian Prime Minister Giorgia Meloni and focus on signature policies such as a tough stance on immigration, while toning down “more costly or disruptive fiscal promises,” with an eye to winning the 2027 presidential election, Schmieding said.
“The three main scenarios above entail a gradual deterioration in France’s prospects… But they do not point to an immediate Liz-Truss-style crisis,” he said.
In the long term, there could be a partial rollback of some of Macron’s reforms, slowing economic growth and increasing inflation.
“Combined with the prospect of credit rating downgrades, this would increase borrowing costs and worsen France’s fiscal problems over time,” he added.
Credit rating agency S&P downgraded the French government’s credit rating in May, citing a “deterioration in the fiscal position,” although it still believes the country has sufficient capacity to repay its debt.
With the final round of voting scheduled for July 7, the outcome of the French election is still uncertain, and the door is still open for Le Pen’s National Rally to win a majority.
“We doubt this morning’s improvement in sentiment will continue as we head into the next round of voting,” Rabobank analysts wrote in a note.
Anna Cooban contributed to the reporting. This story has been updated with additional information.
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