The Economic Implications of France's Snap Election

July 5, 2024

As the dust settles on the first major European Election of the week, attention now turns to the results of the second– France’s Parliamentary Election. On June 9, Macron sent shockwaves throughout Europe and the global economy, as he announced a snap Parliamentary election. His decision to dissolve the National Assembly was finalised after his centrist party suffered an embarrassing defeat in the European Parliamentary elections. With the magnitude of the loss, Macron took a significant political gamble in an attempt to prevent far-right majority power. The first round of snap elections took place on June 30, and the second round will conclude on July 7, this upcoming Sunday.

The results of the European Parliament elections and the announcement of the snap Parliamentary elections caused immediate shifts in the French markets. French equities switched from selling at a premium to a discount. The equity markets were only up 4.6% year-to-date while the STOXX 600 was up 10.8%. In the bond market, the French-German 10-year yield expanded to 80 basis points. The value of the Euro faced scepticism due to traders buying downside protection. The aftermath of the European Parliament elections led to the markets falling by 4% and France’s top three big banks (BNP Paribas, Credit Agricole, and Societe Generale) showed share prices falling by 10%.

Prior to the first round of elections, there were three proposed possibilities: Macron re-establishes his majority and sees off the threat from a growing far-right, the National Rally Party asserts its dominance and creates a cohabitation government, or a hung-Parliament.  The latter would allow Macron to elect a member from an alliance party as a Prime Minister. If the National Rally wins the majority of seats in Parliament, Macron will be faced with electing a Prime Minister of his opposing party. Jordan Bardella is the candidate for the National Rally Party. In this case, Macron would have dominant control over foreign policy, but Bardella and the right-swinging Parliament would have power over domestic policy, such as pensions, taxes, immigration, and employment. These domestic concerns are what will be most influential to the markets. The anticipation of these three scenarios is what investors will have had in mind as they predicted how policies will impact their financial decisions.

French and European business owners were mostly silent regarding the elections’ pre-first round and have largely remained so. Markets fluctuate, but the implications of the fact that few CEOs publicised their position showcases avoidance in offending their clients who have polarising views. After June 30, the results provided more relief for investors due to the fact that margins were closer than expected. The National Rally,  led by Marine Le Pen and her allies,  won 33% of the popular vote, the left-wing New Popular Front received 28%, with the Centrist party in third receiving 22% of the votes. The projection of a hung Parliament had become the most logical outcome. A hung Parliament is a scenario businesses can make peace with. One party will not preside over Parliament, so one ideology, pro-trade or anti-trade,  will not dominate. Following the first round, the STOXX 600 rose by 0.4% and the biggest banks (BNP Paribas, Credit Agricole, and Societe Generale) increased by 3% to 4%. The Euro also rose by 0.6%. The markets have not recovered to pre-election levels,  but the damage has been mitigated to an extent. Investors are more at ease,for there will not be a Frexit on the horizon.

For Macron to ensure the National Rally does not receive majority votes after the second round, he will need to seek alliances with the left-wing. Macron and the New Popular Front are willing to put their differences aside and strategize to ensure France does not become a far-right government with Le Pen and Bardella at the forefront. Candidates from the left and centrist parties are dropping out of the elections if three contenders are running in their constituency. This increases the chance of a hung Parliament and avoidance of a National Rally Party takeover.

The National Rally seeks to lower the level of VAT from 20% to 5.5% on energy bills and motor fuel, use tax breaks to raise salaries to 10%. Additionally, they are looking lower retirement age, restore wealth tax, and tackle immigration concerns by abolishing the right to French nationality for those born on french soil from foreign parents. The National Rally is known to be tied to Eurosceptic behaviour. Bardella will seek to revise EU trade agreements and prevent further growth, which could lead to instability in the bloc. Macron is a former investment banker who is a proponent of pro-business policies. Macron and his Renaissance Party advocate for the tax-and-spend program, increasing the minimum wage by 13 percent, bringing back the wealth tax, and capping energy prices. Both sides would lead to an increase in a budget deficit. A cohabitation Parliament results in the struggle for power between the National Rally and the Renaissance Party. The future of this outcome would depend on whether the two opposing sides can marry their viewpoints, or if their repelling policies are too strong to find stability. A hung parliament’s effect on the financial sector will be more predictable. This is because without one party having a majority say on passing reforms, the economy will likely stay linear, and French equities should recover at the conclusion of the elections. With the absence of radical policies, this will not create significant changes in the financial markets.

Business owners are mostly silent regarding this election, and the implications for dividend policies are further unclear. It is unlikely that any immediate cuts to dividends will be enacted, but France's relationship with the single market, freedom of movement and its relationship with the ECB, will certainly be called into question and the long-term policy is unclear. The viability of all parties to implement their policies beyond a reasonable fiscal budget will concern investors seeking pragmatism over ideology. Few CEOs publicise their stance on the election – this may be due a desire not to offend their clients and customers who have polarising views – or, that in a state of uncertainty, they do not want to offend either side of the political spectrum who will ultimately dictate domestic policy. Some business owners have come to accept a National Rally’ victory. Bardella has shown he is willing to sway from his party’s conventional policies to appease more voters, and he has stated the appeal of pragmatism. He has also affirmed France’s participation in NATO. This distances them from pre-conceptions that the National Rally has pro-Russian sympathies, although Bardella has ruled out the supply of long-range missiles being supplied to Ukraine. Macron and his pro-business policies are a comforting option for CEOs, but the National Rally Party’s protectionism style will seek to enhance France-based business. Immigration is at the forefront of this debate and a significant topic of concern for entrepreneurs. Businesses are concerned about the National Rally Party’s aim to control immigration – which could lead to a shrinkage in the labour pool.

Macron and the Left have already begun making concessions, with candidates standing down in certain constituencies to allow an alliance with a sole purpose of defeating the far-right. In Economic terms, it is difficult to assess how the centrist ideology of free-market liberalism will align itself with the socialist ideology of higher taxation and a generous welfare state. This is not an alliance of aligned views as much as a method to ensure the National Assembly does not take power in parliament. These elections are not ideal for anyone, but a hung Parliament appears to be the likely result and most reassuring turnout for businesses. A hung Parliament will lead to less volatility in the markets than other outcomes, such as sweeping victory from the far right. The leading questions are: will President Macron and his alliance parties be able to keep the National Rally Party from securing majority votes in the second round of elections? And, will economic pragmatism prevail over cultural disillusionment? The latter looks unlikely.

Written and Researched by Annie Jennings 

Annie Jennings