French President Emmanuel Macron arrives at a polling station to vote in the second round of French parliamentary elections in Le Touquet-Paris-Plage, France, on July 7.MOHAMMED BADRA / POOL/Reuters
Polls are often wrong – and they were dead wrong ahead of the French elections.
They said Marine Le Pen’s far-right Rassemblement National (RN) would emerge on top in the National Assembly. At the time, it was hardly a bold call. Ms. Le Pen’s party had won big in the European Parliament elections in early June and the first round of the French parliamentary elections later that month. After the second round, which she was expected to win, she would appoint a prime minister, turning centrist President Emmanuel Macron into a lame duck. The prospect of an untried, free-spending, vaguely Euroskeptic government rattled the French – and European – markets. Investors feared France would replace Italy in the dubious contest to cripple the continent’s economy with a Mont Blanc of debt.
Instead, the victor Sunday was the left-wing alliance, the Nouveau Front populaire (NFP), which won 188 seats, pushing the RN into third place, with 142 seats, after Mr. Macron’s centrist alliance, Ensemble, with 161. No party won an absolute majority, and the centre shrunk.
Say au revoir to the business-friendly agenda of Mr. Macron. His snap-election call after his trouncing in the European elections backfired spectacularly, through Ms. Le Pen’s humiliation in the second round of the French elections must have come as a honeyed consolation prize for him.
Now what?
Explainer: After French election, no party has a majority, so what comes next?
For the next few weeks, maybe months, the three voting blocs will jostle to form a coalition government – 289 seats are required for a majority – or a minority government that could survive a confidence vote. The possible variations and scenarios are virtually endless, though Mr. Macron would never get into bed with Ms. Le Pen’s mob. His apparent strategy is to try to eject Jean-Luc Mélenchon’s far-left La France Insoumise from the NFP and form an alliance with the other parties on the left – the Greens, the Socialists and the Communists. Meanwhile, the NFP, as the biggest bloc, will demand to appoint the prime minister of the National Assembly (La France Insoumise is the biggest party within the NFP and will have a lot of say in the negotiations).
A messy round of jostling and squabbling among the party bosses is certain, with an uncertain outcome. If a stalemate emerges – as seems likely, given the traditional lack of compromise among the big parties – Mr. Macron may urge the formation of a technocratic government under a neutral boss. In that case, another election would be called in a year.
The hung parliament and the political fragmentation and paralysis do not bode well for the French economy and anyone who had hopes of making money off it. The government’s ability to pass legislation that would encourage growth and trim the fat budget deficit, which is expected to land at 5 per cent of GDP in 2024, well beyond the European Union’s 3-per-cent limit, will probably get sidelined.
The prospect of another debt downgrade cannot be ruled out; ratings agency S&P Global demoted French government bonds in May, though they remain well within the investment-grade range. Were that to happen, French government bond spreads would widen over German bonds, considered the safest debt among EU countries. The spread surged before the election and has remained more or less intact since then. Portuguese bond spreads are narrower than France’s – not a pretty picture for the French Finance Ministry and Treasury.
The prospect of a government power vacuum, and what that means for economic reforms, may hurt more than just the deficit. France’s primary deficit (the budget deficit less interest payments on debt) is running at about 2.6 per cent of GDP. The June inflation rate was a relatively high 2.5 per cent. The country is running a hefty trade deficit. Italy, the EU’s traditional economic basket case, is posting better numbers on all these measures.
If there is any good news from the election it’s that the results could have been worse for investors. The markets were dreading an outright victory by Ms. Le Pen’s RN because its populist economic platform included unfunded tax cuts and a promise to lower the retirement age. The deficit – and debt, already at more than 110 per cent of GDP, up from 98 per cent in 2019 – would surely rise, perhaps soar.
But the left’s spending plans, which include undoing recent pension reforms, boosting the minimum wage, indexing wages to inflation and not flattening the debt or deficit trajectories, were they to be implemented, might batter French finances even more. The Paris public policy think tank Institute Montaigne said the NFP’s spending plans would require almost €180-billion in extra funds a year. Boosting taxes on the wealthy would cover only a small amount of that spending spree.
Investors may well avoid France for some time and put their loot somewhere else, such as the growth-friendly United States. It could take years for France to plant itself back on firm fiscal ground as the political turmoil persists. Italy was recently known as the sick man of Europe. France seems to be vying for that sorry title.