Three scenarios unfolding in France explain the euro’s surprising rise after Le Pen’s victory
The forecasts and surveys have been correct, but the results have been less ‘catastrophic’ than expected. In the first round of the French legislative elections held this Sunday, the far-right National Rally party received the most votes with 33% of the votes, ahead of the left-wing coalition New Popular Front (NFP, 28.5%) and the centrist Alliance for the Republic (22%). However, despite this seismic result, the euro is rising with great intensity in the markets (it fell with the rumor and rose with the news) and everything indicates that Europe is going to experience a day of growth in its stock markets and even in its sovereign bonds (the price of the 10-year French bond rises in the initial phase). What is happening so that this electoral result does not become a serious setback for European assets?
From the analysis house, Berenberg explained it clearly and directly in an analysis published this morning: “It’s no worse than expected: Although the far-right National Rally (RN) won the first round of French parliamentary elections, the outcome of the second round on July 7 and the National Rally’s style of shaping French internal policies remain very open. The rupee is up more than 0.5% against the dollar and at $1.0768 per unit, its highest in recent weeks, while stock markets across the Old Continent have rebounded.
match of Le Pen has taken a turning point in recent yearss, from being an organisation that openly calls for France to leave the euro, has gone on to become an organisation that wants to change the euro from within and that advocates some liberal economic measures such as tax cuts.
Political stagnation as a lesser evil
On the other hand, “as was the case in the European elections three weeks ago, the victorious RN’s numbers have fallen by around 2 points from what recent opinion polls had predicted. A hung parliament remains the most likely outcome. While it is possible that the RN will still win an absolute majority of seats in the second round, it now seems slightly less likely than before that the New Popular Front can take power and implement its costly agenda,” say Berenberg experts.
Although little has been said about this issue, the markets may be more fearful of the New Popular Front program than of the National Rally Party, since public spending and debt estimates tend to increase substantially with the proposals of the National Rally Party. left, which talks about increasing some expenditure items and lowering the minimum retirement age to 60 years, for example. On this side, everything indicates that the markets can breathe a little calmer for the time being.
According to last night’s TF1 projection, the RN could win between 240 and 270 seats, compared to 180-200 seats for the united left, only 60-90 seats for Macron’s party and 30-50 for the centre-right Republicans. FR2 gave a slightly different projection, with a wider range of 230-280 seats for the RN, a lower range of 125-165 seats for the left, 70-100 for Macron and 41-61 for the Republicans. According to both projections, The RN will fall just short of an absolute majority of 289 Out of 577 seats in Parliament.
However, the electoral majority system based on constituencies for the second round on July 7 could lead to results that differ from those suggested by the first round, Berenberg analysts explained. To some extent, center and left-wing parties seem willing to back third-place candidates, supporting each other to prevent an RN victory in their respective electoral districts.
Macron’s centrists want to do this in electoral districts where the best-placed left-wing candidate does not come from the far-left. Even far-left leaders, Jean-Luc Mélenchonis prioritising keeping the RN out of power, rather than opposing Macron’s centrists. “Tactical voting will almost certainly be less pronounced than in previous elections. However, it still reduces the chances of RN candidates – and to a lesser extent hard-left candidates – compared to the centre-lefts of the centrist Areas and the United Left on 7 July,” these experts say.
Three scenarios for France
Now, according to economists Bernburgthree possible scenarios open up for France and its economy. None of them is optimal, but the truth is that a large part of them is probably better than expected before these elections. Two of these scenarios would barely change the current state of France’s economy and politics.
-Stability: The most likely outcome is a hung parliament in which neither the far right, nor the united left, nor Macron’s centrists can muster a majority. In such a scenario, no (new) government will achieve much. France will remain as it is, plagued by high public deficits and a losing economy, but the difficulties will not get worse.
from the bank UniCredit see this scenario as the most likely in an analysis published this morning: “A hung parliament remains the most likely scenario… Thus, our base scenario is a hung parliament, in which no party obtains a clear majority of seats and political fragmentation increases. This would worsen the current deadlock, since, according to the constitution, the president cannot dissolve parliament within a year. If no party leader would be willing to accept a proposal to form a government under threat of an immediate censure, Macron could propose the formation of a government of technocrats until a new dissolution can be called,” they explain from the Italian bank.
From the French investment bank, Natixis, they agree and explain that “despite the huge number of possibilities in the second round, Our central scenario of a parliament without an absolute majority for the far-right Rassemblement National remains the most likely scenario And it was strengthened a little when the left coalition asked its candidates to withdraw if they came in third, as it did in almost 100 electoral districts,” say these experts with a deep knowledge of French politics.
-Worse than stability: Although the New Popular Front and the RN are polar opposites on issues of migration, culture and identity, they have all opposed Macron’s reforms. As a result, “We see the risk that Le Pen’s party and the sector of the left could still unite in parliament Without an absolute majority on some selected issues, to soften Macron’s pension reform and to improve the “purchasing power” of citizens, for example through a lower VAT on energy products or through additional subsidies, “they explain from Berenberg.
-Marin Meloni: While significantly less likely than the first two scenarios, Le Pen’s party could still win a majority of seats and install its candidate, Jordan Bardella, as prime minister. If so, he will likely focus on winning the 2027 presidential election, staying on the more moderate path he outlined during the campaign.
“Perhaps he will focus on a few signature policies (for example, getting tough on immigration) rather than on costly or disruptive fiscal promises.” Put another way, lE Pen may try to broadly follow the example of Italian Prime Minister Giorgia Meloni. To do this, she will likely have to convince RN voters, after a lengthy fiscal review, that most of her original fiscal ideas can only be implemented gradually over time, or only if she becomes president in 2027,” Berenberg analysts argue.
Radical policies
Despite everything, from this house they point out that any scenario would be worse for the French economy: “After years in which Macron promoted pro-growth economic reforms, the three scenarios would be changes for the worse: in the short term, they would possibly be a larger internal fiscal deficit and a more tense relationship with the EU if left and right cooperate in a partially hung parliament or if the RN wins a majority on July 7. In the long term, they could provide a small boost to private consumption. In the case of a Bardella government, relations with the EU could be considerably strained,” say the Berenberg experts.
A partial rollback of long-term reforms, some so-called “France First” protectionist measures in the Bardella government’s position, and a less favourable reputation among global investors will reduce trend growth and increase inflation. By adding pressure on the possibility of a downgrade, this will increase financing costs and exacerbate France’s financial problems over time.
French and Spanish loans
“Fundamentals suggest that the French yield differential over Germany should not be significantly lower than that of Spain in scenario one, and should not be higher than that of Spain in scenarios two and three,” these experts say.
The three main scenarios outlined involve a gradual worsening of the outlook for France and little progress on key European issues. But they do not point to an immediate Liz Truss-style crisis.
Fear of Popular Front program
On the other hand, there is the possibility that some of the most radical policies proposed by both sides will be implemented, generating an ‘earthquake’ in the French sovereign debt.
“The risk of a financial crisis, either in the summer or when the 2025 budget is to be prepared at home and presented to the EU this autumn, will increase significantly If any RN government gives up restraint that is currently pointing to, or if The New Popular Front takes power and implements its extremely ambitious and costly financial promises” say the Berenberg experts.
The United Left program in particular, which promises a “clear break” with Macron’s policies and a series of measures to be implemented within 15 days, will be very expensive, with additional annual expenditures of 25,000 billion euros in 2024, 100 billion euros in 2025 and 150 billion euros by 2027. “The result will be a fiscal explosionor if the left tries to fund it through higher taxes on wealth, income and companies, growth would suffer a setback, which in turn would raise serious concerns about fiscal sustainability. However, the first round result has reduced this risk. “It seems very unlikely that the partial left will win a majority and remain united after the election to actually implement such a radical proposal,” these experts say.
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