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Hung parliament likely, leading to slow political decision making and probable limited deviation from current policies.
The French second round election has brought a surprise loss in position for the far-right Rassemblement National (RN) party, who came in third with 143 seats despite leading the polls ahead of the elections. It was the far-left party The New Popular Front (NFP) who came first with 182 seats, with President Emmanuel Macron’s centrist coalition Ensemble in second, winning 168 seats.
Centre-right party Les Républicains (LR) got 45 seats, whilst right party La Droite (LD) got 15 seats. Leftist party La Gauche (LG) got 13 seats, whilst centre party Le Centre got 6 seats. Regional and fringe parties got the remaining 5 seats of the 577 seats in the Assembly.
French National Assembly elections 2024 – breakdown of seats
Source: French Ministry of the Interior, as at 8 July 2024.
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In our view, we are unlikely to see France deviate in any major way from any current policies or get into unorthodox fiscal expansion. Instead, we believe that France will continue to adhere to the fiscal program of deficit reduction governed by the European Union (EU).
Macron’s move to halt the far-right has paid off
Macron’s Machiavellian move, to call for a surprise snap election, after the strong showing by the RN party at the European parliamentary elections in June, seems to have paid off. We covered this ahead of the elections in a report entitled ‘Machiavellian or Tete Brûlée’ .
The call for a Republican front to rise against extremist parties seems to have come through, with the so-called French tendency for a solidarity vote. The intensive week of political jockeying ahead of the second round, where various candidates from the centre and the left tactically pulled out of the race to reduce the chances of the far-right RN party winning, has borne fruit. Our first round response, 'Melonomics rather than Trussonomics, discussed this.
A lack of clear leadership
Jean-Luc Mélenchon, the leader of the winning far-left NFP party has ruled out a coalition with Macron’s Ensemble. This could allow the leftist party LG, centre-right LR, and right-wing LD to seek alliances and/or enter into a governing coalition with Ensemble, which sits at the centre. This could end up as the best-case scenario for Macron, in what was a pretty precarious situation for his party prior to these elections.
In any case, France is left with a split parliament, and no party with an absolute majority in the Assembly, which means that there will be a need for coalitions to form on any specific policies. Unlike periods of cohabitation, when there was clear leadership in parliament from an opposition party to the French president, this split assembly could lead to political apathy at worst, or certainly slow political decision making.
Market unfriendly polices may struggle for support in the parliament
The market might initially worry that a win by the far-left that has fiscal expansion plans, and policy initiatives that would increase wage costs for corporates, would be negative for the French economy. We would however highlight that the far-left party did not achieve an absolute majority, and therefore does not have control of parliament, and therefore will find it hard to find backing for policies that are overly aggressive. Therefore, in our view, we are unlikely to see France deviate in any major way from any current policies or get into unorthodox fiscal expansion. Instead, we believe that France will continue to adhere to the fiscal program of deficit reduction governed by the European Union (EU).
The 2027 French presidential election represents the key investor risk
As a result, our conclusion remains that the selloff in French equities ahead of the elections could be overdone, especially given that a large proportion of the French index generates revenues and profits from outside France (we estimate >80%1). We would expect French bond spreads to gradually narrow again, as the market gets to understand the situation more clearly, and as a Prime Minister gets nominated. This could take some weeks, until agreement between parties gets reached.
In any case, the spectre of the French presidential elections in 2027 looms nearer and shouts louder. This represents the key risk that investors should focus on, should the French centrist coalition not have a charismatic leader to take over from President Macron’s who will be coming to the end of his second and final term as president.
Sources
1Source: Martin Currie internal estimates as at 30 June 2024.
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