Investors are concerned about the potential for a financial crisis in France if the political center collapses in upcoming parliamentary elections, leading to far-right populists taking control of the country. President Emmanuel Macron called for snap elections following a defeat to the far right in a recent vote, causing turmoil in the markets for French stocks and government bonds. There is speculation that the far-right National Rally, led by Marine Le Pen, could become the dominant force in parliament, posing challenges for reducing France’s substantial government debt and budget deficit.
The possibility of the National Rally implementing expensive fiscal and protectionist policies could lead to a financial crisis similar to what occurred in the UK after Liz Truss announced plans to increase borrowing for tax cuts. France’s finance minister, Bruno Le Maire, acknowledged the risk of a financial crisis due to the political turmoil triggered by Macron’s decision to call snap elections. Credit rating agencies are closely monitoring France, with S&P downgrading the country’s credit score in May due to a deterioration in the budgetary position and concerns about the budget deficit narrowing in the future.
Market turbulence has already been observed, with the interest rate on France’s government bonds being higher than Portugal’s, one of the countries bailed out during the European debt crisis. The yield on France’s benchmark 10-year government bonds has risen, and the spread between French and German government bond yields has widened, indicating investor unease. Stock markets have also reacted negatively, with France’s benchmark stock index experiencing larger declines compared to German and pan-European indexes, and the euro weakening as well.
Polls have indicated that Macron’s centrist bloc is trailing behind the National Rally and left-wing parties in the upcoming elections, raising concerns about the potential for increased public spending and tax cuts proposed by the National Rally. Market analysts caution that these policies could further strain public finances and impact France’s sovereign rating. Moody’s has labeled the snap elections as increasing the risks to fiscal consolidation in France, presenting a credit negative situation. Despite the risk of a financial crisis, the European Central Bank is seen as having the capability to prevent a genuine crisis in the French government bond market, as long as the country implements sound fiscal policies.
In conclusion, the upcoming parliamentary elections in France present a significant risk of a financial crisis if the far-right National Rally gains power and implements costly fiscal policies. The uncertainty surrounding the elections has shaken financial markets, with fears of widening budget deficits and increased government debt contributing to market turmoil. French government bond yields have risen, stock markets have declined, and the euro has weakened as investors react to the potential political and economic challenges facing France. While the European Central Bank could intervene to prevent a crisis in the government bond market, the situation highlights the importance of maintaining sound fiscal policies to ensure financial stability in France.
