French president Emmanuel Macron “is going for broke”, says Clea Caulcutt for Politico. Macron’s centrist party received a drubbing at the weekend’s European elections, securing just 14.6% of votes, less than half the figure for Marine Le Pen’s National Rally party. Rather than retreating to lick his wounds, Macron has shocked his own allies by calling a snap parliamentary election three years ahead of schedule.
This “maverick gamble” appears designed to knock Le Pen “off her stride”, but could well backfire. There are “echoes” of David Cameron’s attempt to silence Conservative eurosceptics by calling the Brexit referendum.
In a few weeks’ time, France could be run by its first far-right government since the Second World War. Jordan Bardella (pictured), Le Pen’s 28-year-old protégé, would become prime minister. Periods of “cohabitation”, with a president and prime minister from opposing parties, are not unprecedented, although one hasn’t happened since 2002.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
This scenario would see Macron, as president, retain control over foreign and military affairs, says The Economist, while a National Rally government would run domestic and economic policy. Historically, “French prime ministers tend to get the blame for everything that goes wrong, while presidents can float above the fray”.
How are markets reacting to the early election?
Markets reacted sharply to news of the snap poll. The euro fell against the dollar on Monday, while the CAC 40 stock index dropped 2.5% over the first two trading days of this week. France’s ten-year bond spread against Germany climbed to its highest point this year, a sign investors think lending to the French government is getting riskier.
French bank shares fell particularly hard on Monday, says the Financial Times. The sector could be targeted by windfall taxes. The National Rally’s “protectionist, big-spending agenda could put Paris into conflict with Brussels and alarm investors”. Two scenarios appear possible, Stéphane Déo of Eleva Capital tells Sophie Rolland in Les Echos. Either the National Rally wins enough seats to form a government and implement its free-spending policies, or the elections produce a hung parliament, with limited coalition options, in which case France risks “becoming ungovernable”.
While financial markets have already reacted strongly, they do not seem to have fully priced in the risk of political chaos ahead. French public-sector debt sits at 110% of GDP, says Melissa Lawford in The Telegraph. Ratings agency S&P Global recently downgraded the country’s sovereign debt rating. Le Pen’s costly plans to reduce the retirement age and cut taxes would hardly help matters. If bond markets revolt, then France could find itself heading for its own “Liz Truss moment”.
There is one glimmer of hope for European equities. Last week the European Central Bank (ECB) cut interest rates by 0.25 percentage points, the first reduction since 2019 – and cheaper money usually boosts stock prices. The ECB’s move breaks a 25-year precedent, says John Authers on Bloomberg. Since its inception, the Frankfurt-based bank has never cut rates unless the US Federal Reserve had already done so first. But with America still contending with sticky inflation, the ECB is “setting out on its own”.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
-
How much tax do I pay on investments?Are you worried about taxes biting into your profits? We explain how much you’ll pay and look at ways to keep more of what you earn through investing
-
Inheritance tax receipts surge by 10% – can you reduce your IHT liabilities?Bereaved families are paying more than ever in inheritance tax, but there are some ways to reduce your bill.
-
Out of America's shadow: Why Trump's tariff chaos may be good for non-US stocksOpinion Upending global investment and trade could benefit other countries at the expense of the US market, says Cris Sholto Heaton
-
Will Putin invade Europe? Why investors know Russia is a paper tigerOpinion Markets are right to ignore talk of Putin invading Europe, says Max King.
-
Why French far-right leader Marine Le Pen has been banned from running for officeMarine Le Pen, presidential candidate and leader of France's right-wing National Rally party, has been barred from standing by the country's judges.
-
Five years on: what did Covid cost us?We’re still counting the costs of the global coronavirus pandemic – and governments’ responses. What did we learn?
-
Protests erupt in Turkey after the arrest of president Erdogan's rivalTurkey's president has jailed his main political opponent, Ekrem Imamoglu
-
Can investors stay optimistic about Russian stocks?Investors look to profit from Russia as Trump pushes for peace in Ukraine. But is it worth the risk?
-
The benefits of a stock bubbleOpinion We tend to think of stock bubbles as bad things but, as the dotcom craze shows, good things can come from them, says Matthew Lynn
-
Friedrich Merz proposes 'radical' spending package for GermanyGermany's chancellor designate Friedrich Merz wants to scrap restraints on borrowing and allow for much higher defence spending
