French president calls an early election – will it backfire?

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. 

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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”.

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