French president calls an early election – will it backfire?
Why has French president, Emmanuel Macron announced an election three years early? How did financial markets react?
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.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Alex Rankine is Moneyweek's markets editor
-
8 of the best houses for sale with wine cellars
The best houses for sale with wine cellars – from a Huguenot townhouse in a conservation area in Spitalfields, London, to a Georgian manor house in Lincoln with a barrel-vaulted wine cellar
By Natasha Langan Published
-
Twenty 'finfluencers' questioned under caution by the UK regulator
The individuals were interviewed voluntarily using the Financial Conduct Authority’s criminal powers
By Chris Newlands Published
-
How does France's economy compare to the rest of Europe?
What state is France's economy in and how is it looking compared to Spain, Portugal and Germany?
By Alex Rankine Published
-
Working from home: is it working?
While Labour plans to make working from home the legal default, some employers are calling workers back into the office. What does the future hold?
By Simon Wilson Published
-
Israel conflict: the concerns of a wider war
Israel's raids into Lebanon have raised fears of a wider war
By Dr Matthew Partridge Published
-
Why did Britain give the Chagos Islands back?
What is the deal with the Chagos Islands and what role do the Tories play?
By Emily Hohler Published
-
Can Lebanon's struggling economy survive another war?
Lebanon's economy has been in dire straits for decades, and now it is yet again on the brink of war. Are better times on the horizon?
By Simon Wilson Published
-
Modi’s reforms set Indian stocks on fire
Indian stocks pass a new milestone, but global fund managers are holding back. Are there signs of overheating?
By Alex Rankine Published
-
How to invest in the quiet market months
Here's how to invest in the quiet market months, since “sell in May” hasn’t paid off this year.
By Cris Sholto Heaton Published
-
Mario Draghi delivers a wake-up call on the EU economy. Can it be revived?
Draghi, the former ECB chief has delivered his long-awaited report into the sluggish EU economy and what can be done to revive it.
By Simon Wilson Published