French election stalemate leads to worries about spending plans

8th Jul 2024 12:30

(Sharecast News) - France faced an uncertain political future on Monday after voters rejected the idea a of government led by Marine Le Pen's far-right National Rally but also failed to endorse fully centrist or left-wing alliances, with uncertainty around the spending plans of any incoming administration causing concern among analysts.

Despite the stalemate, the French stock market stayed in positive territory after the leftwing New Popular Front (NPF) won an unexpected 182 seats. The euro slipped against the US dollar to $1.08.

President Emmanuel Macron's centrist Together alliance won 163, while Le Pen's far-right National Rally (RN) trailed in third with 143 seats after leading polls in the first round. Incredible tactical voting made sure there would be no repeat on Sunday.

Prime Minister Gabriel Attal announced his resignation on Sunday in response to the results, although by Monday Macron had asked him to stay on, for the time being.

"These results hardly point to any definitive outcome as far as the selection of a new premier is concerned. A prime minister from the NFP could head a minority government, albeit with little room to implement the left alliance programme. Alternatively, Macron might try to appoint a technocratic prime minister," said Mateusz Urban, senior economist at Oxford Economics.

Despite high turnout estimated at about 67%, no group won the absolute majority of 289 seats required to form a government. The left-wing alliance is made up of the Socialist party and the far-left France Unbowed, which made the largest gains winning between 83-90 seats,

France Unbowed's leader, the hard-left Jean Luc Melenchon, insisted that he would implement his radical policies, including rolling back Macron's pension reforms, freezing the price of some consumer staples, raising the minimum wage and implementing a wealth tax.

"These are policies that could send shivers down the spine of investors. France has a budget deficit of 5.5%, and concerns about its fiscal health have pushed the French - German 10-year bond yield spread to its highest level since the sovereign debt crisis," said Kathleen Brooks, research director at trading firm XTB.

"If the far left do form a government, their policies, if enacted, would certainly aggravate France's fiscal position, and put the country on course to clash with Brussels over a breach of fiscal rules."

Ratings agency S&P said the next government's approach to public finances, and to economic and budgetary reforms, "could be key to determining France's creditworthiness".

"Our stable outlook on France reflects our expectations that real economic growth will accelerate and support budgetary consolidation, albeit not enough to bring down its already elevated general government debt-to-GDP ratio," S&P said in a statement.

"Our 'AA-/A-1+' sovereign credit ratings on France would come under pressure if economic growth is materially below our projections for a protracted period, or if France cannot reduce its large budget deficit and if general government interest payments, as a share of government revenue, increase beyond our current expectations."

Reporting by Frank Prenesti for Sharecast.com