An IMGW News Report
The recent European Parliament elections have sent shockwaves across Europe, with the most profound impact felt in France. Here, the far-right has emerged stronger than ever, affecting even the equities market, reflecting deep political and economic uncertainties.
Unprecedented Market Reaction
French stocks tumbled significantly as the possibility of a far-right government, with the left as the main opposition, shook European financial markets. This sell-off has wiped nearly €100 billion off the value of Paris’s main index. The Cac 40 index is on track for its worst week since March 2022, having dropped more than 6% in five trading sessions since President Emmanuel Macron’s sudden decision to call snap parliamentary elections.
Investors are anxious about the emergence of a radical government with substantial spending plans. The potential rise of Marine Le Pen’s Rassemblement National (RN) has heightened these concerns, leading to a significant market downturn. Finance Minister Bruno Le Maire warned that a far-right victory could result in a “debt crisis” similar to the UK’s gilt market turmoil under former Prime Minister Liz Truss.
Economic Policies Under Scrutiny
RN’s proposed policies, such as cutting value-added tax on energy, fuel, and food, would cost €24 billion annually, according to Macron’s campaign. James Athey, a fund manager at Marlborough Group, highlighted the potential fiscal irresponsibility and the instability a far-right government might bring, which markets abhor.
Political Alliances and Projections
Four left-wing parties have formed a unity pact, unveiling a joint programme with unfunded spending promises worth tens of billions of euros. These include scrapping Macron’s planned pension age increase, freezing food and energy prices, hiking income taxes for the wealthy, and reintroducing the wealth tax. The left’s programme also rejects EU budgetary rules that require a deficit of less than 3% of GDP.
Projections based on European Parliament election results suggest that only about 40 of Macron’s MPs could make it to the second round, with the vast majority of the new assembly potentially supporting massive spending commitments. This scenario has amplified concerns about the French market’s future, with possible rating downgrades and fears of a Eurozone breakup.
Broader Market Impact
The turmoil has extended beyond the French equity market. The euro has fallen against the dollar, and the Stoxx 600 index is on track for its worst week since October last year. Indices in Germany, Italy, and Spain have also lost ground, while Wall Street’s S&P 500 index has risen by 1.6% this week. Barclays has revised its advice to clients, recommending caution on European equities due to the political situation in France.
Banking Sector Under Pressure
French banks have been hit hard, with Crédit Agricole, BNP Paribas, and Société Générale experiencing significant drops this week. French government bonds have also suffered, with the yield gap between French and German benchmarks reaching its highest level since 2017.
The European Parliament elections have highlighted the growing influence of the far-right in France, sending ripples through the financial markets and raising concerns about future political and economic stability. As investors and policymakers navigate this new landscape, the implications for France and Europe are profound and far-reaching.
Reference:
- Steer, G., McDougall, M., Hall, B., & Abboud, L. (2023, June 14). French stocks head for worst week since 2022 over fears of populist election win. Financial Times. Retrieved from Financial Times