Economic Stakes in France's Second Round Election: What to Expect

Explore the economic stakes in France's second-round election. Analysts predict increased fiscal risks if Marine Le Pen's National Rally secures a majority, though it's unlikely.

As French citizens prepare to cast their ballots in the decisive second round of legislative elections, the future direction of France’s legislative and economic landscape hangs in the balance. This vote will determine the makeup of the French National Assembly, with 577 seats up for grabs and 289 needed for an absolute majority.

Understanding the potential economic impacts of France's decisive second-round legislative elections.

Latest Polls: Far-Right Expected to Fall Short

In an effort to prevent vote splitting against the far-right, President Macron’s centrist alliance and the leftist New Popular Front have strategically pulled over 200 candidates from the runoff ballots. This tactical move, known in France as the Republican front, aims to consolidate votes against Marine Le Pen's National Rally (RN). Projections based on recent surveys indicate that RN and its allies are expected to secure between 190 and 250 seats. While significant, this would still fall short of the 289-seat threshold needed for an absolute majority.

Marine Le Pen has warned of potential political gridlock if no party secures an absolute majority. "If no one gets an absolute majority, and we’re the only ones who can, no bill will be passed," she stated in a recent interview with CNews.

Hung Parliament or RN's Absolute Majority: Implications for the Economy

Analysts suggest that a lack of an absolute majority would constrain the implementation of RN’s radical policy agenda, potentially avoiding a fiscal crisis similar to the UK's recent experience under Liz Truss. ABN Amro's senior economist Bill Diviney and rates strategist Sonia Renoult note that even if RN secures a majority, market dynamics and EU regulations would likely mitigate the worst-case scenarios. However, they acknowledge that fiscal slippage could increase compared to the current administration.

Following the first round, the French-German 10-year spread narrowed slightly, but analysts expect it to widen again in the coming quarters. Alexandre Stott, a market strategist at Goldman Sachs, highlights that the immediate focus of any new government will be the 2024 budget. The outgoing government aimed to reduce the deficit to 5.1% of GDP from 5.5% in 2023, with planned spending cuts.

Potential Economic Policies and Their Impact

A hung parliament could lead to minor fiscal deviations from current guidance, while an RN majority could quickly implement costly proposals, such as a VAT cut on energy. This measure, estimated to cost around 0.4% of GDP annually, could further stress public finances. Goldman Sachs predicts that France's public debt could exceed 115% of GDP by 2026 under a far-right majority.

Related: European Financial Markets Brace for Turbulence as French Parliamentary Elections Approach

Inflation and Economic Uncertainty

Stott outlines three potential channels through which the election outcomes could impact inflation. First, RN's proposed VAT cut on energy could temporarily lower French headline inflation by up to 1.4 percentage points. Second, the overall null-to-negative impact on aggregate demand could slightly reduce core inflation. Third, RN's proposals on competition and immigration policy could potentially increase core inflation, despite conflicts with European treaty law.

The economic stakes in France's second-round election are significant. Whether facing a hung parliament or an RN majority, the implications for fiscal policy and market outlook are profound. As voters head to the polls, the future of France's economic landscape remains uncertain, hinging on the legislative power balance that will be determined in this crucial vote.

Source: Euronews