France still has the power to shake up European markets

The Uncertain Future of French Politics and its Impact on Europe

The chaos in French politics has not been resolved with the first round of voting on June 30, and the country’s uncertain political future could lead to a market collapse and a loss of confidence towards Europe.

All eyes are on the runoff on July 7, as the surprise party of Marine Le Pen could secure between 230 and 295 seats.
With 289 seats needed for a majority and the high possibility of tactical voting in the second round, Rassemblement National is believed to have only a slim chance of forming the next government on its own.

Analysts predict that the uncertainty, which markets dislike more than anything else, will persist.
It’s not just about the stability of French national bonds or the strength of the common currency.
The French political deadlock could also lead to a clash with Brussels over budget rules, potentially undermining the economic credibility of the EU.

Possible Scenarios and Market Concerns

None of the anticipated future scenarios in France are particularly appealing to markets.
Paradoxically, a single-party government led by Rassemblement National would result in two years of effective deadlock for France, given the broad powers of the presidency outlined in the French constitution.

Some analysts point out that it might not be a single leader posing the biggest threat to French financial stability, but rather a complete absence of leadership.
A paralyzed government could face attacks from both extreme ends of the political spectrum, with both the right and left opposing Macron’s pro-growth reforms.

Long-standing concerns in the market could suddenly intensify if high debt levels erode fiscal policy credibility or sovereign creditworthiness, potentially leading to monetary policy paralysis and increased inflation pressures.

Implications for France and the EU

The Eurozone has evolved since the 2011 crisis, implementing measures to reassure investors.
However, these safeguards might not suffice to counterbalance all the remaining shortcomings of the monetary union, especially if challenged by one of its economic powerhouses.

Even though the markets did not crash immediately after the first round of voting in France, signaling less success for Le Pen’s party than expected, the turmoil is far from over.
The prospect of a hung parliament post-election should not comfort investors, as it could lead to budget gridlock and further difficulties with Brussels.

Market participants are no longer as complacent towards fiscal issues in France and other countries, and as we approach the end of the year, the market sentiment may shift towards less tolerance, posing challenges for fiscal policies across Europe.