France heading towards economic disaster. Alarm bells ringing for Europe

The French Earthquake: Political and Economic Implications

The French earthquake is not only of a political nature.
The upcoming early elections, with the likely victory of the far right, risk leading France towards an economic disaster.

The financial markets are already trembling at the prospect of Rassemblement National gaining more power in the second-largest economy of the Eurozone.
This scenario could stall parliamentary works and open even bigger holes in the already stretched French budget through populist spending.

After Macron called for early elections, the financial shocks were immediate.
The euro slipped for two consecutive days against the dollar, the CAC 40 stock market index in Paris lost about 3%, and the yield on 10-year government bonds, a barometer of economic and political risk, reached new highs for the year.

The Economic Turmoil in France

The French vote on June 30th takes place in a complicated context regarding the State’s finances.
France has recently experienced a downgrade in its solvency by the rating agency Standard & Poor’s, citing political fragmentation as a risk factor.
While Paris cannot be considered as close to the danger level of Italy, burdened with higher debt, bond buyers see French debt as an investment with a risk level similar to that of Portugal.

Macron has interpreted the market alarm as an additional signal to convince voters to mobilize against Le Pen’s party.
The fluctuations in the debt market, he pointed out, quickly impact the real economy.
Governments with increasing financing costs and massive debts have less liquidity for hospitals, schools, and public transportation.

Minister of Finance Bruno Le Maire was more explicit and alarming: “Understand that if the Rassemblement National program goes through, we will close factories and lose jobs.”

The Future Economic Scenarios

The potential political instability poses a credit risk, given the challenging fiscal framework that the next government will inherit.
The weight of French debt is set to continue expanding, reaching 115% of GDP by 2027, a steep progression from 98% in 2019 and 64% in 2007.

After overcoming the pandemic and the energy crisis, France is now forced to tighten its belt.
Paris will cut €20 billion in public spending this year and at least another €20 billion in 2025.
The deficit at 5.5% of GDP requires a reconsideration of expenditures.

The Extremist Right’s Economic Impact

Although the far-right party has not published an economic manifesto for the elections, the Institut Montaigne think tank estimated that Le Pen’s economic policies in the 2022 vote would increase the deficit by an incredible €101 billion per year.
A government under the Rassemblement National with a radical change in economic policies would soon face external constraints difficult to bypass, in the form of financial markets and the EU.

The rising star of the far-right, Bardella, is beginning to realize that Le Pen’s costly proposals could undermine the party’s credibility.
The following weeks will provide the first answers regarding the resilience and credibility of the economic recovery in France and across the EU.