National Bank of Canada : The impact of France’s hung parliament

Geopolitical Briefing

Economics and Strategy

July 8, 2024

The impact of France's hung parliament

By Angelo Katsoras

President Macron's decision to hold parliamentary elections following the EU vote has backfired. His gamble that support for the far right and far left would collapse in favour of his party once the future of France was on the line did not pay off.

Although agreements between the far-left New Popular Front and Macron's coalition, Ensemble, to withdraw candidates in over 200 ridings succeeded in relegating the far-right National Rally party to third place, Macron's coalition, which is expected to lose around 86 seats, is all the more squeezed between the far right and the far left. Indeed, despite underperforming expectations, the National Rally's seat total will increase from 89 to 143 seats. As for the New Popular Front bloc, which won the most seats (180), it consists of several parties, from the far-left La France Insoumise, the Greens, and Communists to the more moderate Socialists. It is very likely that, in addition to arguing with Macron's forces, it will have to contend with significant internal disagreements among its members.

Moreover, while markets may breathe a sigh of relief that the denial of a majority to either the far right or far left reduces the risk of overspending and of seeing a spike in bond yields, Macron now faces a country mired in deadlock. This poses major challenges not only for France but also for the EU.

Source: "French leftwing parties jostle to lead new government after unexpected victory," Financial Times, July 8, 2024

How France could be impacted by a hung parliament

• While a hung parliament makes an increase in deficit-financed spending less likely, it will make it nearly impossible to pass further economic reforms or spending cuts. The president has broad authority over defence and foreign policy, but Parliament has control over budget and spending measures.
• While the far right and the far left are far apart on most issues, they do have some things in common. For example, they both support lowering the retirement age for state pensions, which Macron raised from 62 to 64. The National Rally supports bringing the retirement age back to 62, whereas the New Popular Front is in favour of giving people the right to retire at 60. We believe the market is underpricing the risk of the two sides agreeing to make changes to the state pension system.
• France currently ranks third in terms of most indebted country in the EU, behind Italy and Greece. Its debt-to-GDP ratio has risen to 112%, up from 86% in 2019 and 65% in 2007. The European Commission recently identified France as one of the countries violating fiscal rules on account of its high debt and deficit levels. However, unlike tiny Greece during the early 2010s, France's systemic importance prevents the EU Commission or the European Central Bank from taking tough measures.

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Impact on EU

• The political and economic challenges confronting France today are similar to those facing Germany, where a deeply unpopular coalition government is struggling with the lowest economic growth in the G7. German exports are threatened both by global trade tensions and by China's increasing recourse to home-grown alternatives. With the EU's two largest economies distracted by their internal challenges, the EU will find it much harder to advance its agenda.
• France's political deadlock and high debt levels make it even less likely that countries like Germany and the Netherlands will agree to joint borrowing at the EU level. The EU COVID aid package is likely to remain a one-off. In fact, German Finance Minister Christian Lindner's stated recently that any move by the ECB to support French debt after the election would raise serious "legal and constitutional" questions.1

Bottom line: Political deadlock not only threatens France's long-term growth prospects, it also means the country will be too distracted by domestic issues to provide EU leadership. This state of affairs, combined with Germany's difficulties, raises the risk of a leaderless EU at a time when it is grappling with low growth and heightened geopolitical tensions worldwide. Finally, France is the latest European example of where support for traditionally centrist parties has declined in favour of alternatives on the far right and left of the political spectrum.

1 "French stocks and bonds sink ahead of election," The Financial Times, June 28, 2024

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