The RN and the NFP came out on top in the first round and will see their numbers grow in the French Parliament. The political configuration of the National Assembly after the second round on July 7 remains very uncertain due to the proliferation of three-way races.
The RN and the NFP came out on top in the first round and will see their numbers grow in the French Parliament. The political configuration of the National Assembly after the second round on July 7 remains very uncertain due to the proliferation of three-way races.
The final result will depend on the withdrawal strategies that are being clarified and aim to reduce the number of RN elected officials by withdrawing candidates who come in third place if the RN is leading (an approach adopted by the main parties constituting the New People’s Front, and to some extent by Ensemble!). Confirmation of adherence to this approach in each constituency and the question of vote transfers remain uncertain. The scenario of an absolute majority for the RN has become less likely and now seems very improbable for the NFP. Note that no new dissolution can occur before July 2025!
Our central scenario assumes only a relative majority for the RN or the NFP, thus preventing the implementation of significant expenditures and favoring continuity with the European Union. We do not overlook the risk of increased social tensions.
Polls conducted by institutes point on average to the absence of an absolute majority for the RN bloc(between 230 and 280 seats according to Ipsos), a second place for the NFP (between 125 and 165 seats), 70 to 100 seats for “Ensemble!”, and 41 to 61 seats for Les Républicains/Divers Droite, with the remainder distributed among other parties. Without an absolute majority, it is likely that the RN bloc will seek to rally right-wing elected officials who did not join this bloc for the first round of the legislative elections, although it is difficult to anticipate their success.
The ability to form a government if the RN is far ahead but without an absolute majority would raise the question of the country’s governability. It would indeed be very difficult to form a stable bloc that would then have to include all other parties. Conversely, a scenario of an absolute majority for the RN, or even the NFP, cannot be excluded at this stage, political and social uncertainty (social unrest, or even blockages) remains very high.
However, the programs of the two leading blocs have been watered down and are intended to be “funded.” Their commitment to not breaking with the EU institutions and rules seems assured. Additionally, several safeguards exist on the political level:
- The President of the Republic, who continues to indicate his intention to complete his term in 2027, will retain his veto power on certain reserved areas (notably Defense and Foreign and European Affairs), including within the European Union where he sits, with other heads of state, in the European Council.
- The Senate also retains a limiting role, particularly in its ability to oppose any constitutional modification (also subject to the Constitutional Council’s oversight).
- In the absence of a budget agreement, the continuation of identical funding each month also reduces the risk of a complete halt of French public services, unlike what can happen in the United States with the “shutdown.”
Beyond these aspects, the key will be the financial markets’ response.
Financial markets played a particularly effective role in 2022 against Liz Truss’s program (which planned massive unfunded budgetary expenditures) as the sharp rise in British sovereign rates quickly undermined this policy and even the government, ultimately replaced in less than two months to restore the UK’s fiscal credibility.
In 2018, Matteo Salvini’s rise to power in Italy triggered a financial market crisis, exacerbated by concerns about the new government’s economic and budgetary policy. Salvini, leader of the League, promised bold and costly reforms, including tax cuts and increased public spending, raising fears about the sustainability of Italy’s debt.
Italian spreads (versus Germany) between 2016 and 2019.
Sources : Bloomberg, Groupe Richelieu
In 2022, in Italy, G. Meloni, for her part, did not make the same mistakes as her predecessor, quickly softening her program, reassuring investors about the absence of a break with the EU and, by extension, the sustainability of public finances.
Italian spreads (versus Germany) between 2022 and 2023.
Sources : Bloomberg, Groupe Richelieu
We understand the “crisis experience” of governments vis-à-vis markets, which allows them to adapt their demands… in a second stage.
Even though the most likely scenario remains that of a form of governmental inertia, with only a relative majority for the RN and a weak ability to implement announced measures, markets could test their resolve after the elections.
We believe the OAT-bund spread will remain at a high level (above 70 bps) with a risk of slippage.
France-Germany spreads.
Sources : Bloomberg, Groupe Richelieu
We are certain that the ECB will not intervene
Despite the good reaction of the markets following the first round, we remain negative on French assets for now considering that the market could test the resilience of the French economy. We remain particularly negative on sectors related to the French economy and the state. The most at-risk sectors are those with high political risk beta, high exposure to France and the EU, and high debt. The main sector likely to suffer from this political uncertainty remains the financial sector. Naturally sensitive to political risk, their revenues are more than 50% generated in the euro area. Their long-term beta (20 years) is also one of the highest at 1.34x. Real estate should also suffer from the increase in risk premiums. The automotive sector, a quintessential cyclical sector with high beta (1.26 on average over 2 years and 20 years), would suffer from uncertainty over the European regulatory trajectory on combustion engines.
Main global and French indices
Sources : Bloomberg, Groupe Richelieu
In terms of European stocks, growth momentum should continue and disinflation should accelerate. Consumers, with their enhanced purchasing power, should be a necessary support. France and Germany mask the good performance of other economies. This is one of the reasons why we do not have a negative view for the year despite political turmoil. We favor more defensive sectors in the short term.
