French recipes for a change

Winners and losers at the elections to the European Parliament in terms of preliminary vote shares

^{Sources: Europe elects, DWS Investment GmbH as of 6/18/24}

In markets as in politics, however, perceptions often matter more than electoral realities. When French President Emmanuel Macron decided to call snap parliamentary elections in reaction to his parties expected but dismal performance, both equities and bonds markets got spooked. On one level, that’s understandable enough. French government debt to GDP is around 110%. The budget deficit was 5.5% in 2023 and is expected be around 5% this year as well. With the reinstatement of European fiscal rules (public debt below 60% and public deficits below 3% of GDP), France will enter into an Excessive Deficit Procedure (EDP). S&P cut the rating from AA to AA- at the end of May. None of this, however, should have been breaking news to markets. Nor is the inherent difficulty in predicting results to the two round legislative elections to the National Assembly (AN), the dominant chamber of parliament.

Since 2022, Macron’s Renaissance party and its allies have lacked a majority in the AN. A unity pact among four left-wing parties on Thursday has put them at risk of being excluded from many second-round run-offs on July 7, which could instead see plenty of matchup between an unusually united left and Marine Le Pen’s the far right Rassemblement National (RN). Though we are very skeptical of RN’s prospects to win an outright majority, there is a decent probability of another hung parliament. Under the French constitution, the President could not call another snap election for 12 months. For the coming weeks, we expect volatility to remain high.