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France Election: Investors Anxious Over Potential Fiscal Upheaval

by Onuraag Das   ·  June 27, 2024  

The France election has sparked significant market uncertainty and concerns over a potential debt crisis. Investors are closely monitoring the political landscape, aware that the outcome could significantly impact France’s fiscal policy and bond market. This article will explore the implications of the election, highlighting the concerns surrounding debt and market stability.

Political Turbulence and Economic Fears

Uncertainty over the outcome of the France election hangs heavily over markets. Both the left and right-wing parties have proposed policies that could dramatically alter the country’s fiscal landscape. Analysts warn that if either the hard right or left forms a government and implements their plans, it could lead to a fully-fledged bond market and fiscal crisis. Investors remain cautious, remembering the sell-off in French stocks and government bonds after President Emmanuel Macron called a shock parliamentary election. Although the immediate market reaction has eased, concerns persist ahead of the upcoming vote.

Market Reaction and Investor Sentiment

Recent polling suggests a tight race, with the far-right Rassemblement National (RN) party, led by Jordan Bardella, potentially winning the most seats. The left-wing alliance, Nouveau Front Populaire (NFP), follows closely. Macron’s centrist alliance is seen as a third contender. This political uncertainty has heightened market volatility. The France election could result in a hung parliament, further complicating fiscal policy decisions. The country’s blue-chip CAC 40 index is experiencing its worst month since May 2023, with major banks like Societe Generale and BNP Paribas seeing significant declines.

Bond Market Concerns

French bond yields, which move inversely to prices, have remained relatively contained. However, the spread between French and German 10-year bond yields has widened, indicating growing market concern. This spread has reached more than 71 basis points, the highest in over a decade. Investors are betting that Germany represents a lower risk compared to France. The France election has led to comparisons with the political and market turmoil seen in other countries, notably the United Kingdom during Liz Truss’s brief tenure as Prime Minister. Her policies led to a violent bond market reaction and a subsequent central bank intervention.

Fiscal Policy Implications

Both the RN and NFP have proposed changes to fiscal policy that could destabilize markets. These include raising the minimum wage, freezing prices of essentials for low-income households, and altering income tax brackets. Both parties have also expressed a desire to reverse Macron’s pension age reform, though the RN has recently softened its stance. Additionally, they plan to offset higher spending by increasing taxes on the wealthy. Analysts warn that these fiscal proposals could spark a market crisis similar to that experienced in the UK.

Potential Outcomes and Market Reactions

Andrew Kenningham, chief Europe economist at Capital Economics, outlines several possible election outcomes and their market implications. A best-case scenario involves a centrist or technocratic government scaling back its plans when faced with the reality of governance. Even in this scenario, the spread of French bond yields over their German counterparts is likely to remain elevated. In the worst case, either the RN or NFP forms a government, implements their campaign pledges, and rejects the European Union’s fiscal rules. This could push the gap between French and German 10-year yields to 300 basis points, potentially forcing the government to change direction or resign.

European Central Bank’s Role

The European Central Bank (ECB) would be reluctant to intervene directly unless the French government presented a credible plan to reduce the deficit. However, if yields spiraled out of control, the ECB might be forced to step in, much like the Bank of England did following the UK’s mini-budget crisis. This scenario underscores the significant risks associated with the France election and its potential impact on the bond market and fiscal policy.

Historical Parallels and Investor Concerns

The recent drama in French politics and financial markets draws parallels with the Brexit vote in 2016. The sudden decision to hold a parliamentary election has spooked markets, leading to a higher risk premium for French assets. Despite the uncertainty, there is little concern over France enacting its own “Frexit.” Even the National Rally has moved away from actively proposing to leave the euro area or the European Union. Nevertheless, fiscal developments remain a concern, especially given France’s high debt-to-GDP ratio of 110%.

Long-Term Debt Challenges

France’s debt pile stands at a staggering 3 trillion euros ($3.2 trillion). Macron has made some efforts to reduce this debt, including pension age reform, but the public deficit has nonetheless increased. Market watchers remain skeptical about French debt, particularly as investors look more favorably on the UK ahead of its general election. The France election presents both risks and opportunities. While some analysts warn of potential fiscal upheaval, others see the current market sentiment as a buying opportunity.

Market Opportunities and Risks

For Beat Wittmann, chairman at Porta Advisors, the recent turmoil in French assets presents a good entry point for investors. Despite the uncertainty surrounding the France election, the electoral process is set to be orderly and democratic. The markets are teaching politicians a lesson ex-ante, which Wittmann believes could ultimately stabilize the situation. The spread between French and German bond yields and the decline in the French stock market may offer attractive investment opportunities.


The France election is a pivotal event with far-reaching implications for the country’s fiscal policy and bond market. Market uncertainty is high, and the potential for a debt crisis looms large. Investors are watching closely, aware that the outcome could significantly impact market stability and France’s economic future. Whether the election results in a centrist government or a more radical shift to the left or right, the effects on fiscal policy and the bond market will be profound. The next few weeks will be critical in determining the economic direction of France and the confidence of investors in its financial markets.

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