Investors made clear on Tuesday the depth of their concerns about President Emmanuel Macron’s bid to call new elections in France, raising the country’s borrowing costs, putting downward pressure on stock prices and leading the ratings agency Moody’s to warn that it could downgrade French sovereign debt as risks. political instability increases.
Macron’s dissolution of Parliament’s lower house on Sunday after his party was beaten by Marine Le Pen’s far-right party in the European Parliament election has sparked concerns that the government could reach a deadlock. . The turmoil has focused attention on France’s fragile finances and the prospect of a legislative deadlock that could undermine the government’s ability to address it.
“This decision will not alleviate the economic challenges facing the country,” Philippe Ledent, senior economist at ING Bank, wrote in a note to clients. Public finances and the performance of the French economy will be “at the center of the election campaign,” he added.
As the leader of France’s conservative party on Tuesday called for an alliance with the far-right to defeat Macron ahead of two rounds of national voting beginning June 30, investors punished French stocks, sending the Paris stock market tumbling. 1.33 percent. after a sharp drop on Monday.
The yield on France’s 10-year government bonds rose sharply for the second day in a row amid investor concerns about France’s ability to manage its finances. Bond yields are indicative of the government’s borrowing costs, and high levels would make it more difficult to stimulate the economy and manage the country’s debt.
Suddenly, France faces uncharted territory. The prospect that Le Pen’s party, the National Rally, could triumph in hastily called legislative elections, which could weaken Macron’s grip on power and possibly force him to govern with a prime minister from his political opposition, is on the cards. risk of accumulating economic damage. above the political cost.
“Domestic fiscal and economic policies are set by the government, which needs a majority for its legislation in Parliament,” said Holger Schmieding, chief economist at Berenberg Bank in London. “For a fiscally troubled France, new parliamentary elections add a level of uncertainty.”
The turmoil comes as the French economy is in a rough patch, as wars in Ukraine and Gaza, economic slowdowns in Germany and China and record-low interest rates take a bigger-than-expected toll on growth. Macron’s government recently warned that growth would be weaker than expected this year, and his finance minister, Bruno Le Maire, was tasked with finding more than €20 billion in savings quickly as the country’s finances deteriorate. deteriorate.
After the government spent lavishly during the pandemic to support the economy and protect consumers from high energy prices, French debt has risen to 3 trillion euros, or 110.6 percent of gross domestic product. The public deficit for 2023 amounts to 154 billion euros, representing 5.5 percent of gross domestic product, one of the worst results in the eurozone.
France now risks violating European Union budget rules that restrict government borrowing and is likely to face sanctions next week from the European Commission, the EU’s executive branch. On Tuesday, Le Maire warned that France could be thrown into a “debt crisis” if Le Pen’s party won power.
Paris had been increasingly concerned about the downgrading of French debt by international rating agencies, raising borrowing costs. On May 31, Standard & Poor’s downgraded France’s debt rating, unsettling the government, whose economic credibility has been one of its biggest political assets.
Then on Tuesday, Moody’s warned that Macron’s move could deepen France’s financial problems by creating “a polarized political environment.” By dissolving the National Assembly, Macron increased the risks that France will not be able to realign its budget, raising the prospect of a new downgrade.
“There is a high risk of further political instability in the future,” the agency said, adding that Parliament could be plunged into political deadlock for at least a year because the winner of the election is unlikely to have an absolute majority. That could mean that almost any legislation Macron proposes would be blocked, including measures to cut government spending needed to avoid violating European Union fiscal rules.
The danger is that France’s high debt will rise further, which could lead to a faster-than-expected rise in interest payments, Moody’s added.
Le Pen and her passionate protégé, Jordan Bardella, have backed increased public spending to address the problems that have driven waves of voters to the National Rally party, especially the loss of purchasing power caused by high inflation and energy costs, and the demand for employment. creation in areas that have been devastated by industrial losses caused by globalization.
Macron has tried to play the role of European leader during the Russian invasion of Ukraine, but the National Rally has been assiduously courting voters, especially in rural areas.
Le Pen’s party won by wide margins this weekend in places that have lost jobs due to deindustrialization. The National Rally has captured broader audiences for its promises to strengthen purchasing power, create jobs through “smart” protectionism and protect France from European policies that expanded globalization.
Macron has been trying to counter the rise of National Rally, which has taken advantage of the economic slowdown, immigration problems and regulatory requirements imposed by the European Union to attract disenchanted voters.
Now, in the middle of his second term, Macron has tried to show that he was getting France back in business, burnishing his image especially with foreign investors. He has reformed France’s rigid labor code to make it easier for companies to hire and fire and is streamlining France’s generous unemployment system.
He also oversees a huge subsidized industrialization program that has attracted hundreds of billions of euros in commitments from multinational companies. These include the creation of four large electric car battery plants in northern France and a pharmaceutical industry bolstered by new investments from Pfizer and Novo Nordisk, which will expand production of their popular weight-loss drugs Ozempic and Wegovy.
Last month, Macron hosted hundreds of global CEOs at the Palace of Versailles for an annual business conference that generated big new promises, including a €4 billion investment by Microsoft for a new data center in the eastern France.
Still, France’s economic slowdown has been notable, particularly for voters who have leaned toward Le Pen’s party. Many feel that inequality has widened, rather than narrowed, as Macron promised, in the seven years since he took office.