The debt crisis is back in France
The worst-case scenario for the elections has been prevented by France's President Emmanuel Macron. However, France may soon find itself in a volatile mix of budget explosions, market turbulence, and political crisis.
Breathing a Sigh of Relief in Paris: The right-wing populist RN march of Marine Le Pen has been thwarted in the French parliamentary elections. However, France might be in for rough waters soon. With the stalemate between right- and left-wing extremists and Macron's party in the National Assembly, France could face an extended period of gridlock. The Grande Nation has maneuvered itself into such a political dead end that the markets could eventually tremble.
At the Paris bourses, the situation is still unclear after the election. The risk premiums for French government bonds rose slightly in the first hours of trading, while the CAC 40 index lost a little before making up its losses. However, if the initial investor reaction is any indication, France could face significant turbulence in the medium term.
Even Germany's green economic minister, Robert Habeck, who could face a similar populist awakening in next year's federal election, admits that "enormous challenges" lie ahead for Europe and Franco-German relations. The political malaise is unfolding against a backdrop of ballooning government debt. And it is not clear when France will get a handle on its debt problem. Quite the opposite.
"It would be a disaster for the country if it were to embark on a path of massive spending increases," warns former ECB President Jean-Claude Trichet at Bloomberg Finance. The plans of the New Popular Front on the left and the National Rally on the right are simply "not feasible." Given the debt situation, "there is no room for that." Trichet hopes that in the coming months, there will be a "maturation process" among the political leaders of both extremist factions.
"Disaster" for Creditworthiness
Paris, with an economic output of 110 percent, is already on thin ice with investors - after Greece and Italy, the third-highest debt-to-GDP ratio in the Eurozone. The Commerzbank analysts assume that France's already high budget deficit, in the face of uncertainty about the formation of a new government, could further increase.
The extremists on the left and right want to add significantly more to the spending: Increase the minimum wage, pensions at 60, price caps for gas and diesel: The plans of the New Popular Front, according to the Left Front's statements, will cost 150 billion euros by 2027. Marine Le Pen's right-wing National Rally also wants to bring financial benefits to the electorate: Tax cuts on energy, withdrawal of Macron's pension reforms, tax breaks for families and businesses.
This could spell the end of France's creditworthiness. "It would be a disaster for the country if it were to pursue a path of massive spending increases," warns former ECB President Jean-Claude Trichet at Bloomberg Finance. The plans of the left and right are simply "not feasible." Given the debt situation, "there is no room for that." Trichet hopes that in the coming months, there will be a "maturation process" among the political leaders of both extremist factions.
The Euro is the Biggest Loser
The markets seem to share this view. They believe that the extreme spending plans will be thwarted in the consensus-building process for the government. But it's just as likely that Macron will swallow some of the expensive demands to win over the Left. Or that he refuses to form a stable government in the long term. Observers estimate that the coalition or a government appointed by the President would not last longer than a year.
This short expiry date concerns France's financiers already at this point. The country needs reforms that must be led by a broad coalition of parties, writes ING Economist Philippe Ledent. If this fails, it could lead to long-term instability, which would unsettle the markets.
"The 'Lame Duck' in a core country of the European Union is not exactly confidence-inspiring and associated with investor prospects," observes Jürgen Molnar, Strategist from Broker RoboMarkets. This is evident in the yield of French government bonds. Since Macron's announcement of new elections about a month ago, it has already risen by almost 3.5 percent.
And so, France's financial stability - and with it, that of the Eurozone - is once again at risk: "It is hard to imagine how a budget with cuts can be passed in the face of the new political realities," says the chief investment strategist of Rothschild Asset Management to Bloomberg. A downgrade for French government bonds is therefore inevitable. A comeback of the crisis is likely - "with a new election within a year."
In light of France's escalating government debt and the expensive spending plans proposed by both the New Popular Front and the National Rally, former ECB President Jean-Claude Trichet warns of potential disaster for France's creditworthiness. With rising risk premiums for French government bonds and investors already concerned about the country's financial stability, a downgrade for French government bonds seems inevitable, posing a threat to France's economy and the Eurozone as a whole.
