French elections and their potential impact on the European Sovereign Debt Market
As France prepares for pivotal parliamentary elections, the Eurozone financial markets brace for increased volatility. The elections, set for the first round this Sunday and concluding on July 7, could significantly influence the European sovereign debt market. With Marine Le Pen’s National Rally (RN) leading the polls, followed by the New Popular Front (NFP) and President’s Renaissance, the stakes are high.
Recent polls from Harris Interactive, Ifop, Elabe, Ipsos, Odoxa, OpinionWay, and Cluster17 show RN at 35.4%, NFP at 28.1%, and Renaissance at 20.8%. This sets the stage for a potential showdown between far-right and far-left coalitions, potentially sidelining Macron’s centrist parties.
Sonia Renoult, a rates strategist at ABN AMRO, provides crucial insights into the potential fiscal implications of the elections. Renoult warns that France’s government finances are already strained, and a shift towards a less fiscally responsible government could worsen the situation. She notes, “France’s fiscal deficit is unlikely to return to the 3% target by 2027 under any foreseeable scenario.”
Reactions and projections after French elections
ABN AMRO’s baseline scenario predicts an RN-led relative majority in parliament, leading to a cohabitation government with Macron. Market concerns focus on the possibility of unsustainable fiscal policies and a less cooperative stance towards the European Union (EU). Both right and left parties advocate for expansionary fiscal policies and express significant opposition to further EU integration.
RN’s policy proposals suggest a significant increase in government spending compared to the current administration. Key measures include: indexing pensions to inflation (€27.4bn), lowering the retirement age from 64 to 62 (€22bnl), reducing VAT on energy from 20% to 5.5% (€11.3bn).
However, Renoult highlights that some measures may face implementation challenges due to constitutional constraints and conflicts with EU law. For example, the proposed VAT reduction on energy, which falls below the EU’s minimum rate of 15%.
Potential deficit scenarios
An RN-led government is expected to maintain deficits above 6% in the coming years. Conversely, an NFP-led government could see deficits approaching 8%. Both scenarios suggest that government debt could become unsustainable, exacerbating fiscal instability.
The upcoming French parliamentary elections pose significant implications for the European sovereign debt market. With RN and NFP leading the polls, the prospect of expansionary fiscal policies and strained EU relations looms large. Financial markets and policymakers alike will closely watch the election outcomes, anticipating potential shifts in fiscal policy and their broader impact on the Eurozone’s economic stability.