Investors expressed concern on Tuesday about President Emmanuel Macron’s gamble to call for new elections in France, pushing up the cost of the country’s debt, reducing stock prices and prompting the Moody’s rating agency to warn that reducing France’s sovereign debt is a risk. political instability increases.
Mr Macron dissolved the lower house of Parliament on Sunday after his party was beaten by far-right Marine Le Pen in European Parliament elections sparking concerns that the government could be in a stalemate. The crash has focused on France’s fragile finances, and the prospect of legislative gridlock that could undermine the government’s ability to cope.
“This decision will not solve the economic challenges facing the country,” Philippe Ledent, senior economist at ING Bank, wrote in a note to clients. France’s public finances and economic performance will be at the “heart of the election campaign,” he said.
As the head of France’s conservative party on Tuesday called for an alliance with the far-right to defeat Mr Macron again ahead of two rounds of national elections due to start on June 30, investors punished French stocks, sending the Paris Bourse down 1.33 percent, after a sharp fall on Friday.
The yield on France’s 10-year government bond rose sharply for a second day amid investor jitters about France’s ability to manage its finances. Bond yields show the cost of government debt, and rising rates will make it difficult to stimulate the economy and manage the country’s debt.
France was suddenly faced with uncharted territory. The prospect that the party Ms. Le Pen, the National Rally, could win the hastily called legislative elections – which could weaken Mr Macron’s grip on power and possibly force him to govern with a prime minister from the political opposition – risking further economic damage. above the political toll.
“Fiscal and domestic economic policy is set by the government, which requires a majority for legislation in Parliament,” said Holger Schmieding, chief economist at Berenberg Bank in London. “For fiscally challenged France, the new parliamentary elections increase the level of uncertainty.”
The crash comes with France’s economy in tatters, as wars in Ukraine and Gaza, economic slowdowns in Germany and China and sky-high interest rates take a bigger toll than expected. Mr Macron’s government recently warned that growth would be weaker than expected this year, and his finance minister, Bruno Le Maire, has been charged with finding more than 20 billion euros in savings quickly as the country’s finances deteriorate.
After the government spent heavily during the pandemic to support the economy and protect consumers from high energy prices, France’s debt rose to €3 trillion, or 110.6 percent of gross domestic product. The government deficit for 2023 is €154 billion, with 5.5 percent of gross domestic product, one of the worst performances in the euro zone.
France is now at risk of breaching EU budget rules that limit government debt and is likely to face sanctions next week by the European Commission, the EU’s executive branch. On Tuesday, Mr Le Maire warned that France could be plunged into a “debt crisis” if Le Pen’s party gains power.
Paris has been increasingly worried about France’s debt being downgraded by international rating agencies, which has increased borrowing costs. On May 31, Standard & Poor’s downgraded France’s debt rating, shocking the government, whose economic credibility is one of its main political assets.
Then on Tuesday, Moody’s warned that Mr. Macron’s maneuvers could exacerbate France’s financial problems by creating a “polarized political environment.” By dissolving the National Assembly, Mr Macron has increased the risk that France will not be able to revise its budget again, raising the prospect of another downturn.
“There is a risk of greater political instability in the future,” the agency said, adding that Parliament could be thrown into political gridlock for at least a year because the winner of the election is unlikely to have an absolute majority. This could mean that almost any legislation Mr Macron has introduced will be blocked, including measures to cut government spending needed to avoid falling foul of the European Union’s fiscal rules.
The danger is France’s debt ballooning higher, which could lead to faster-than-expected interest payments, Moody’s added.
Mrs. Le Pen and her firebrand protégé, Jordan Bardella, have supported higher public spending to address the problems that caused the wave of voters to the National Rally party, especially the loss of purchasing power caused by inflation and high energy costs, and job demands. creation in an area that has been damaged by the loss of industry to globalization.
Mr. Macron has tried to play the role of European leader when Russia attacked Ukraine, but the National Rally has assiduously courted voters, especially in rural areas.
Party Ms. Le Pen won by a large margin this weekend in a place that is losing jobs due to deindustrialization. The National Rally has gained a larger audience for its promise to increase purchasing power, create jobs through “intelligent” protectionism and protect France from European policies that promote globalization.
Mr. Macron has tried to counter the rise of the National Rally, which is focused on 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, Mr Macron has sought to show that he is moving France back to business, burning his image especially with foreign investors. He has overhauled France’s rigid labor code to make it easier for companies to hire and fire and to tighten France’s generous unemployment system.
He also oversees a massive subsidized industrialization program that has attracted commitments of hundreds of billions of euros from multinational corporations. These include the creation of four large battery factories for electric cars in northern France and the pharmaceutical industry, which has been boosted by new investments from Pfizer and Novo Nordisk, which will expand the production of the popular drugs Ozempic and Wegovy.
Last month, Mr Macron hosted hundreds of global chief executives at the Palace of Versailles for an annual business conference where he made big new promises, including a €4 billion investment by Microsoft for a new data center in eastern France.
Even so, the French economy is bleak, especially for voters who have swung to Ms. Le Pen’s party. Many feel that inequality has widened, rather than narrowed, as Mr Macron promised, in the seven years since he took office.
