France’s political uncertainty further dampens Europe’s economic outlook

France’s political uncertainty further dampens Europe’s economic outlook

Time to read: Minutes

Political instability in France has sent the CAC 40 index down almost 10% since it peaked in May. The markets currently seem relieved that France’s far-right RN party may not gain an absolute majority in the French Parliament—but that could still mean gridlock and a debt crisis.

What happened?  

France’s far-right populist party (the National Rally, or RN), led by Marine Le Pen, trounced President Emmanuel Macron’s centrists during European Parliamentary elections held in early June. Macron then called for two rounds of special snap elections for France’s Parliament—and on June 30, the RN scored another victory, winning more National Assembly seats than expected. The second round is coming on July 7.  

What’s at stake?  

Le Pen has advocated for stricter limits on immigration, economic protectionism and increased fiscal spending, most likely focused on security and defense. Unfortunately, France’s current debt-to-GDP ratio of 110% and budget deficit of 5.5% have already exceeded the EU’s target of 60% and 3%, respectively.1 Sizeable fiscal expansion would only further strain the country’s fiscal position, leading many to worry that France could have a “Liz Truss” moment, where the U.K.’s then-Prime Minister sent the British pound and government bonds tumbling after proposing a wave of tax cuts without cutting any spending to offset them.

What’s next?  

It’s possible that the RN will be able to secure a majority during the second round of polling on July 7, which would allow it to carry out its spending plans and possibly strain France’s finances. But even if the RN doesn’t gain an absolute majority, parliamentary gridlock could still push France closer to a debt crisis. Considering the challenges facing Europe at the moment—including France’s political uncertainty, the Eurozone’s tepid 0.8% GDP growth (vs. 2.7% in the U.S.)1 and forecasted negative earnings growth—we believe that a continued underweight to European equities seems warranted.

 

Maverick Lin contributed to this article. 

1 Bloomberg as of 07/01/24 

 

Voya Investment Management has prepared this commentary for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults (5) changes in laws and regulations and (6) changes in the policies of governments and/or regulatory authorities. Past performance is no guarantee of future returns.  

The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Strategy holdings are fluid and are subject to daily change based on market conditions and other factors. 

 

IM3677838 

Top