Barbara Reinhard, CFA
Senior Managing Director, Chief Investment Officer, Multi-Asset Strategies and Solutions
It’s been a circus of a week in French politics, after dissolution of the National Assembly brought a cavalcade of infighting as parties tried to construct a majority alliance. But there’s one potential result that concerns the market much more than others.
It all started when Marine Le Pen’s far-right National Rally took an unexpected 31.4% of the vote in European Parliament elections. When conservatives then threatened a vote of no confidence in the government, President Emmanuel Macron responded by dissolving the National Assembly and calling for a snap legislative election. The CAC 40 was not pleased—the main French index fell over 6% on the possibility of Marine Le Pen’s populist plans, including tax cuts, increased spending, and anti-immigrant policies. The euro, other European stocks, and government debt across the Eurozone were dragged lower as well.
Then the infighting started. The Right was unable to put together a cohesive alliance—and there was a fair amount of backbiting and betrayal happening on the Left, too. The dust hasn’t fully settled, but after a week, President Macron’s Renaissance party and allies currently hold 250 out of 577 seats in the National Assembly, just shy of the 289 needed for a majority. Le Pen’s National Rally holds 88, other conservatives hold 61, an alliance of leftists holds 149, and other, smaller groups hold the remaining 29 seats.
Under Macron, France’s deficit currently stands at 5.5%, well past the expected 4.9% as government revenue has declined. French GDP expanded at a 0.2% quarterly rate in Q1 2024, with expectations of 0.9% for FY2024. Borrowing costs for European governments across the Eurozone have already surged in 2024, and the possibility of significantly increased fiscal spending under Le Pen has concerned the market. Analysts say the impact of a potential Le Pen government and its policies could be twice that of short-lived (and disastrous) UK prime minister Liz Truss.
As of 06/17/24. Source: Bloomberg.
The Parisian standoff continues, and while it seems unlikely that Le Pen can pull together a majority coalition, investors should stay cognizant of the risks. In the face of all this, we remain underweight EAFE and stay overweight U.S. equities, a view we are unlikely to change until we see a significant deterioration in domestic sentiment.
Arjun Kaushik contributed to this article.