The French second round of elections that will take place this Sunday are putting the Euro and financial markets under pressure. The scenarios about the composition of the French parliament – the National Assembly – are mainly two and their outcomes are linked to the evolution of the country’s public debt, writes eToro analyst for Romania, Bogdan Maioreanu.
The various campaign promises being made by France’s far right and far left ahead of the snap elections have something in common: they will all be very expensive to carry out.
The most likely scenario for the 2nd round is a National Assembly without an absolute majority, creating significant challenges in the formation of a new government. Yet this is perhaps the least damaging scenario for the financial markets, because it removes the risk of a major slippage in public finances and a violent increase in French debt that would be caused by the economic programs of the far right RN (Rassemblement National) and respectively, of the NFP (New Popular Front) left alliance parties. Moreover, as a sign that the markets are looking at this main scenario as the most possible one, the spread between the German and French 10-year rates is slightly declining, a sign of investor confidence in the financial stability of the eurozone, despite the challenges and uncertainties that persist.
Immediately after the first results of the 1st round of the French elections, the euro depreciated. But recently we have seen the euro surge against the US dollar after mixed PMI reports from Europe and a weak services PMI from the US. Euro is also helped by expectations that the RN won’t gain a majority, and to relief that the left-wing New Popular Front didn’t win more than expected in the first-round vote.
The second scenario is the possibility that the RN and its allies reach an absolute majority, a situation that some of the polling institutes do not rule out, but are not considering it to be the central scenario. This will put pressure on the euro and France’s fiscal position.
The prospects of an absolute majority of the RN impacts several sectors of the French economy. As the big French banks are buyers of state debt, this scenario with the far right in power is likely to bring a significant rise in the 10y bonds yields. Therefore the banks would suffer, which is why following the European elections, they lost between 10 and 15% of their stock market value.
France’s far right on the brink of power after Macron’s gamble backfired
Another impact was on two big construction companies, Vinci and Eiffage. These went from defensive to risky stocks the day after the European elections. The sudden possibility of an RN victory in the legislative elections has weakened the entire sector, sensitive to the interest rates that the expensive program of the far right has put in tension. But there is an additional threat for the two holders of large motorway concessions: that of nationalization.
Last but not least, RN wants to privatize the public broadcasters, which would bring 3 billion euros into the state coffers. While good for the budget, it will distress the current private players TF1, M6 and NRJ group. It is possible to significantly increase competition in the advertising market, which currently seems incapable of absorbing the arrival of one or more new players.
Investors are watching carefully the outcome of the French elections as they can influence both the euro and the European stock markets. In France 26% of investors are still seeing Europe as generating the best returns over the long term according to the most recent eToro Retail Investor Beat survey. US markets come second with 19%. The same percentage (26%) we have for Romanian investors but the first is US in investors preferences with 29%.
