In the lead-up to France’s surprise parliamentary election, both far-right and leftist parties are gaining momentum, putting pressure on President Emmanuel Macron’s centrist administration. The far-right National Rally party, led by Marine Le Pen, is currently leading in opinion polls but is not expected to win an absolute majority. The party has hinted at policies such as lowering the retirement age, tax cuts, and increased spending, raising concerns about fiscal sustainability in the eurozone’s second-largest economy.
Following the rise of far-right and leftist parties, investors have started to contemplate the risk of a budget crisis at the heart of the euro area. The risk premium demanded by investors to hold French government bonds over the euro zone benchmark Germany has risen to the highest level since 2017. This spike in risk premium is the biggest weekly jump since the euro zone debt crisis in 2011. Market analysts are warning about the potential for a financial crisis if either the far right or the left wins the election.
The rising concerns over the French parliamentary election results have already started to affect financial markets. The cost of insuring France’s debt against default has reached its highest level since May 2020. Additionally, the increasing borrowing costs have negatively impacted banks, with shares in major French banks like BNP Paribas, Credit Agricole, and Societe Generale experiencing significant losses. This has led to a cancellation of a bond sale by a French state-backed agency and adjustments to funding plans for bond auctions.
The situation in France is seen by bond investors as a test of fiscal responsibility within the eurozone. The RN’s proposed program for the parliamentary election has raised concerns over a 3.5 percentage-point increase in France’s budget deficit. Analysts are drawing parallels to past financial crises in the UK and the US, where fiscal policies led to market instability. The eurozone is yet to experience such a test, with France being eyed as the potential trigger for broader financial challenges in the region.
The outcome of the French parliamentary election and the subsequent government’s fiscal policies will have a significant impact on the eurozone’s financial stability. While some experts believe that the EU’s deficit rules will curb any extreme spending by the far-right party, there are concerns about potential market reactions and the stability of the financial system. With the ECB expected to intervene if necessary, uncertainties remain about the level of support available and the impact of non-compliance with EU fiscal rules on market stability.
The upcoming French parliamentary election is showcasing the fragility of the eurozone’s financial system and the importance of prudent fiscal policies. The rise of far-right and leftist parties has raised concerns among investors, leading to increased risk premiums and market volatility. The outcome of the election and subsequent government actions will determine the future outlook for France and the eurozone as a whole. It is essential for policymakers to address these challenges proactively to avoid a potential budget crisis and ensure the stability of the euro area.