The recent decision by French President Emmanuel Macron to call a snap election following a defeat by the far right in a vote for European lawmakers has caused turmoil in the markets and affected the value of the euro. This unexpected move has raised concerns about Macron’s ability to govern with a potentially hostile parliament, which could hinder his administration’s policy agenda and create uncertainty around the country’s financial stability. Market indices such as France’s CAC 40 and Europe’s Stoxx 600 saw declines, with banks being among the biggest losers. Shares in major French banks like Société Générale, BNP Paribas, and Credit Agricole also experienced significant drops.
The euro fell against the US dollar and British pound following Macron’s announcement to dissolve the French parliament and call for new elections. The far-right opposition party, National Rally, is expected to gain ground in the upcoming election, potentially changing the composition of the National Assembly. This could make it more challenging for Macron to govern effectively and implement key policies. Mike O’Sullivan, chief economist at Moonfare, pointed out that the uncertainty surrounding the election results is unsettling for the markets, as it is unclear what a new government would look like and how it would affect economic policies.
One of the main concerns is how a new parliament could impact France’s efforts to reduce its significant government debt burden, which stood at 110.6% of GDP at the end of last year. Ratings agency S&P recently downgraded France’s credit score due to budgetary concerns, although it believes the country can still manage its debts. However, the agency expects the budget deficit to remain high, which could affect the economy’s recovery. Analysts warn that a potential right-wing majority in Parliament may impede reform efforts and raise market concerns about France’s deficit picture.
Bond traders have also taken notice of the political uncertainty in France, with yields on French government bonds rising to their highest level since November and the spread between French and German government bonds widening. Higher yields suggest that investors are demanding a higher premium to buy French bonds amid the political instability. Andrew Kenningham, chief Europe economist at Capital Economics, highlighted the risk of a new parliament making it harder for the government to bring down the fiscal deficit, potentially impacting economic growth and financial stability. Overall, the uncertainty surrounding the French election has left investors and markets on edge, with the upcoming results likely to shape the country’s economic future.
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