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Macron’s survival has not calmed the markets

France has called time on President Macron’s economic project. Credit: Getty

July 8, 2024 - 4:30pm

It turns out France’s “Republican front” is still alive. As much as the Left and centre detest one another, they still share a hatred of the Le Pen family project. In a stunning result, Marine Le Pen’s Rassemblement National came in third place in Sunday’s French elections.

However, France will be stuck with a hung parliament. A new government led by Macronists may take office, but even if it does it will have weaker legislative support than before the election. Alternatively, a tense cohabitation between a Left-wing cabinet and a president who resists its initiatives may emerge, rendering it largely ineffective.

But regardless of what government takes shape in the Elysée, what seems unavoidable is that further economic reform of the sort Emmanuel Macron had been undertaking will come to a halt. Amid such policy inertia, France’s myriad problems, not least its unsustainable fiscal path, thus look set to fester. With a fiscal deficit that now exceeds 5%, a generous but largely unfunded pension system and one of the highest debt-to-GDP ratios in the G7 — itself a group that tops the global debt-league tables — France is already raising concerns among creditors worried about a further loosening of its purse strings.

So instead of the much-feared Liz Truss moment, in which a party with expansive unfunded spending plans takes office and triggers panic in markets, France will now get what might be called its Jeremy Hunt moment. Everyone remembers how the former chancellor’s appointment and shredding of his predecessor’s budget in the autumn of 2022 immediately calmed markets and helped bring Britain’s soaring interest rates back to earth. Indeed, so traumatic was the experience of sharply rising mortgage costs which attended the aborted Truss-Kwarteng experiment that the issue featured in many doorstep conversations in this year’s general election campaign.

But less remembered is that while British interest rates quickly returned to their previous levels once Hunt took charge of the Treasury, they thereafter resumed a steady upward climb that would, over the following year, eventually return them to more or less the same level at which they’d peaked the previous autumn.

The problem was that the long-term problems facing Britain, from stagnant productivity to degraded public services and failing infrastructure, went largely ignored. France may now face a similar prospect. It will almost certainly lack a coherent political project for at least another year, the earliest at which Macron could call fresh elections. This may mean that public discontent with politics only deepens, which could yet strengthen either or both the far-Right and far-Left.

In other words, this play may not be over. Faced with such uncertainty, investors may hold off on their purchases of French bonds or shares, which would result in higher interest rates and further raising the costs of governing and the credit charges to businesses and households.

Whether he chooses to heed the call, France has called time on President Macron’s economic project. It has also declared loudly that it won’t tolerate a government of the far-Right. But it hasn’t yet made up its mind what should now follow. If there’s one thing markets hate, it’s uncertainty. Unfortunately, it also looks to be the only certain thing about French politics for the foreseeable future.


John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).

jarapley

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Jim Veenbaas
Jim Veenbaas
4 days ago

France is a basket case almost destined for economic ruin. There’s one thing all these parties share – right, left and centre – a hopeless ignorance of fiscal policy. The Rassemblement National might be good on net zero and open borders, but it wants extravagant spending programs and to lower the age of pension eligibility, one of Macron’s few real achievements.

Stephen Walsh
Stephen Walsh
4 days ago

Le Pen only squeaked into the second round of the last presidential elections ahead of Mélenchon by barely 1%. The next President of France is probably more likely to come from the Far Left than from the Right. Such a President and government would be of a type previously elected in some countries in South America, but never before in Western Europe. And unlike the South American variants, much of the bedrock of Far Left support in France is Muslim. The markets can make of that what they like, but one doubts that risk has been fully priced in.

Bernard Brothman
Bernard Brothman
4 days ago
Reply to  Stephen Walsh

I wonder if Liberté, égalité, fraternité will be replaced with something else?

Jim Haggerty
Jim Haggerty
3 days ago

Also, what happens when this unruly Assembly has to create and submit a budget to the EU in September? I doubt it will cut spending so how will the EU respond? Do they allow it and ignore the fiscal rules? That would be a green light for Italy and others to keep spending. Or do they reject it and set off anger in the French streets? Interesting times indeed

UnHerd Reader
UnHerd Reader
4 days ago

10 year bonds (08/07):
Germany: 2.54% (-0.02 in 24 hours)
United Kingdom 4.11% (-0.01)
France 3.16% (-0.05)
Italy 3.89% (-0.05)
Spain 3.3 % (- 0.04)
Netherlands 2.82% (-0.02)

Euro = $1.08, £0.84 (unchanged)

Financial markets seem pretty stable to me ‍♂️

Peter B
Peter B
4 days ago
Reply to  UnHerd Reader

Thanks. And that’s very interesting reading.
For reference (if I read the numbers correctly), the 10 year Us bond yield is 4.30% – around the same as the UK’s.
You do wonder if Italy’s bond yield should really be lower than the UK’s (or Spain’s for that matter) … . Of course, the Euro ought to have eliminated the large variation in bond yields between all these countries …

Susan Grabston
Susan Grabston
4 days ago

I’d piss my pants if the UK turned out to be the “cleanest shirt” in the fiscal laundry of Europe. Quite the narative as Lmmy sets off on his prawn cocktail initiative.