The French Gamble

The Olympics take place in Paris from July 26th to August 11th.? How are the French preparing?? By having a potentially transformational election of course.? Marine Le Pen’s National Rally (RN) Party won the European election, so President Emmanuel Macron is attempting to regain the political initiative.? Like an inveterate gambler, Macron has decided to go back to the people and test whether Le Pen is too toxic for the French people, again.? By scaring the electorate, he hopes to force people to continue to back the status quo.?

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The bet looks riskier this time.? Chloe Martin, a political analyst thinks, “For years now voters have been saying we’ve tried everything besides the RN.? Macron is going to let them taste the RN in a bet that they will soon be disgusted by them.”? Elabe projections show the RN could win 270 of the 577 seats.? The Republicans have indicated a willingness to partner with the RN.? Its leader Eric Ciotti said, “I want my political family to move in this direction… A right-wing bloc, a national bloc – is what the vast majority of our voters want.”? The left-leaning parties sealed an alliance to join forces in the upcoming election and they may win the second largest bloc.?

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The RN won by large margins in places hit by deindustrialization.? They want to implement “intelligent” protectionism.? They pledge to lower the VAT on oil, gas, electricity, and food, which will cost €24 billion.? There is no plan on how to finance this program.

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Macron and his Finance Minister, Bruno le Maire, are doing their best to generate fear. Le Maire said, “A debt crisis is possible in France, a Liz Truss scenario is possible.”? He later told Franceinfo Radio that the Popular Front of the left would cause an “economic collapse”.? “Their program is complete madness.? It will guarantee downgrade, mass unemployment and an exit from the European Union.”?

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France is at risk of breaching EU budget rules.? With growth weaker than expected, Le Maire needs to find more than €20 billion of savings.? French debt is 110.6% of GDP.? The government deficit stands at 5.5% of GDP.? On May 31st, S&P downgraded France’s debt rating, and Moody’s warned that it may do the same.? Moody’s says, “Given the polarized political environment in France, the winner of these elections is unlikely to have an absolute majority in Parliament.? There is a high risk of greater political instability in the future, especially as the National Assembly cannot be dissolved within the first year of its term.? Potential political instability is a credit risk given the challenging fiscal picture the next government will inherit.”? It doesn’t help that the rating agencies need to assess youthful, unproven candidates. ?Prime Minister Gabriel Attal is 35 and was chosen to counter the appeal of Jordan Bardella, 28 of the RN.?

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French bonds fell driving yields over safer German peers to the highest level in seven years.? $107 billion was wiped out on French stocks.? French banks lost more than 10% of their market cap.? The CAC was down 5.6% for the week putting it in negative territory.? The euro was the worst performing currency against the dollar over the week.

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The reason the French elections are significant is that most western governments have too much debt.? Ruchir Sharma of the Rockefeller Foundation recently wrote a book called What Went Wrong with Capitalism.? He suggests that government interventions to smooth out the economy since the 1960s led to larger and larger bailouts, which mostly helped big business.? Meanwhile small and medium-sized businesses had to deal with higher regulatory requirements creating a “two track” economy.?

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With inflation high, central banks will struggle to help governments finance their deficits without a resurgence in inflation.? Meanwhile, governments don’t want to cut spending meaning fiscal deficits will continue to be high.? There is a third option, which is make government spending more efficient, but I don’t see any politician globally with such talent.?

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This means if central banks stay tight, we should see more government bond market volatility in the months ahead.?