Surprise Victory of French Left-Wing Coalition "Increases Uncertainty"... Euro Falls

As the left-wing coalition, the New Popular Front (NFP), is projected to achieve a surprising victory over the far-right party in the French general election, the euro is showing weakness. In the market, uncertainty has increased further due to a 'hung parliament' deadlock where no party holds a majority, and concerns are mounting that the left-wing coalition, which has secured the leading position, will exacerbate France's debt problems with its pledge to expand fiscal spending.

[Image source=AFP Yonhap News]

According to Bloomberg and other sources, on the 7th (local time), immediately after the release of the exit polls for the French general election runoff, the euro traded slightly weaker at around $1.0807 per euro. The news agency warned that "a turbulent period may return to the market in the coming weeks," expressing concerns about volatility in stocks, bonds, and other regular trading sessions soon to open. Earlier, right after the first round of voting on the 30th of last month, the far-right National Rally (RN), which had signaled a governing opportunity by ranking first, fell to third place behind the NFP and the broader left-wing coalition in the runoff. Currently, no faction is expected to secure a parliamentary majority, complicating future government operation scenarios.

Andrea Tueni, head of Saxo Bank France, described it as surprising that far-right governance was prevented but noted, "This is not necessarily good for the market. The NFP's pledges, as the leading party, are perceived most negatively by investors." Jeffrey Yu, chief strategist at BNY Mellon, diagnosed that "French politics has fallen into chaos once again," adding that "risks from expansionary fiscal policies remain."

David Roche, chairman of Independent Strategy, also stated in an investor memo released that day, "The conclusion is a hung parliament," and assessed that "the relief of preventing far-right governance will not last long." With no party securing an absolute majority, a deadlock in the French parliament is inevitable. Such uncertainty is undoubtedly an element the market dislikes.

Moreover, the left-wing coalition, having secured the leading party status, is pushing forward with its existing pledge to significantly increase fiscal spending, which is expected to further worsen France's already excessive deficit problem. Previously, the left-wing coalition proposed large-scale fiscal spending commitments, including raising the minimum wage, abolishing pension reforms, and eliminating tax cuts for the wealthy. The Montaigne Institute, a French think tank, analyzed that implementing these pledges would require an additional annual expenditure of approximately 95 billion euros, which is six times that of the broader left-wing coalition and twice that of the RN.

This is why, ahead of the election, investors' greatest concern was not a far-right RN majority but a left-wing coalition majority. Roche pointed out, "In fiscal terms, the left-wing coalition will be more extreme than a far-right government," adding, "They will repeal pension reforms and will not comply with the European Union's Excessive Deficit Procedure (EDP)." The EDP is a system that requires member states with excessive deficits to adjust their budgets according to EU regulations and imposes penalties such as fines if they fail to comply. France has already received a warning proposal to initiate the EDP from the European Commission.

Jan von Gerich, senior market analyst at Nordea, said, "The left-wing coalition's economic pledges are problematic in many ways compared to the right-wing's," and predicted, "Although the left-wing coalition did not secure an outright majority, the election results will further deteriorate France's fiscal outlook." Ben Lam, strategist at Bloomberg Economics, mentioned that immediately after the exit polls were released, Jean-Luc M?lenchon's far-left party 'La France Insoumise (LFI)' leader declared that all pledges would be fully implemented and that they would not negotiate with President Macron, stating, "French government bond investors will not welcome this."

Accordingly, major analysts including TD Securities expect the yield spread between safe-haven German and French government bonds to widen again beyond 80 basis points (1bp = 0.01 percentage points). This indicates that investors' concerns about France's fiscal and economic situation are increasing, and the fiscal burden such as debt interest is also growing. After the early election announcement by President Macron, French stocks, bonds, and the euro, which had taken a direct hit, showed some recovery last week.

Simon Harvey, head of FX analysis at Monex Europe, emphasized, "From the market's perspective, the outcome makes no difference. There will be a legislative vacuum in the French parliament," adding, "The real focus should be on the (soon-to-open) bond market." Bloomberg reported, "Since the left-wing coalition did not secure an absolute majority, their actions will be limited," but also noted that "(the left-wing coalition's victory) could shake French assets in the coming days."

On the other hand, Annika Gupta, head of macroeconomic research at WisdomTree, said, "Since no one secured an absolute majority, it will be very difficult to implement actual policies and push reforms," and predicted, "The market will be pleased that the extreme scenario with the far-right has been avoided."