One thing is clear after France's surprise election results on Sunday: Any new government formed by President Emmanuel Macron will face months of political deadlock. What is less certain is whether that deadlock will further imperil France's heavily indebted economy.
The turmoil has renewed focus on France's soaring 3 trillion euro debt and a deficit of more than 5 percent of economic output, and led to a warning on France's sovereign debt rating by Standard & Poor's ratings agency on Monday.
“Uncertainty looms over the composition of France's future government,” said the agency, which had already downgraded France's debt rating on May 31, dealing a blow to a government whose economic credibility has been one of its main political assets. France's debt could be downgraded again if polarization in France's new parliament weakens the government's ability to fix its finances, the agency said.
Leftist parties in France have made unexpected gains in nationwide legislative elections, winning the most seats in the lower house of parliament, overtaking the nationalist, anti-immigration National Rally party. The result leaves no party with a majority – including Mr Macron's centrist coalition – and has left the lower house of parliament divided. into three bitter rival factions,
french economy I'm already going through a tough timeThe unemployment rate, which fell to a 15-year low of 7 percent last year, has now risen again as manufacturers have reduced output and exports have slowed. Consumers, upset by persistent inflation, have also cut back on spending, a key driver of growth.
Mr. Macron’s government recently warned that growth this year would be lower than expected as it considers spending cuts of more than 20 billion euros (about $21.5 billion). rebuke to France France was put on credit late last month for violating fiscal rules restricting spending and borrowing. France's debt has risen to more than 110 percent of economic output, and its budget deficit has deepened after the government spent heavily to protect consumers and businesses from pandemic lockdowns and high energy prices.
Mr. Macron's right-wing and left-wing opponents used debt to attack him during their campaign. But the major parties are in no mood to forge a consensus, and investors are concerned that the new parliament will fail to pass a budget in the autumn that includes major spending cuts and risks a further decline in France's sovereign debt.
“Once the dust settles, the deadlock in parliament will prove more damaging than ever,” Alex Everett, an investment manager at London-based investment firm Aberdeen, wrote in a note to clients. “France’s budget problems are far from over. Macron’s attempt to force unity has instead fueled further discord.”
Investors have already Government borrowing cost increasedThe gap between the interest rate investors are paying on France's debt and the interest rate they are paying on Germany's debt has become the largest since the financial crisis, a sign that investors are concerned about France's ability to manage its finances. The danger is that France's debt could grow even bigger, causing interest payments to rise sharply.
Further complicating the picture is the left-wing coalition, the New Popular Front, which won the most seats in the lower house of parliament on Sunday. The party, which includes Communist, Green and Socialist MPs, is pushing hard to “tax the rich and spread the wealth”. work schedule The party is inspired by the far-left France Unbowed party, and has said it is willing to violate EU financial rules if necessary to advance its platform.
Indeed, unless the government raises taxes on businesses and the wealthy, the leftist bloc is likely to reject a national budget that honors France’s promise to Brussels and debt rating agencies to cut next year’s deficit to 4.4 percent of gross domestic product from 5.1 percent, Mujtaba Rahman, managing Europe director at Eurasia Group, wrote in an analysis. The group will also demand more spending on education and health care and possibly push to raise France’s minimum wage, he said.
But the left, while emboldened, will lack overall control, so their agenda is unlikely to be approved. This has eased fears among some investors about the economic damage the New Popular Front could cause.Pending programsThe estimated cost would be up to 187 billion euros per year, to be met by increased taxes of up to 150 billion euros on businesses and wealthy individuals and the elimination of a variety of corporate tax breaks.
“An unstable parliament is probably the best solution for European equities,” said Claudia Panseri, chief investment officer for France at UBS Global Wealth Management.
On Monday, Mr Macron's finance minister, Bruno Le Maire, warned in a post on X that the left-wing bloc's economic programme could lead France into a financial crisis and economic collapse. “It would destroy the results of a policy we have pursued for seven years and which has done so much damage to France. Work, attractions and factories,” He said.
Holger Schmidding, chief economist at Berenberg Bank, said the legislative impasse “signals the end of Mr. Macron’s pro-growth reforms.” Instead, he said, Mr. Macron’s centrist coalition will likely have to roll back some of its key initiatives — possibly including his move to raise France’s retirement age from 62 to 64, which led to nationwide protests in 2022.
Mr Schmieding said such reversals and dislike among global investors are likely to dampen growth and increase inflation in France in the long term. “With a possible credit rating downgrade, this will raise financing costs and worsen France's fiscal troubles,” he said.