France: Elections could herald significant policy shift
On 30 June, France heads to the polls to elect a new lower house of parliament. Polls currently put the right-wing National Rally (RN) party ahead of a coalition of multiple left-wing parties, with President Macron’s centrist political movement in third place. The center-right Republicans party are polling a distant fourth.
However, the two-round voting system (a second round will be held on 7 July) makes predicting seat distribution in the 577-seat lower house tricky, as some voters will opt for a different party in the second round than in the first. As such, a government led by the RN, the left-wing coalition or Macron’s own party are all possibilities: in all three cases, the government could lack a majority in parliament, which would hamper policymaking.
The RN would likely attempt to cut taxes—including on such essential goods as food and energy—and boost spending on security. The left-wing coalition would likely attempt to hike taxes on the wealthy and corporations, boost spending on health and education and lower the retirement age. As such, a majority government run by the RN or the left could result in a higher fiscal deficit and increased public debt relative to a more centrist administration representing policy continuity.
That said, the European Commission and financial markets will impose limits on the government’s ability to loosen its fiscal stance. On 19 June, the Commission opened an excessive deficit procedure against France; the country’s budget deficit is forecast to be close to 5% of GDP this year, above the 3% limit set by Brussels. In addition, S&P cut France’s credit rating in late-May; further ratings downgrades and bond yield spikes could occur if large unfunded tax cuts and spending hikes are floated under the next government.
Moreover, there is a decent chance that the RN or the left-wing coalition will lack an absolute parliamentary majority even if they form the next government; in such a scenario, they would be forced to jettison their most lavish tax-and-spend proposals.
Regardless of the victor, our panelists are downbeat on France’s economic prospects, with GDP growth seen below the Euro area average out to 2028 despite relatively strong demographics. Over the same period, the fiscal deficit and public debt are seen elevated at over 3% and 110% of GDP respectively.
On the political outcome, EIU analysts said:
“We believe that the most likely outcome […] is another hung parliament with a prime minister coming from a broader alliance of republican parties. […] Moderate voters, especially older ones, will probably fear the prospect of a far-right prime minister, while traditional parties tend to do better in the legislative polls. Nonetheless, given the level of support for far-right parties in the polls, Mr Macron’s decision is a huge political gamble, and the risk of a cohabitation scenario with a far-right prime minister is very high.”
Goldman Sachs analysts commented on fiscal policy:
“[Under a status-quo electoral outcome] we assume a gradual improvement in the fiscal balance—with some slippage relative to the government’s guidance—and the 10-year spread to Germany falling back to its pre-dissolution level of 50bp. We then consider a deadlock scenario in which a hung parliament does not allow any political group to pass meaningful tax or spending measures. Past reforms and the improvement in economic activity could still allow the primary balance to improve slightly, but borrowing spreads would remain at […] 75bp. […] Lastly, we consider a scenario in which either the far-right or the left coalition secures an absolute majority and is able to deliver a sizeable fiscal expansion. We assume that the primary balance is -2pp of GDP, more negative than in our baseline, and borrowing spreads widen further to 100bp.”