Macron's call for elections in France raises fears of financial problems

Investors made clear on Tuesday the depth of their concerns over President Emmanuel Macron's gamble to call a new election in France, driving up the nation's borrowing costs, pushing down stock prices and prompting ratings agency Moody's to warn that it could downgrade French sovereign debt as a risk. increase in political instability.

Macron's dissolution of Parliament's lower house on Sunday, after his party was beaten by Marine Le Pen's far-right party in European Parliament elections, has sparked concerns that the government could reach a stalemate . The turmoil has focused attention on France's fragile finances and the prospect of a legislative deadlock that could undermine the government's ability to deal with it.

“This decision will not alleviate the economic challenges facing the country,” Philippe Ledent, senior economist at ING Bank, wrote in a note to clients. Public finances and the performance of the French economy will be “at the center of the election campaign”, he added.

As the head of France's conservative party called on Tuesday for an alliance with the far right to fend off Macron ahead of two rounds of national voting starting on June 30, investors punished French stocks, sending the Paris stock market tumbling '1.33%. after the sharp decline on Monday.

The yield on 10-year French government bonds rose sharply for a second day on investor unease over France's ability to manage its finances. Bond yields are indicative of government borrowing costs, and high levels would make it harder to stimulate the economy and manage the country's debt.

France suddenly finds itself facing uncharted territory. The prospect that Le Pen's party, the Rassemblement National, could triumph in the hastily called legislative elections – which could weaken Macron's grip on power and perhaps force him to govern with a prime minister from his political opposition – risks accumulating economic chaos. at the top of the political budget.

“Domestic fiscal and economic policies are set by the government, which needs a majority for its legislation in Parliament,” said Holger Schmieding, chief economist at Berenberg Bank in London. “For a France in fiscal difficulty, the new parliamentary elections add a level of uncertainty.”

The turmoil comes with the French economy at a difficult time, as wars in Ukraine and Gaza, economic slowdowns in Germany and China and record interest rates impact growth more than expected. The Macron government recently warned that growth would be weaker than expected this year, and his finance minister, Bruno Le Maire, was tasked with quickly finding more than 20 billion euros in savings as the country's finances nation deteriorate.

After the government spent lavishly during the pandemic to support the economy and protect consumers from high energy prices, France's debt rose to 3 trillion euros, equivalent to 110.6% of gross domestic product. The public deficit for 2023 amounts to 154 billion euros, equal to 5.5% of gross domestic product, one of the worst performances in the eurozone.

France is now at risk of violating European Union budget rules that limit public borrowing and is likely to face sanctions from the European Commission, the EU's executive branch, next week. On Tuesday, Le Maire warned that France could be thrown into a “debt crisis” if Le Pen's party takes power.

Paris is increasingly concerned about the downgrading of French debt by international rating agencies, which would increase financing costs. On May 31, Standard & Poor's downgraded France's debt rating, unnerving the government, whose economic credibility has been one of its main political assets.

Then on Tuesday, Moody's warned that Macron's move could worsen France's financial problems by creating “a polarized political environment.” By dissolving the National Assembly, Macron has increased the risk that France will fail to bring its budget back into line, raising the prospect of a further downgrade.

“There is a high risk of greater political instability in the future,” the agency said, adding that Parliament could be thrown into political stalemate for at least a year because the winner of the election is unlikely to gain an absolute majority. That could mean almost all laws proposed by Macron would be blocked, including measures to cut public spending needed to avoid violating European Union fiscal rules.

The danger is that France's high debt will swell further, which could lead to a faster-than-expected rise in interest spending, Moody's added.

Le Pen and her fiery protégé, Jordan Bardella, have advocated for increased public spending to address the issues that drove waves of voters to the National Rally party, notably the loss of purchasing power caused by high inflation and from energy costs, and labor demand. creation in areas that have been devastated by industrial losses due to globalization.

Macron sought to play the role of European leader during Russia's invasion of Ukraine, but the National Rally has assiduously courted voters, especially in rural areas.

Le Pen's party won by wide margins this weekend in places that have lost jobs to deindustrialization. The National Rally has won a wider audience with its promises to strengthen purchasing power, create jobs through “smart” protectionism and protect France from European policies that have expanded globalization.

Macron has sought to counter the rise of the National Rassemblement, which has exploited the economic slowdown, immigration issues and regulatory requirements imposed by the European Union to attract disenchanted voters.

Now halfway through his second term, Macron sought to demonstrate that he was bringing France back to business, burnishing its image especially among foreign investors. He has revised France's strict labor code to make it easier for companies to hire and fire and is streamlining France's generous unemployment system.

He is also overseeing a huge subsidized industrialization program that has attracted hundreds of billions of euros in commitments from multinational companies. These include the creation of four large electric car battery plants in northern France and a strengthened pharmaceutical industry with new investments from Pfizer and Novo Nordisk, which will expand production of its popular weight-loss drugs Ozempic and Wegovy.

Last month, Macron hosted hundreds of global CEOs at the Palace of Versailles for an annual business conference that garnered big new commitments, including a 4 billion euro investment by Microsoft for a new data center in France Oriental.

Nonetheless, France's economic slowdown was evident, particularly to voters who switched to Le Pen's party. Many believe that inequality has widened, rather than narrowed, as Macron promised, in the seven years since he took office.

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