Whoever wins the French elections must beware of the markets

<span>Like Rishi Sunak, Emmanuel Macron is taking a gamble that does not appear to be going entirely to plan.</span><span>Photograph: Chesnot/Getty Images</span>
Like Rishi Sunak, Emmanuel Macron is taking a gamble that does not appear to be going entirely to plan.Photograph: Chesnot/Getty Images

“It’s a big deal, of course it’s a big deal,” says Sophie Montanari, emerging from the Métro at Notre Dame de Lorette in central Paris to talk about her struggles to make ends meet.

“We never used to have trouble at the end of the month. Now we do. It’ll certainly influence our vote.”

A shop worker married to a plumber, with three children under nine, Montanari, 37, said she had recently gone back to full-time working from three days a week.

“I’m not sure the politicians realise how much more expensive life is now for families since Covid,” she said. “Almost everything – electricity, gas, basic foods like pasta. I’m not decided yet. But I’ll be looking carefully at what they plan to do about it.”

Emmanuel Macron, like Rishi Sunak, has called a snap election, which will be held over the two weekends that straddle polling day in the UK. Like the British prime minister, the French president is taking a gamble that at this stage does not appear to be going entirely to plan.

Voters, unhappy about the state of the French economy, are abandoning the parties of the centre in favour of those of the right and the left. Anti-government sentiment is running high.

Related: Europe live: French far-right candidate assaulted on campaign trail

Andrew Kenningham, chief Europe economist at Capital Economics, says: “France has suffered from all the problems the rest of Europe and the developed world more generally has been suffering from: the pandemic, the energy shock, relatively weak productivity, an economy that is not growing very much, insecurity.

“There are big economic problems that are contributing to people’s discontent.”

Assib Hamadi, 45, a deputy hotel manager, is one of those who have lost patience with Macron. He says the cost of living is his “number one priority” and one of the main reasons why he does not plan to vote for President Macron’s centrist party, as he had done in 2017 and 2022.

“He hasn’t done enough,” says Hamadi. “And it’s going to get worse this year – gas is going up in July, electricity later. They say inflation’s down but I’m certainly not feeling it. That’s the first job of a government, isn’t it? Make sure everyone can get by.”

Although France has recorded one of the lowest cumulative inflation rates in the EU since 2019, polls show the cost of living is voters’ top concern.

Politicians have taken the message on board, with all three main contenders in the snap elections – National Rally (RN), the left-green New Popular Front (NFP) alliance and Macron’s Renaissance – promising relief.

But the prospect of higher spending whatever the outcome of the election has spooked financial markets already concerned about the size of France’s annual budget deficit and its rising national debt.

Last week, the European Commission opened a disciplinary case over France’s failure to stick by the EU’s tough budget rules. These stipulate that member states run budget deficits of no more than 3% of annual income. Last year, France ran a 5.5% budget deficit and, despite some planned spending cuts by Macron’s government, it will decline only modestly over the next few years.

The International Monetary Fund estimates that by 2027 the deficit will still be 4.5% of GDP – far too high as far as Brussels is concerned. The Washington-based IMF says France needs a fresh dose of austerity to get Brussels off its back.

That, though, was an assessment made before the elections to the European parliament, in which the RN topped the poll. That prompted a sharp sell-off in French bonds and shares, raising the prospect of a Liz Truss moment: a government that pursues economic policies that alarm the financial markets, and pays a heavy price for doing so.

Bruno Le Maire, France’s economy minister, name-checked Britain’s short-lived prime minister as he sought to warn voters of the risks of voting for RN. “A Liz Truss-style scenario is possible,” he says. Gabriel Attal, the prime minister, on Thursday described his rivals’ plans as “a leap into the unknown, from a great height, without a parachute”.

Kenningham says the state of the French public finances is the country’s biggest headache. When monetary union was launched a quarter of a century ago, Germany and France had similar sized national debt at 60% of GDP. Since then, Kenningham says, Germany’s debt to GDP ratio has remained virtually the same whereas France’s has almost doubled, to 110% of GDP.

“At a time when there is a need to make deficit cuts, electing a party whose main platform involves a very big increase in the deficit is asking for trouble. Investors are not going to want to lend a lot of money to the French government.”

Holger Schmieding, chief economist at Berenberg bank, says there are four possible election scenarios: a hung parliament in which no party has an overall majority; a government dominated by the RN that softens its policy stance; an RN government that sticks to its past agenda and picks fights with the EU; and a left government that pursues a radical agenda of price freezes on food and energy, reduces the pension age to 60 and introduces a wealth tax.

“Under any of our scenarios, France will likely have to live with a higher yield spread over Germany, lower trend growth and some ratings downgrades in the future. Over time, all three factors would exacerbate France’s fiscal challenges.”

Aware of the risk of a fresh fall in French bonds and shares should the markets take fright at some of their proposals, RN and NFP have sought to present themselves as responsible economic managers.

NFP has said its budget deficit will not exceed that of the present government, with measures such as lowering the retirement age back to 60 funded by stronger economic growth and higher tax revenues from those better off.

RN has said that if it wins it will be “reasonable, realistic and responsible”, acknowledging that all of its economic plans, which also include returning the retirement age to 60, will not be achievable straight away, or even soon.

Related: European Commission warns France over fiscal rules as election looms

Business leaders remain to be convinced. Medef, France’s equivalent of the CBI, said last week that the proposals of “some parties” were likely to weaken France economically and lead to financial instability. “The result will be crucial to the creation of an economic future in which companies can prosper and create jobs.”

For some analysts the current state of French politics is reminiscent of the early 1980s, when the newly elected socialist president François Mitterrand, who arrived in office on a platform that included nationalisation, wealth taxes and a higher minimum wage was forced – under intense pressure from the markets – into an austerity U-turn within two years.

Philippe Ledent, senior economist at ING bank, says: “Today, budgetary and debt problems are greater, growth potential is lower and the duties incumbent on each member state of the monetary union are even stricter.”

In Ledent’s view, a leftwing or a rightwing government would have to choose between provoking an economic, financial and institutional crisis or heavily watering down its initial programme. “The examples of Greece in the early 2010s, and more recently of Italy, tend to show that the second option will eventually prevail,” he says.

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