The domestic political situation in France remained extremely tenuous on Tuesday, when Emmanuel Macron’s inner circle was forced to refute rumors he might resign in the event an audacious gamble on ad hoc legislative elections goes wrong.
Radio 1, citing someone close to Macron, said “all scenarios” are on the table, including “extreme” measures.
The allusion to a possible resignation put more pressure on OATs. 10-year French yields exceeded 3.30%, the highest in seven months. The two-day selloff counted as the largest since the onset of the pandemic.
The spread to bunds ballooned to ~65bps, the widest since November. Of course, Germany has its own far-right problem, and it was likewise on full display in the EU parliamentary elections, but the threat to the government’s more pressing in France.
“We see scope for a further widening of the OAT-Bund spread in the near-term,” ING analysts including Chris Turner said Tuesday, citing “looming uncertainty,” not just around the snap vote, but also the EU’s excessive debt procedure.
France’s deficit exceeds the EU’s 3% threshold and the bloc’s budget rules are set to kick back in after a multi-year suspension for COVID. France was downgraded by S&P last month, putting the government under even more pressure to demonstrate something like a commitment to fiscal responsibility.
For whatever it’s worth, a SocGen model suggests the OAT-bund spread at 64bps is pricing a little more than 50% of the “stress intensity” seen around the 2017 election. “Current uncertainties justify some risk premium, but stress intensity should remain well below 2017, when a ‘Frexit’ was debated.”
The ‘Frexit’ conversation isn’t likely to crop up again, but as Goldman noted, “a far-right government could interfere with European economic policy” in at least two ways. “First, some of the far-right’s policy proposals regarding the single market and immigration restrictions would likely be deemed at odds with European law and could create friction in the dialogue with Brussels,” analysts including Alexandre Stott wrote. “Second, large institutional steps at the European level — such as common debt issuance and Ukraine’s accession to the European Union — would most likely require parliamentary approval and could be hindered by a blocking far-right majority.”
Domestically, it’s very hard to say what a poor outcome (for Macron) in the snap vote might mean for efforts, such as they are, to address concerns about the fiscal trajectory. “The most recent [far-right] policy platform dates back to the 2022 presidential election and outlines significant tax cuts and spending increases,” Goldman’s Stott went on, musing about the ramifications of a majority far-right government.
The figure above, from Goldman, shows you the results of the EU vote (on the left) and the composition of the French legislature (on the right).
Do note: France gets a lot of leeway when it comes to fiscal matters and EU rules because… well, because it’s France. In the event of a rightward political lurch, and particularly in the event of an unceremonious early exit for Macron, France would probably be put on a tighter leash.
This is all speculation for now. But if Macron’s gambit doesn’t pay off — and particularly if Le Pen’s RN gets a majority — you can expect OATs to sell off dramatically. The spread to bunds would blow out accordingly.
As for the ECB backstop, it’s complicated. “The trigger levels to intervene appear higher than before, with the central bank having set QT on a preset course and with all reinvestments set to end by the end of this year,” ING remarked, adding that although Christine Lagarde could always deploy the Transmission Protection Instrument (the “anti-fragmentation” tool unveiled two years ago), that backstop’s conditioned on compliance with budget rules.
It seems likely that the RN will put Jordan Bardella forward as its’ candidate. He is the 28 year old protege of Marie Le Pen, whose bio states that he grew up in a working class family of modest means in Drancy and Saint-Denis.
Similar to JDVance, one would think from reading his biography, that he would be left leaning in his political views.
The RN is now truly ‘populist’ (at least in its promises) i.e., they have gone full socialist for the nationals. They have no plans to reduce spending (except by cutting everything to do with foreigners/immigrants etc) and, on the contrary, want to expand the list of goodies the good French (i.e., whites) would receive…
Macron is in a corner after welcoming immigrants and now being forced to cut spending – assuming France truly needs to comply with the EU 3% budget deficit rule.
He can always step aside and lobby for one of those “cushy” jobs at the EU.
No, SeaTurtle, they’ll put Bardella forward as PM if they win a majority, but saying RN would put Bardella ahead of Le Pen in 2027 for the presidency is like saying the GOP would put Matt Gaetz ahead of Trump for the White House. Bardella’s a wunderkind. Le Pen’s an icon.
I mean, look, I could be wrong. I’m not an RN insider. And things could change in three years. But she’s at the height of her popularity. It’d be strange for her to come all this way only to pass the torch before claiming the prize.
He married into her family- so, who knows what is going on. The good news is that he doesn’t look like a skin head.
Bardella is not working class in any way; his estranged father paid his way for private school. Bardella dropped out of business college to become a professional politician, having found his way to the far right in high school. He is a smiling handsome young guy who does not (yet) share the same name as the vicious, racist Le Pen family, and he uses as cred with the under-educated French from the provinces the fact that his mother is an Italian immigrant. He reminds one of Jared Kushner, ever mild and smiling as he proceeds to con those as dumb but not as good-looking as he is. I do hope that Macron’s gamble on snap elections doesn’t end up resembling Cameron’s gamble on the Brexit vote…..