France Staggers Toward Political, Financial Crises

Bruno Le Maire’s concerned.

During an interview with Franceinfo radio, Emmanuel Macron’s finance minister took aim not only at France’s far-right, but also the country’s left, which united this week to form a “New Popular Front.”

“Their program is complete madness,” Le Maire said, castigating the likely agenda of the left alliance comprised of the radical Insoumise party as well as the socialists, the greens, the communists and some hangers-on you’ve never heard of.

The left-wing tie-up felt like something out of a comic book. “A new page in France’s history has been written with this new Popular Front!”, a grandiose statement declared. Cue a splash page with four heroes posing, fists on hips: “Leftists assemble!”

Le Maire resorted to fearmongering. The leftist bloc, he warned, will “guarantee” more cuts to France’s sovereign credit rating, “mass unemployment” and could mean an exit from the European Union.

I don’t think the scare tactics are going to work. Not this time. Not against the left and not against the right either. European electorates, and particularly voters who aren’t enamored with the political center, are sick and tired of hearing about ratings agencies. And painting one’s political rivals as proponents of an EU exit isn’t as effective as it once was on the campaign trail.

The leftist consortium should be formidable against Marine Le Pen’s juggernaut. Think of two 400-foot titans wrestling in the middle of a metropolis, falling clumsily into tall buildings, using light poles as spears and throwing cars at each other.

I don’t see the majority math working for the left, united or not, but if it somehow did, it’s not entirely out of the question that Jean-Luc Mélenchon could end up prime minister. “I don’t impose myself, but I don’t rule myself out,” he said on France 2. (The other groups in the alliance aren’t likely to support that. At a time of bitter division, he’s not exactly a unifying figure.)

Meanwhile, on the right, The Republicans tried to oust party leader Éric Ciotti after he called for an alliance with Le Pen, breaking with decades of precedent and, according to many, bringing ignominy on the party. He didn’t go quietly.

Ciotti, citing a security risk, tried to lock the doors of the party headquarters in Paris in an apparent bid to prevent an emergency meeting convened to remove him. When that didn’t work (he was removed anyway), he called the meeting illegitimate. “None of the decisions carry legal consequences,” he said. “I am and remain the president.” Then he threatened the rest of the party leadership with unspecified “criminal repercussions.” Later, Ciotti showed up on TV claiming that dozens (“about 80”) Republican candidates were prepared to run with Le Pen’s support.

Whatever the case, the blocs — the left alliance and what’s likely to be some manner of tie-up between Le Pen and breakaway LR lawmakers — could condemn Macron to a total wipeout. Some of his candidates may not make it to the second round.

Markets don’t love this. The CAC 40 suffered its worst weekly rout since 2022, an egregious 6% plunge that wiped away around $100 billion of market value. Losses for the country’s largest banks were in the double-digits.

Do note: That chart would look more dramatic were it not for the pandemic plunge, which stretches the y-axis.

Le Maire lambasted the far-right in terms that were every bit as caustic as those he used to deride the left. “When I look at the far-right, I see a program that is made of lies,” he said. “I’m sorry, they don’t have the means to afford these expenses.” By “these expenses” he meant promises related to public spending, cuts to electricity prices and other populist proposals.

I don’t think the threat of a so-called “Frexit” is real, but markets are beginning to take it a semblance of serious, which is surely what Le Maire (and Macron) want: Facing disaster at the ballot box, all they have left is the fear card.

The OAT-bund spread is now the widest since 2017. It blew out by ~30bps this week alone.

“Given the relevance of the French economy to the EU as well as flashbacks to Brexit, we’re sympathetic to the flight-to-quality,” BMO’s rates team said Friday, as German yields fell. “One would need to seriously consider the longer-term prospects for the EU in the event that France follows the UK and leaves the building, as it were.”

Bloomberg reviewed a draft proposal (they called it a “manifesto”) from the left alliance which calls on France to refuse “austerity constraints” imposed by Brussels. You could forget about limits on debt-to-GDP ratios, deficits and so on.

The left bloc would also add a week to paid annual leave, reinstate a wealth tax and “abolish” Macron’s controversial pension reform. Banks would face higher reserve requirements related to climate risks and financial transaction taxes would increase.

When asked if France’s tumultuous political reality could spark a financial crisis, Le Maire said “yes.”


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21 thoughts on “France Staggers Toward Political, Financial Crises

  1. [This article briefly said ‘BTP-bund spread’ instead of ‘OAT-bund’ spread. It was corrected two minutes after publication]

  2. I wrote this to a friend who is wondering if this will impact one-month vol:

    “Political machinations in the EU hardly matter. Unless they somehow send interest rates much higher. Otherwise ~ If the pro-Russians take over, there will be a deal with Putin which would be MARKET FRIENDLY! Especially for large cap US stocks. No one really cares about Ukraine anymore. ”

    Everything is bullish for US “AI stocks” !

    1. I have a hard time believing a Putin deal will be market friendly. I am about 2/3 way through Capital by Pickety. It seems that wealthy people’s financial managers will recognize the systemic ongoing risk a Putin busom alliance poses. Such a geopolitical change occurring just at a time when it seems the west is close to winning on the ground would be a travesty.

      1. Everything is market friendly until it isn’t. Algo’s don’t care about politics, alliances, or the global order. When everything goes south they will sell off the market and buy commodities.

        I darkly imagine mushroom clouds over DC, Moscow, Pyongyang, London, etc. The algo’s will transition to investing in rad suit manufacturers, bomb shelter suppliers, and canneries.

          1. Well if you look through basically any 10-K in the past year, almost every firm mentions a strategic investment in Gen AI and LLM’s. This technology is incredibly error prone but despite those errors, adoption is continuing to grow. Ignoring the red flags is absolutely going to have consequences. And I fear at some point, AI is going to drive market outcomes that will be consequentially negative for investors. But I think there is potential for the Apple/OpenAI partnership to be a step too far. If iOS starts feeding their users bad information, screwing up schedules and alarms, or sending messages that has negative impacts on their lives; Apple will be who pays the price for OpenAI’s mistakes. Given enough of these negative impacts it could cause a societal shift in the view of Gen AI and potentially even technology generally.

            Either Earth becomes an algorithm society of code executing meaninglessly as long as machines have power and networks, or humans turn their back on this stage of the tech evolution because they find it less trustworthy than the government. The 2028 presidential campaign slogan “The 10 most terrifying words in the English language are ‘I have a generative AI and it’s here to help'”.

          2. Seeing this comment a few days late but I just wanted to reply: thank you.
            As a professional technologist and an avid early adopter and explorer of the capabilities of LL ems, I don’t think I’ve ever seen anything more foolhardy than the recent incredibly widespread hype, including significant financial investment, all for a technology that mostly simply doesn’t work. As you correctly point out, and far too few others do, the error rate is overwhelming and swamps any occasionally subjectively impressive-seeming outcomes from a stochastic process. The confirmation bias required to try to make practical use of these things for any length of time, and yet still believe the current state of the technology is anything but an interesting toy, is beyond anything I’ve seen before.

      2. “close to winning on the ground”? It looks more like Verdun redux to me?

        But it’s easy to foresee the narrative that a war-ending deal with Putin would usher in an era of peace, a second “peace dividend” along with resumed energy shipments from Russia which would drive down inflation.

          1. Lucky we an store power. We have been building extremely large batteries for a long time. I once worked in the 1990’s on engineering a project that built a 20 acre battery. The ‘battery’ was to refine copper. Just a matter of time to get the tech right and investment in place.

  3. If replacement leadership in France wants to spend money in excess of existing EU parameters and also wants to curb immigration- this will be very difficult to achieve as part of the EU.
    If immigration is going to be controlled- that has to happen at the EU borders in Italy and Greece- where the immigrants first land. The entire EU would have to agree on how this is to be done and how this is to be paid for. Good luck with that!
    If a country wants to deficit spend in excess of EU parameters- it is a lot easier to do that with one’s own currency.

    I don’t know if I will need them, but I still have some francs saved from when I traveled there decades ago. 🙂

    1. I disagree on the immigration point. Italy and Greece would be happy with the most extreme measures we could take. And, IMHO, should take. Poland, Hungary etc. are also ill-disposed (to say the least) to immigrants. So, on that topic, the people of Europe are pretty united.

      Again, I am very much a left leaning centrist/a left wing liberal, though not “woke” (to try and be simple about it). However, on immigration, I agree with the right and basically everybody but the ultra leftist/woke left. We need to control it a lot better and be able to choose who comes in.

      I’m against what asylum has become and am against paying ransom to Turkey to stop the flood of Syrians before they hit our borders.

  4. It’s worth noting that the fiscal/spending/budget issue is actually a problem for France. France isn’t a currency-issuing sovereign. So, silly as this is, France does have real, binding budget constraints because they can’t print money.

    1. Yes, that is silly that France can not set their own budget and control their own currency!

      So, given the direction that it appears France is headed- is Frexit out of the question?

  5. What an “own goal” by Macron.

    French politics may devolve into disorder or populism, but France remains one of my potential escape routes in the event orange becomes the new red, white, and blue.

    1. There is not a better place to be in order to develop one’s skills as a flaneur (one who wanders without purpose, observing society) 🙂

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