Whoever wins the French election should be wary of the markets

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

“We have never had problems at the end of the month. Now we do. It will certainly affect our vote.”

A shop worker married to a plumber with three children under the age of nine, Montanari, 37, said she had recently returned to full-time work three days a week.

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

Emmanuel Macron, like Rishi Sunak, has called for snap elections, which will be held over the two weekends leading up to 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 according to plan.

Voters, unhappy with the state of the French economy, are abandoning centrist parties in favor of those of the right and left. Anti-government sentiment is on the rise.

Andrew Kenningham, chief Europe economist at Capital Economics, says: “France has suffered from all the problems that the rest of Europe and the developed world in general have suffered from: the pandemic, the energy shock, relatively weak productivity, an economy that is does not increase much, the uncertainty.

“There are huge 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 did in 2017 and 2022.

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

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 accepted the message, with all three main contenders in the snap election – the National Rally (RN), the leftist New Popular Front (NFP) alliance and Macron’s Renaissance – promising relief.

But the prospect of higher spending, regardless of the outcome of the election, has spooked financial markets already worried about the size of France’s annual budget deficit and its growing national debt.

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

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

This, however, was an assessment made before the European Parliament elections, in which RN led the poll. That triggered a sharp sell-off in French bonds and stocks, raising the prospect of a Liz Truss moment: a government pursuing economic policies that alarm financial markets and paying a heavy price for doing so.

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

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

“At a time when deficit reduction is needed, electing a party whose main platform includes a very large increase in the deficit is asking for trouble. Investors will not want to give too much 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; an RN-dominated government softening its political stance; an RN government that sticks to its past agenda and resolves disputes with the EU; and a leftist government pursuing a radical agenda of freezing food and energy prices, lowering the retirement age to 60 and imposing a wealth tax.

“Under each of our scenarios, France is likely to live with a higher yield spread in Germany, lower trend growth and some downgrades going forward. Over time, all three factors would exacerbate France’s fiscal challenges.”

Aware of the risk of another fall in French bonds and stocks if markets are spooked by some of their proposals, the RN and NFP have tried to present themselves as responsible economic managers.

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

The RN has said that if it wins it will be “reasonable, realistic and responsible”, admitting that all its economic plans, which also include bringing the pension age back to 60, will not be realized immediately, even soon.

Business leaders remain to be convinced. Medef, the French equivalent of the CBI, said last week that the proposals by “several parties” were likely to weaken France economically and lead to financial instability. “The outcome will be crucial to creating an economic future in which companies can thrive and create jobs.”

For some analysts, the current state of French politics is reminiscent of the early 1980s, when newly elected Socialist President François Mitterrand, who came to office on a platform that included nationalization, wealth taxes and a higher minimum wage, was forced to – under intense pressure from the markets – in a tightening turn within two years.

Philippe Ledent, senior economist at ING bank, says: “Today, the budget and debt problems are bigger, the growth potential is lower and the tasks that belong to each member state of the monetary union are even stricter.”

According to Ledent, a leftist or rightist government would have to choose between provoking an economic, financial and institutional crisis or drastically reducing its initial program. “The examples of Greece in the early 2010s, and more recently Italy, tend to show that the second option will ultimately prevail,” he says.