European Parliament - Shift to the right hurts the capitals more than EU politics

However, the political shift to the right is somewhat less extreme than expected. The pro-European political centre remains intact. The centre-left ‘Socialists and Democrats’ end up with 138 of the total 720 seats, three less than in the outgoing parliament of 705 seats, but two more than projected by the IPSOS poll last March. The centre-right ‘European People’s Party’ reached 180 seats, gaining two, instead of losing one as predicted by the IPSOS poll.

Meanwhile ‘Renew’ and ‘The Greens’ suffered extensive losses. Both are down 15 seats. In the projected Parliament Renew will have 86 seats and The Greens 56. The shift in the focus of voters played a role in the loss. In 2019 the environment was the main issue during the elections, which boosted the results, particularly The Greens. In last week’s elections migration was the main issue. Renew and The Greens are important proponents of progressive policies, such as greening the economy. New policy initiatives on this front will likely fall down the list of priorities, given the election outcome.

As the biggest party, the European People’s Party has the privilege to nominate the next president of the European Commission. Hence, chances are that Ursula von der Leyen will continue to lead the European Commission. This would contribute to stability. However, von der Leyen will have to convince a majority in Parliament first that she is the best candidate for the job. A tough job, as she needs to please both the left and the right wing. In her post-election speech she tried to attract the left wing by saying the EPP will form a bastion against the radical left and right. This raises the question of how she views her relationship with Giorgia Meloni, who she has recently tried to curry favour with.

Given the new Parliament’s constellation, as we flagged in our preview (see here), creating coalitions in a more fragmented Parliament will become more difficult. It is likely that the European People’s Party will mostly stick to cooperating with S&D, Renew and The Greens, and occasionally will seek partnerships on the radical right. Whether this is successful largely depends on the willingness of radical right-wing parties to cooperate. Their track record so far is extremely weak because their policies are not necessarily consistent with each other.

This might change, though, in view of the recent attempts by Marine le Pen and Giorgia Meloni to get closer to each other. The political climate in Europe has polarized. Ahead of the elections, we saw various instances of violence against politicians, with attacks on Slovak prime minister Robert Fico, and Danish prime minster Mette Frederikson. In such an environment, it is difficult to have open discussions on differences in political views, and to produce robust policies that are broadly supported. In combination with the weak support for national governments in major European countries France and Germany, we continue to think a policy poor period lies ahead. Indeed, the risks surrounding the snap French election (see below) suggest that European governments will face potentially even greater difficulty coming to common ground solutions. (Philip Bokeloh)

French snap election: How high is the risk for France?

Yesterday, President Macron took many by surprise by announcing a snap legislative election on the back of weak results for his political party in the EU election. His political party (Renaissance) obtained only half of the votes than its far-right opponent, Rassemblement Nationale (RN) which is Marine Le Pen’s party. This was clearly a protest vote against Macron and his current government, and was the key reason for the President to call for new legislative election to re-assess the political direction that the French would like to take for the remaining three years of his mandate. The election will be held on the 30th of June (1st round) and 7th of July (2nd round). This will be a crucial election as it will determine French government policy for the upcoming three years. Although Macron will remain president during this time (with the presidential vote still to take place in April 2027), the real power is in the hand of the prime minister as he or she will make the decisions on the political and economic policy of the country.

At this point, we see three potential scenarios playing out:

1. RN party gains a majority at the parliament: This could lead to a so-called cohabitation for the remaining three years. This refers to a situation where the president’s political party and the Prime Minister’s party are different. In this scenario, the President would be forced to nominate a Prime Minister from the RN. This would clearly be the most risky scenario for the French debt market as it would negatively impact the country’s fiscal outlook. However, for this to happen the RN would need to substantially increase its number of seats as it currently holds 89 seats in the parliament against 245 seats for the government in place. In our view, it will be difficult for the RN party to be able to close the gap to this extent. Furthermore, the risk of seeing the far-right party leading the government might push traditional parties like the PS (left-wing party) or the LR (right-wing) party to form a coalition to keep the RN party out of the government.

2. Reunification of the left-wing NUPES coalition which was established during the past election composed of the Socialist (PS), the Greens (Les Verts), and far-left party (La France Insoumise). Last time, the NUPES coalition managed to obtain 131 seats (second biggest political force in the parliament after Macron’s party). If this coalition were to gain a majority, then Macron would need to nominate a prime minister from this coalition instead. However, we deem this scenario unlikely given the recent political backlash between the socialist party (PS) and Melenchon’s party (La France Insoumise), particularly following the controversial reactions to the Gaza conflict from the LFI party. Therefore, there is significant uncertainty on whether a coalition could be formed again. The parties are currently in discussion on the possibility to re-form this coalition. An update on this should follow in the upcoming days.

3. Last, we think there is still a significant chance for Macron’s party to retain its (relative) majority at the parliament. This scenario is in our view the most likely outcome at the moment, as despite the EU election results, this is usually not representative of the likely legislative election outcome. This would be the most market-friendly scenario as the current government would remain in place and continue with its economic and fiscal plan, which are more in line with the EU’s fiscal rules. However, it is likely that Macron’s party will lose seats compared to two years ago.

Overall, the election brings additional uncertainty to France’s economic and fiscal outlook which already led the market to price in a higher risk premia, with the 10y French spread widening by 6bp today. Given that the announcement was made last night, no polls have yet been run on the upcoming election. Thus, we will wait for new polls to come out before making any significant change to our spread outlook. We will write a more detailed note in the coming weeks on the French election and prior the first round to discuss the likely political outcome. Here we will explore in more detail the economic and fiscal impact for France, as well as the impact on French bond yields and spreads. (Sonia Renoult)