French Elections - Uncertainty still very high on far-right majority
While Le Pen’s far right RN party scored a historic win in the first round of French assembly elections yesterday, the margin of victory was somewhat less than some polls had predicted, with a vote share of around 33% at the time of writing (left alliance NFP are at 29%; Macron’s Ensemble at 21%). 76 seats were won outright, with the remaining 501 seats going to a run-off vote on Sunday 7 July. The highest turnout in decades – at close to 70% – means that 315 seats (over half of the assembly) will go to a three-way run-off, compared with just 22 such triangulaires in 2022.
Withdrawal of third candidates crucial to prevent RN majority – Importantly, NFP leader Melenchon and president Macron almost immediately announced the intention to withdraw candidates from three-way races in order to maximise the electoral chances of remaining candidates standing against RN. Macron’s pledge has been somewhat more equivocal, saying that decisions to withdraw would be made case-by-case depending on whether a rival leftwing candidate is ‘compatible with republican values’. Help may also be forthcoming from the smaller centre-right Les Republicains voters (10% vote share in 1st round), though the commitment to withdraw candidates from this party has been more vague, with one leading figure from the party stating ‘we will not give national instructions’, and that voters remain ‘free in their choices’.
The widespread withdrawal of third candidates would significantly lower the chance of RN gaining an absolute majority. But even in this scenario, uncertainty is very high, as it is not clear that centre-right voters would switch to a far left candidate in the head-to-head seats with RN. Latest projections suggest RN will gain anywhere between 240-310 seats, with an outcome in the upper end of this range necessary to achieve an outright majority of over 289 seats. The picture will become clearer after tomorrow evening’s deadline for 2nd round candidate withdrawals passes.
Truss-style fiscal crisis still looks unlikely – The outcome so far is consistent with our base case, which sees a minority RN government being formed. The lack of an absolute majority would significantly constrain the party from following through on its radical policy agenda. This should prevent a Liz Truss/UK-style fiscal crisis. Even with an absolute RN majority, while this risk would increase, other constraints – including market forces and EU authorities – would still make such a negative scenario unlikely. Whatever happens, it looks clear that we will see less fiscal consolidation than under the current government. After the election, the French 10y spread narrowed around 5bp to 75bp, but our base case sees the spread widening again in the coming quarters. We will give a more comprehensive update on our macro and rates views following the second round vote and once the policy agenda looks more clear. In the meantime, see our election preview for more.