French left poised for surprise victory over Macron and Le Pen

(Bloomberg) — A left-wing coalition is on track to win the most seats in France’s legislative elections, dealing a surprise blow to far-right leader Marine Le Pen’s hopes of forming the next government.

The New Popular Front, which brings together the Socialists and France Insoumise (far left), could obtain between 170 and 215 seats in the National Assembly, according to initial projections. This is still far from the 289 seats needed to obtain an absolute majority in the Lower House, which has 577 seats.

Marine Le Pen’s National Rally, which pollsters said last week was the most popular candidate, is expected to come in third, with between 110 and 158 seats, while President Emmanuel Macron’s centrist alliance is expected to come in second, with 150 to 182.

A victory by the New Popular Front is likely to worry investors worried about the state of France’s public finances. The group has promised a significant increase in public spending, a hike in the minimum wage and a lowering of the retirement age, measures that would provoke a major conflict with the European Union.

Even if the group does not have the votes to govern alone, it is likely to demand new spending commitments from Macron in order to form a new administration.

With no party expected to win more than 50% of the seats in parliament, Macron will have to appoint a prime minister to lead a minority government. That post usually goes to the group that wins the most seats, but the undecided outcome could lead to a period of coalition-building between the parties.

Those projections partly justify Emmanuel Macron’s decision to dissolve parliament after Marine Le Pen’s party suffered a landslide defeat last month. He was widely criticized for the move after his party finished third in the first round of voting last week, in which Le Pen took the lead.

Last week, there was a frantic effort to activate the Republican Front, a mechanism by which the major parties strategically withdraw candidates from certain constituencies to bolster anti-National Rally votes. Macron’s party withdrew 76 candidates from runoffs where they had little chance of winning, in order to avoid splitting the anti-Le Pen vote. The New Popular Front withdrew 130.

France cannot afford a big spending increase to appease disgruntled voters because the government is already struggling to contain the budget deficit. Last month, the European Commission placed the country under a special procedure for violating deficit rules, which could make it difficult to curb efforts to implement ambitious spending plans while respecting EU rules.

Macron dissolved the lower house nearly four weeks ago and called an early vote after his group was defeated in the European elections.

France’s CAC 40 index has posted the worst performance among major European stock indexes since Macron called early elections last month, while at the height of the fall a measure of bond market risk hit its highest level since the sovereign debt crisis.

Stocks rebounded last week after the first round of voting eased concerns about a far-right government, and general market stress eased.

The CAC 40, however, remains around 4% below the levels observed before the announcement of the early elections on June 9. The premium demanded by investors to hold French government bonds relative to German bonds amounts to less than 70 basis points, below the peak of 86 basis points observed after the announcement of the elections, but well above the level of 50 basis points observed in early June.

(Updated with details on next steps from sixth paragraph.)

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