French election shock sends euro skidding after left-wing victory

The euro fell 0.3% in early Asian trading on Sunday after France’s New Popular Front party won the country’s legislative elections.

According to an Ipsos poll, the far-left NFP won between 177 and 192 seats in the National Assembly, out of a total of 577.

The party of outgoing President Macron is expected to win 152 seats against 158. This result constitutes a humiliating defeat for the Ensemble group, which led to the resignation of Prime Minister Gabriel Attal.

While the markets had recently rebounded on the conviction that the right-wing National Rally was not ready to obtain an absolute majority in France, market uncertainty seems set to return.

The far-right RN is expected to win only 138 to 145 seats after Sunday’s vote, although investors now have new faces to watch.

“It seems like the anti-far-right parties have really received a lot of support,” Simon Harvey, head of FX analysis at Monex Europe, was quoted as saying by Reuters.

“But fundamentally, from a market perspective, there is no difference in terms of outcome. There will really be a vacuum in terms of France’s legislative capacity.”

Markets notoriously hate uncertainty and the French political scene is currently far from stable.

Given the likelihood of a parliament without an absolute majority and the lack of clarity about what form of coalition might be possible, some form of minority government or “cohabitation” – where power is shared between a prime minister and president from opposing parties – seems likely.

This could herald a legislative impasse.

Added to this is the fact that the left-wing New Popular Front (NFP) alliance is not known for its budgetary prudence.

As early as the summer, party leader Jean-Luc Mélenchon had said that decrees could be issued to repeal Macron’s pension reform and increase the French minimum wage.

The group also wants to implement a 10% pay rise for civil servants, increase housing subsidies by 10% and hire more teachers and health professionals.

The additional measures will involve a gradual increase in public spending of 150 billion euros. The party says this increase will be financed by a tax increase for the richest.

The coalition’s belief in public spending has spooked markets, especially given the current health of French finances.

Mélenchon’s “France Insoumise,” however, represents only one part – albeit the largest – of the NFP. It remains to be seen whether the alliance can hold up now that it has propelled the National Rally to third place in the elections. Moreover, any attempt to form a government may well seek to circumvent “France Insoumise.”

The country made headlines in March when it announced deficit figures for 2023, with public accounts showing a budget shortfall of 5.5% of economic output.

This figure represents an increase from 4.8% the previous year and is significantly higher than the government’s target of 4.9%.

The Macron government had pledged to reduce the deficit to less than 3% of national product by 2027, which would allow it to stay in line with EU targets.

Alexandre Ouizille, leader of the New Popular Front (NPF), had said before Sunday’s vote that his party would not increase the deficit. “We will not reduce it,” she added, however.

Trading in French bonds and stocks will begin in Europe on Monday morning.

Investors will be closely watching developments in Paris to see how this new political era could affect fiscal stability.