French vote leads to hung parliament

The French parliamentary elections have culminated in no party securing an absolute majority, with a surprising twist: the left-wing New Popular Front alliance garnering the most seats, surpassing President Emmanuel Macron’s centrist Together alliance and the Marine Le Pen-led National Rally (RN) coming in third. The outcome upends the norm of parliamentary majorities in France, leaving it in uncharted political territory.

A few short-term scenarios are possible. Likely paths include a left-led minority government without parts of the far left or right, or a technocratic government appointed by Macron. The left-wing coalition is in pole position to form a government—but this will require negotiations with the centrist bloc. Some within the center-left parties have signaled willingness to negotiate to help form a loose majority in parliament.

Negotiations to establish a working parliamentary majority could span days—or even weeks. We see this outcome as potentially negative for French government bonds given the political uncertainty and if a left-leaning coalition enacts tax and spending changes that strain France’s budget deficit. France has already been warned for breaching European Union fiscal rules and had its sovereign credit rating downgraded earlier this year.

If no coalition can be formed, a technocratic government of civil servants appointed by Macron may take charge. Such a government would only pass essential legislation, such as the budget, without enacting substantial policy changes, including fiscal reforms. We would view this as neutral for French assets, with government bond yields likely staying elevated due to the uncertainty.

The result leads to a fractured political landscape for at least a year—Macron cannot call another parliamentary election for at least 12 months. His presidential term, lasting until 2027 barring resignation, means he is still in charge of defense and foreign affairs, including France’s response to the war in Ukraine. Yet this political gridlock could diminish France’s influence on European Union policy.

Broad market reaction to the election outcome was relatively muted. The spread between French and German 10-year government bond yields was steady and has narrowed since Macron called the snap election a month ago when it widened to levels last seen during in the euro area debt crisis.

We stay neutral euro area government bonds on a tactical six to 12-month horizon and a long-term strategic horizon, favoring UK gilts given the political stability anticipated from the UK election outcome. We maintain our underweight to European stocks overall on a tactical horizon.

BlackRock Investment Institute​

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