Euro strengthens on the idea that the RN may not obtain an absolute majority in France

This article was originally published in English

The first round of French elections showed that Marine Le Pen’s far-right National Rally (RN) party may not be able to secure enough votes to secure an absolute majority in the Assembly. This possibility resulted in a strengthening of the euro, with the single currency opening higher against most other G-10 currencies during Monday’s Asian session. Investors fear serious economic and political disruption if Ms. Le Pen’s party comes to power after the legislative elections.

A possible parliament without a majority

Over the weekend, turnout in the French election reached 59.4%, up from 39.4% two years ago, the highest turnout since 1986. According to projections from Sunday’s first round, the far-right National Rally (RN), led by Marine Le Pen, won between 33% and 34.2% of the vote nationally. The left-wing coalition followed with 28.5% to 29.6%, while President Emmanuel Macron’s centrist alliance won between 21.5% and 22.4%.

The potential results suggest that the RN could obtain between 230 and 315 seats, the New Popular Front between 115 and 200 seats, and Macron’s centrist alliance between 60 and 120 seats. This is the first time in history that the far right has obtained such a result in France.

However, Le Pen’s party has yet to secure an absolute majority to dominate the National Assembly, making it difficult to pass laws. Although this could weaken the French political landscape, the second round of elections, scheduled for July 7, will determine the future of the country. If the RN fails to obtain enough seats to obtain an absolute majority in Parliament, the conclusion of agreements between the parties during the second round will be decisive for the outcome of the election.

However, this could be the best outcome for European markets and the euro, as the French far right has not gained as much support as expected. The scenario ofA hung parliament means that no party can override the legislative branch, posing less of a threat to France’s financial stability.. It will also give Mr Macron the time and opportunity to make a turnaround in the next election, which will take place in three years.

European markets end June down and volatility is high

Major European stock markets ended June on a negative note due to political unrest. The fall was particularly pronounced for French stocks, with the CAC 40 losing 6.42% last month. The Euro Stoxx 600 fell by 2.08% and the DAX by 1.42% in June. As a result, the euro has weakened against most other G-10 currencies due to the rise of the far right in the EU legislative elections. Given the uncertainties surrounding the final outcome of the French elections, European stock markets and the Euro are expected to remain volatile in the coming week.

Risk aversion may continue to dominate market sentiment, as evidenced by the spread between yields on French 10-year bonds and their German counterparts, which rose again to 81.1 basis points on Friday, the level the highest since 2012. In times of crisis, German government bonds are considered safe havens in Europe, leading to an increase in the yield gap between the benchmark bonds of these two countries.

Sale of French government bonds

At the same time, investors appeared to sell French government bonds, fearing that the rise of the far-right party could undermine France’s ability to manage its public debt. Marine Le Pen’s program, which advocates anti-immigration policies, tax cuts and an increase in the retirement age, should considerably widen the public deficit.

Some also fear that potential economic turmoil could have a ripple effect across the eurozone. Last week, the German government halted a joint issuance of public debt aimed at supporting the defense system due to political unrest in France. Furthermore, the rise of far-right influence could discourage foreign investment and hamper France’s technological progress in Europe, jeopardizing Emmanuel Macron’s ambitious plan to attract up to 15 billion euros of investments, particularly in the areas of technology, artificial intelligence and pharmaceuticals.

Despite the growing risks in France, the ECB does not consider it necessary to intervene in the French bond market. Lawmakers stressed that resolving any turbulence in French markets was primarily the responsibility of French policymakers.