Brown Rudnick Trade Alert: France

“What a week! What Games! This is France!” exclaimed President Emmanuel Macron on the opening night of the Paris Olympic Games. After the snap election in France led to a hung Parliament with no coalition achieving a working majority, Macron has called for an “Olympic political truce”. According to the Financial Times, Macron will not be naming a new government until the Olympic Games have come to a close as it would create “disorder” for the host country. 

The president shocked the nation by announcing the snap election which was held on 30 June, with a second round held on 7 July in response to a heavy defeat to Marine Le Pen’s Rassemblement National (“RN”) in European parliamentary elections. Not only did the news of the election shock the world of politics, it also had an impact on the French economy with the euro falling by 0.6 per cent, while Paris blue-chip stocks saw a decrease of 1.4 per cent. 

In the European parliamentary elections, Macron’s centrist alliance received 14.5 per cent of the vote, just 0.5 per cent ahead of the centre left, with RN taking home a massive 31.5 per cent of the vote. These previous results made it all the more surprising that RN’s quest for power was thwarted by a surprise left-wing surge in the recent French election.

After the second round results of the snap election, the New Popular Front (“NPF”) alliance came out on top with 182 seats in the National Assembly, with Macron’s centrist Ensemble party not far behind with 163 seats. Le Pen’s RN achieved 143 seats, despite emerging from the first round of votes as the leading party.

Despite the initial rise in French shares following the election results on 8 July 2024 (albeit short lived) and the risk premium of French bonds over German bonds narrowing, the political impasse which has followed has led to concerns of harm to the French economy. Moreover, on 25 July 2024, the Financial Times reported that French business confidence had slumped to its lowest level for more than 3 years. As such, Macron has used the Olympic Games to reassure corporates that the French business environment will continue to be friendly for foreign investors. 

The economic system in France follows the principle of the welfare state, which intervenes regularly in the country’s economy to ensure that social services are developed for its citizens’ wellbeing. This model is expensive in general, but particularly more so following the Covid-19 pandemic when the government implemented a vast plan to minimise unemployment and company closures through the grant of state loans and subsidies. 

In 2024, the most significant obstruction to President Macron’s efforts in controlling the national debt lies with France’s borrowing. Whilst still recovering from the setbacks caused by the pandemic in 2021, the Russia-induced energy crisis and conflict in the Middle East during 2022-2024 hasn’t allowed positive progress quite as expected post-pandemic. 

Nevertheless, Macron indicated that returning to fiscal sanity is a matter of historic importance to him. “We increased our debt during the Covid-19 crisis. But before that our policy was one of budgetary prudence. We must go back to it”, he said in July 2022. The French government claims that borrowing can be slashed quickly, reducing the deficit to 2.7pc of GDP by 2027. 

According to predictions made by IMF, French national debt will steadily increase, reaching 115 per cent of GDP before the end of the decade, whilst Germany reduces its borrowing back to below 60 per cent (similar to its pre-Covid levels).

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