A ‘dire situation’? RN potential in focus

“The example of the 1997 dissolution — the only true dissolution — should prevent future presidents from using this weapon carelessly.”

Last Sunday it became evident that Emmanuel Macron had not learned the lesson that French presidents would be wise to avoid the miscalculation of Jacques Chirac — as portentously flagged by Crédit Agricole CIB economists back in 2021 — when he dramatically set France on a course that has left large parts of its population, neighbours and financial markets fretting about the future.

With the Rassemblement National (RN) coming first with 31.37% of votes in European elections, and Macron’s centrist Ensemble coalition on just 14.6%, the prospect of defeat for France’s traditional parties by the far-right RN after first and second rounds of voting on 30 June and 7 July, respectively, is likely, according to Valentin Giust, global macro strategist at Crédit Agricole CIB.

Indeed, his central scenario is a substantial majority for the RN, with an absolute majority only just shy of being the base case.

“There are unquantifiable factors and uncertainties — voter turnout, candidates who drop out of three-way races, correlations between first-round scores and second-round gains — that mostly create upside for the RN in terms of the final results versus the central scenario,” he says.

This is despite early polls not reflecting the factional manoeuvring that occurred this week and thus being of questionable value, not to mention the unprecedented political backdrop. For example, it has been suggested that Macron had expected to benefit from the left being dispersed, as was the case in the European elections, but its parties have quickly coalesced to form the Front Populaire bloc, whose combined European vote share was ahead of Ensemble.

As well as flagging this miscalculation, Louis Harreau, head of developed markets macro and strategy at Crédit Agricole CIB, is sceptical of suggestions Macron was seeking to lay a trap for the RN by calling an election it could realistically win. The argument is that the RN would struggle to maintain its popularity in government, leading to a loss to Macron’s party in 2027 presidential elections.

“We have our doubts about this strategy, to be honest, as it would mean that Macron hopes that France would be in a dire situation in three years’ time,” says Harreau.

The prospect of the 2025 budget facing a no-confidence vote in September and impending general political gridlock are deemed the most practical reasons for Macron’s gamble. But markets are now faced with pricing in a RN budget and considering whether the president’s purported prediction may come to pass.

Based on the economic platform it put forward in 2022 presidential and legislative elections, but taking into account the current context, Giust and Harreau reckon that an RN programme would imply a spending hike of around 2% and fiscal relief of more than 1% of GDP, with some one-offs adding to the deficit in its first year. They calculate that, if fully implemented, it would result in deficits of 6%-10% of GDP per year over the next five years, pushing French public debt towards 128% of GDP by 2028.

“Cautious conclusions should prevail due to the very limited visibility on RN’s economic priorities as well as its future leeway to enforce them,” says Harreau. “In addition, the latest speeches by RN leaders point to a need for fiscal consolidation and call into question some measures, e.g. pension reform.

“A few key measures could offer RN a substantial political return at a manageable budget cost (i.e. below an additional 1ppt of GDP per year of deficit),” adds Giust. “Of course, these projections are subject to extreme caution, not only because of the action of the government, but also because of the change in the economic outlook and of the potential change in the cost of debt.”

Giust and Harreau nevertheless warn that RN’s economic programme, if implemented in full, is likely to significantly increase doubts around France’s ability to sustain its public debt.

“This situation would have the potential to trigger significant tensions on French assets — and some European assets.”

While acknowledging that the RN could adopt a more pragmatic stance in light of this, and also to set itself up for the 2027 presidential election, they highlight the potential hit to France’s funding costs and potential knock-on effects.

“In this context, the uncertainty regarding France’s public finance outlook will remain extremely high until the election, but also until the new government — if it is an RN government — shows how it intends to govern: in line with its promises or with pragmatism.”

Clarity on the RN’s ambitions should develop after the campaign officially starts tomorrow (Monday). The new National Assembly is scheduled to gather on 18 July, with a new prime minister potentially in place in time for the start of the Paris Olympics on 26 July.