Investment Institute
Macroeconomics

Uncertain Winds

  • 17 June 2024 (10 min read)
KEY POINTS
We explore some macro-financial consequences of the French looming snap elections, with a focus on the fiscal trajectory. Fortunately, for now the decline in US yields helps European markets to deal with the shock. We also look at how the populist push makes the EU Commission’s approach to trade with China even more delicate.

The surprise snap general elections called by the French President have affected markets beyond French borders. Sovereign spreads have widened in the Euro area periphery as well as in France. There are no immediate existential threats to the monetary union – far-right Rassemblement National, which firmly holds the top position in the polls after its victory in the European elections, no longer wants France to exit monetary union – but uncertainty over the macro-financial outcome on 7 July is high as fiscally spendthrift agendas from both the far-right and the left alliance compete with the more orthodox offer from the struggling incumbent centrist majority. We walk our readers through the quirks of the French electoral and institutional system. Based on the few relevant polls, the most likely scenario is a hung parliament. We explore how France could operate without a majority, especially from the point of view of its capacity to pass a budget, a key concern given the recent downgrade of French public debt by S&P. France has much more capacity than the US to avoid “government shutdown” situations. Yet, a proper majority would be needed to deliver the significant discretionary fiscal correction measures implied in the current French Stability Programme. We also explore the scenario with the second highest probability according to the polls, i.e., a RN-led government. The outcome would essentially depend on whether such administration would focus on “social/cultural issues” while taking little risk with economic policy – the “Meloni model” – or try to deliver on its spendthrift 2022 manifesto.

There has been some discussion about what the ECB could do if spreads continue to widen. This is where the collision with Brussels could materialise. Indeed, for the ECB to deploy its TPI tool, compliance with the EU fiscal surveillance framework would be needed, always a challenge for a populist government. For now, the decline in long-term interest rates in the US and globally, triggered by another month of good news on the US inflation front, offers some protection. Separately, the populist push in France and Europe as a whole cannot not have an impact on Brussels policy. This makes the Commission’s targeted approach to imports of EVs from China even more delicate. 

Download the full article
Download report (448.78 KB)
Pushing the Walls
Macroeconomics

Pushing the Walls

Investment Institute
Changing of the Guards
Macroeconomics

Changing of the Guards

Investment Institute
Looking for some Glue
Macroeconomics

Looking for some Glue

Investment Institute

Have our latest insights delivered straight to your inbox

SUBSCRIBE NOW
Subscribe to updates.

    Disclaimer

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.

    Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.

    Back to top