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)
Changing of the Guards
Macroeconomics

Changing of the Guards

Investment Institute
One Week at a Time
Macroeconomics Viewpoint Chief Economist

One Week at a Time

Investment Institute
Mind the Crowds!
Macroeconomics

Mind the Crowds!

Investment Institute

    Disclaimer

    This website is published by AXA Investment Managers Australia Ltd (ABN 47 107 346 841 AFSL 273320) (“AXA IM Australia”) and is intended only for professional investors, sophisticated investors and wholesale clients as defined in the Corporations Act 2001 (Cth).

    This publication is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments, 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.

    Market commentary on the website has been prepared for general informational purposes by the authors, who are part of AXA Investment Managers. This market commentary reflects the views of the authors, and statements in it may differ from the views of others in AXA Investment Managers.

    Due to its simplification, this publication 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 publication is provided based on our state of knowledge at the time of creation of this publication. 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.

    All investment involves risk , including the loss of capital. The value of investments and the income from them can fluctuate and investors may not get back the amount originally invested.