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Bank investors have fair cause to fear an outsized role for Marine Le Pen’s far-right Rassemblement National in France’s next government. They put those concerns aside on Monday. Even though RN came top in the first-round election with 33.2 per cent of the vote and was first place in an estimated 296 constituencies, markets responded by pushing shares higher, led by Société Générale and Crédit Agricole.
The relief rally was driven by investors betting that the chances of RN winning an outright majority are diminished and a hung parliament may be more likely. They should still proceed with caution.
France is already under the gaze of the European Commission, along with others including Italy, for its large budget deficit. A RN majority would probably push the deficit higher, with short-term promises to raise public spending. That could mean tighter financial conditions for French businesses at a time when interest rates are supposed to be falling. Longer term, Le Pen’s party plans to undo deeply unpopular reforms to public pensions put in place by President Emmanuel Macron. Even without a parliamentary majority, those demands may continue to put pressure on government bond prices.
Just how optimistic Monday’s rally appears will become clearer as efforts to present a united “front républicain” to counter RN proceed. Turnout and the degree of fragmentation in first-round voting both add to the uncertainty. With turnout in the first round at 66 per cent, the highest since the 1990s, there are an unusually large number of third-place candidates going into second-round voting.
As it stands, as many as 300 out of 504 seats could be in a three-way run-off in the second round. RN needs to win about 250 of those to get an absolute majority.
Leftwingers in third place have largely agreed to drop out of the next round in order to consolidate the anti-RN vote. Macron’s alliance has made a less explicit guarantee to drop third-place candidates where it feels it can.
The strength of the front républicain will dictate the outcome of the second round. But assumptions that centrists will shift to the left if presented with just two candidates “may be overblown”, warns Andrea Filtri of Mediobanca, reducing the predictability of the second round. On the other hand, assuming that left-wing voters will converge their vote to the centre makes some sense.
Expectations of a hung parliament might then be over-optimistic. That could leave the price rally in French markets with nowhere to go but down.
andrew.whiffin@ft.com
