What made the French people slow down their steps to vacation and go out to vote?
On June 30th local time, the first round of the French National Assembly election was held. According to data released by the French Ministry of the Interior on July 1st, the voter turnout for this election reached 66.71%, setting a record high for legislative election turnout since 1997.
"The French holiday season is about to begin, and such a turnout is simply unimaginable," said Zhao Yongsheng, Director of the French Economic Research Center at the University of International Business and Economics and doctoral supervisor at the Sorbonne University in Paris, who was observing the election in France. He told the First Financial reporter that the turnout of French voters in the first round of the election set a new high in nearly 40 years, with the turnout exceeding two-thirds of all voters. It is worth noting that in the last election in 2022, only 39.4% of voters cast their votes at the same time.
According to statistics, in the first round of the National Assembly election voting, the far-right party National Rally led by Marine Le Pen received 33.15% of the votes, the second-placed left-wing coalition "New People's Front" had a vote share of 27.99%, and the centrist ruling coalition "Together" led by French President Emmanuel Macron's "Renaissance Party" had a vote share of 20.83%, ranking third.
After the election results were announced, on July 1st, the euro and European stock markets rose across the board. Why did the market react in such a way despite Macron's party coalition having the "lowest" vote share?
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This means that the market expects a cross-party alliance in France to prevent the far-right from obtaining an absolute majority in the second round of the French election.
Zhao Yongsheng explained to the First Financial reporter that previously in polls, the far-right party National Rally was expected to receive about 37% of the votes in the first round, but the actual vote share was 4 percentage points lower, which is more optimistic for Macron than expected. Although the possibility of a "cohabitation" of left and right in French politics still exists, this does not mean that Macron will have to face a hung parliament or the grim reality of a far-right prime minister. In his view, President Macron still has the opportunity to shake things up, but in the remaining week, "if President Macron has any big moves, it's time to make them."
Why did European stock markets rise across the board?
As mentioned earlier, on July 1st, the French benchmark stock index Cac 40 led the way, with a sharp increase of 2.6% at the opening.
The Spanish Ibex index rose by 1.5%, the Italian FTSE MIB index rose by 1.8%, and the European Stoxx 600 index rose by 1%. Even the German DAX index, despite more signs of weak economic growth expectations, also rose by 0.2%.German investment bank Berenberg's Chief Economist Holger Schmieding provided a very precise summary of the market and current situation in a report. He stated that the results indicate that the first round of the French presidential election was "not worse than expected."
For instance, the second-placed left-wing coalition "New Popular Front" is currently polling at around 28%, which is two percentage points lower than the opinion polls, meaning that "a hung parliament remains the most likely outcome."
Schmieding also indicated that in the second round of voting on July 7th, the far-right party National Rally could still win an absolute majority, but "now it seems a bit less likely than before." At the same time, the possibility of the left-wing coalition "New Popular Front" taking power and implementing its costly agenda appears to have diminished further.
Global investors generally do not favor the left-wing coalition "New Popular Front," which is likely to spend money indiscriminately.
Regarding the outcome of the second round, Schmieding outlined three scenarios: The first scenario is a stalemate. This means that the far-right, the united left, and Macron's centrists in the parliament would all fail to secure a majority. Under such circumstances, any (new) government would achieve nothing.
The second scenario is worse than a stalemate: Although the united left and the far-right are diametrically opposed on issues such as immigration, culture, and identity, they both oppose Macron's pro-growth reforms. Therefore, "the far-right party National Rally and some left-wing parties could still join forces in a hung parliament to soften Macron's pension reforms on specific issues, and increase citizens' purchasing power, for example, by reducing the VAT on energy products or increasing subsidies," he wrote.
The third scenario, which is the less likely one, is that the far-right party National Rally wins a majority of seats. In this case, the party could possibly appoint 29-year-old Jordan Bardella as Prime Minister.
In this scenario, Le Pen might focus on winning the 2027 French presidential election, sticking to the more moderate path she has indicated during this campaign. She might concentrate on implementing some signature policies (such as a tough stance on immigration) rather than costly or destructive fiscal promises.
In other words, Le Pen might largely follow the example of Italian Prime Minister Meloni. To this end, she might explain to the voters of the National Rally, after a lengthy fiscal review, that most of her initial fiscal proposals could only be implemented gradually over time, or only after she becomes the President of France in 2027.
Joachim Klement, Head of Strategy, Accounting, and Sustainable Development at Liberum Capital, said: "The coming week will still involve bargaining among the parties." He anticipates that as alliances are formed to reduce the advantage of the National Rally, the euro will strengthen this week. If the parties ultimately prevent Le Pen's National Rally from securing a majority in the crucial second round, France will get a more centrist government, which would be positive for the euro and narrow the French-German bond spread.Schmieding also warned that if France's political and economic situation becomes deadlocked, it could lead to a decline in France's long-term growth rate, a continued widening of the interest rate differential with German debt, and a "global reputation that is even worse." At the same time, a government dominated by a far-right or left-wing coalition could trigger more dramatic outcomes. The "extravagant agenda" of either side, including lowering the retirement age and cutting income taxes, could lead to an "imminent financial crisis."
Macron's opportunity lies in the "big move"
According to estimates by the French polling agency Ifop, the far-right National Rally is expected to occupy 260 to 310 seats in the National Assembly, with the possibility of an absolute majority; the left-wing coalition "New People's Front" is expected to occupy 115 to 145 seats; and the ruling party "Renaissance Party" and the centrist coalition "Together" will occupy 90 to 120 seats.
As stipulated, France's National Assembly elections will vote to elect 577 members of the National Assembly, with a term of 5 years. The election adopts a two-round voting system. In the first round, candidates who receive more than half of the votes are directly elected; if no one receives more than half of the votes, candidates who receive no less than 12.5% of the registered voters in their constituency enter the second round of voting, and the candidate with the highest number of votes is elected. The second round of voting is scheduled for July 7th.
Currently, since no party has won more than half of the votes, the three party coalitions have all entered the second round of voting, and the algorithm for the second round is different.
Zhao Yongsheng told the First Financial reporter that the algorithm and strategy of the two-round election system are different from the one-round election system that people are generally familiar with, and it is more strategic.
For example, in the first round, he said, based on his personal observation, he felt that Macron was reserved, "The reason is that as long as the candidates who receive no less than 12.5% of the registered voters in their constituency enter the second round of voting, but it is impossible for the coalition led by Macron to be below 12.5%, so he did not make significant promises in policy."
However, he also believes that given the current widening gap in vote share between the far-right National Rally and the centrist ruling coalition led by Macron's "Renaissance Party," which was 5 to 6 percentage points in 2022 and is now more than 10 percentage points, and with the left-wing vote share also on the rise, Macron needs to make a difference in the remaining week.
The extremely high voter turnout "sends a very strong signal." Zhao Yongsheng told the First Financial reporter that first, Macron's government needs to effectively solve the current inflation problem in France, which requires reforms in areas such as wages.
Secondly, in terms of industrial policy and investment plans, Macron's government needs to make the public clearly aware of a development timetable, rather than adopting a tariff approach similar to that of the United States to prevent French people from buying high-quality and low-priced foreign products. "In fact, the French investors around me feel very embarrassed about France's current use of this tariff method," he explained.Once again, on certain issues such as geopolitical matters, the French public is now generally losing patience. Zhao Yongsheng explained to the First Financial Daily reporter that the French public prefers the current French government to focus on internal short-term development issues, rather than just concentrating on external and medium to long-term reforms.
He gave an example, saying that in the remaining week, it can be speculated that Macron could make promises in various subsidies and grants, such as directly increasing the minimum wage to 2200 euros, and so on. With the current short time and urgent tasks, in order to avoid a situation of cohabitation or a hung parliament, Macron must take a gamble and come up with some substantial measures.
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