France’s stock market is heading for its biggest weekly fall in more than two years, amid fears that the country’s far-right party could win the upcoming parliamentary elections.
French bonds were also hammered this week, as analysts warned of the risk of a Liz Truss-style market panic following Emmanuel Macron’s shock decision last Sunday to call snap national assembly elections.
The CAC 40 index of the largest 40 stocks listed in Paris has had its worst week since March 2022. It fell by 2.7% on Friday, taking its losses for the week to over 6%.
Friday’s selloff came after France’s finance minister, Bruno Le Maire, warned that the country could risk a financial crisis if either the far right or left won the coming parliamentary election, because of their heavy spending pledges.
“When I look at the far right, I see a programme that is made of lies,” Le Maire told franceinfo radio.
The far-right National Rally party, led by Marine Le Pen, has previously called for protectionist economic policies and proposed higher public spending, as well as lower VAT on fuel, electricity and gas.
Le Maire also claimed that a new alliance of left-wing parties would cause “economic collapse” if it won power.
France is aiming to bring down its budget deficit to 3% by 2027, to meet the maximum borrowing allowed under eurozone rules. Increased government spending, or tax cuts, could undermine that push.
Asked whether the current political instability could lead to a financial crisis, Le Maire said “yes”.
“This is because of the political programmes that are on the table with regard to the question if we will be able, yes or no, to keep financing this debt,” he added.
The gap between France and Germany’s borrowing costs has widened to a seven-year high this week, as investors sold French bonds – pushing down prices, which lifted the yield, or interest rate, on the debt.
This spread measures the premium that investors demand for lending to Paris, rather than the traditional safe haven of Berlin. The last time this gap was wider was in 2017, shortly before Macron defeated Le Pen in the presidential elections that year.
A poll this week showed that National Rally was on track to win the snap election and claim a third of the vote, ahead of France’s leftwing bloc, which is forecast to take 22%, and Macron’s centrists with 19% of the vote.
Heavy losses for centrist candidates would almost certainly spell the end of Macron’s pro-growth reforms, warned Holger Schmieding, chief economist at Berenberg bank. A hung parliament could lead to gridlock, he said.
“However, if Le Pen calls the shots in parliament and pursues major parts of her expensive fiscal and protectionist ‘France first’ agenda, the result could be a Liz Truss-style financial crisis. At the moment, we rate this as a serious risk, not as a forecast,” Schmieding added.
If National Rally won power in the French National Assembly, France would be in a “cohabitation” scenario; Macron would remain president and Jordan Bardella of National Rally would probably become prime minister.