Following the parliamentary elections in France, Bruno Cavalier comments in his article for finews.first on the economic policy consequences for the country.
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Emmanuel Macron wanted to clarify the political situation. He has only made it more complex and unstable. This is a completely new situation since the creation of the Fifth Republic in 1958. To avoid political instability, the next government could be forced to stand still economically.
What are the consequences of this situation? First of all, the indecision regarding the formation of a new government can only lead to a wait-and-see attitude on the part of economic players. Fiscal stability is by no means assured. Some investment decisions are being put on hold until it is clear whether taxes will be increased. This has been reported by several business organizations. Secondly, the risk of political instability comes at the most unfavorable time of the year, i.e. just before the annual budget debate.
«There is a high probability that the risk premium will tighten again»
By mid-summer, the draft budget is usually finalized down to a few details before it is officially presented in September and discussed in parliament in October. Adjustments will be necessary this year once the government's political coloring is known. This budget uncertainty comes at a time when France is under European Commission deficit proceedings and the rating agencies are monitoring any non-compliance with deficit reduction targets.
The French risk premium rose sharply after the announcement of the resolution before falling back again, but it has not returned to its starting point. There is a high probability that the risk premium will tighten again if the budget debate is inconclusive or delayed.
«This is not the ideal context aimed at re-emphasizing Europe in international competition»
Finally, the political risk in France hurts the rest of Europe. It is not good if one of the zone's major economies is weakened as a result. The impact could be felt through the trade channel (fall in demand in other countries) and through the financial channel (contagion effect).
In addition, the lack of a stable political orientation in France must lead to hesitation in neighboring countries, especially Germany. This is not the ideal context in which to promote initiatives aimed at re-emphasizing Europe in international competition.
Bruno Cavalier is the Chief Economist at Oddo BHF. He studied at the University of Paris II, where he obtained a doctorate in economics. In the past, he has held several positions with French banks, Crédit Agricole, Crédit Lyonnais, and Rexecode.
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