Surprise Election Outcome Sparks Political Uncertainty in France

France is on the brink of political instability following a surprise victory by a left-wing coalition in the July 7 legislative election. With no party securing a majority, the New Popular Front, National Rally, and President Macron’s centrist alliance must navigate a fractured legislature.

Fragmented French Legislature Faces Uncertainty as New Popular Front, National Rally, and Macron’s Alliance Compete for Control

The New Popular Front, which comprises the Socialists and the far-left France Unbowed, is expected to secure between 171 and 205 seats in the National Assembly. According to recent polls, Marine Le Pen's National Rally is anticipated to secure between 130 and 152 seats, placing it in third place. President Emmanuel Macron's centrist alliance is expected to secure between 152 and 180 seats, placing it second.

It is still being determined how the country, which lacks a history of coalitions, will establish a government capable of passing laws, given that all three factions still need to be made aware of the 289 seats necessary for an absolute majority in the 577-seat lower house.

On July 8, French Prime Minister Gabriel Attal declared that he would submit his resignation to Macron, thereby establishing a new government.

At the outset of trading, the euro declined as investors processed a result that was not widely anticipated. This result reignited concerns regarding France's fiscal issues, as the parties pledged to increase public expenditures significantly.

According to the Institute Montaigne (via Fortune), the New Popular Front's campaign pledges would necessitate roughly €179 billion ($194 billion) in additional funds annually. Macron's party and its allies would incur additional spending of nearly €21 billion, while the far-right National Rally's proposals would cost approximately €71 billion.

Le Pen emphasized the positive aspects of the results, noting that National Rally, which held 89 seats in the previous legislature, is on track to secure the most seats of any single party.

“The tide is rising,” Le Pen said. “It hasn’t risen high enough this time, but it’s still rising.”

The unexpected outcome has fragmented the legislature into three distinct factions with divergent agendas, as no single alliance possesses the necessary numbers to govern with an absolute majority. According to a statement from an Elysee official, Macron will delay any further decisions regarding the appointment of the next prime minister until the National Assembly's new configuration is established.

France Faces Unprecedented Choices: Coalition Government or Technocratic Administration Amid Political Crisis

In the history of the modern republic, France will now be presented with two options with little precedent. Macron could attempt to form a coalition among willing but only sometimes aligned parties. However, this would necessitate the New Popular Front disbanding and reorganizing itself to support the president, excluding its more radical elements.

Conversely, Macron may temporarily establish a technocratic administration to solve the current political crisis. Both alternatives will probably result in a government that is less influential on the international stage and unable to enact significant legislation.

“The absence of majority and the absence of government will expose France and French people to formidable danger,” Macron’s first prime minister, Edouard Philippe, warned on July 7. “Central political forces now have a responsibility they cannot duck: They must work for an agreement without dishonor that will stabilize the political situation.”

On July 7, Jean-Luc Melenchon, the leader of France Unbowed, assured his supporters that his New Popular Front would execute its entire program and that he would decline to negotiate an agreement with Macron. However, Olivier Faure, the leader of the Socialist Party, adopted a more empathetic tone, asserting that the party is responsible for "identifying a course of action" to address the requirements and desires of the French populace.

French assets declined following Macron's snap election announcement four weeks ago. However, they rebounded late last week as traders began to anticipate an absolute majority for Le Pen's far-right party and embraced the possibility of a gridlocked government in which neither the right nor the left had unchecked power.

Although some traders were relieved by the lower-than-anticipated seat count for Le Pen's party and the increase in Macron's bloc, the left bloc's victory is expected to impact French assets in the weeks ahead negatively.

For Vincent Juvyns, global market strategist at JPMorgan Asset Management, this could manifest in the widening spread between French and German bond yields.

“The European Commission and rating agencies are expecting €20 billion to €30 billion euros of cuts but the government will actually have to deal with a party which wants to increase spending by €120 billion,” Juvyns said. “This could create tension across markets in the coming weeks. Markets may demand a higher spread as long as the new government hasn’t clarified its fiscal position.”

The projections on July 7 provide some justification for Macron's decision to dissolve parliament in the wake of a humiliating loss to Le Pen's party last month. According to Bloomberg, the decision was criticized after his party concluded in a distant third place in the first round of voting last week, during which Le Pen seized the initiative.

Mainstream Parties' Efforts to Activate Republican Front Face Criticism and Uncertainty

Over the past week, there have been numerous frantic endeavors to activate the Republican Front, a strategy by which mainstream parties strategically withdraw candidates from specific elections to increase their support for the National Rally. Macron's party withdrew 76 candidates from runoff contests where they had a low likelihood of prevailing to prevent the anti-Le Pen vote from being split. The New Popular Front withdrew 130 members.

National Rally President Jordan Bardella criticized the strategy, stating that the Elysee Palace's approach is "not going anywhere."

In a note, Antonio Barroso, the deputy director of research at Teneo, stated that establishing a new government would be complex and require significant time.

“This indecision runs a risk for the country that nobody should underestimate,” Philippe said. “The credibility of our country could be hit, as well as its credit ruined.”

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