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French shares tumbled on Friday as the prospect of a far-right government with the left as the main opposition rattled European financial markets and deepened a sell-off that wiped nearly 100 billion euros off the main Paris index.
The Cac 40 is on track for its worst week since March 2022. It was down 2.9 percent by mid-afternoon, amid a renewed selloff in bank stocks.
The index has fallen more than 6 percent in five trading sessions since Emmanuel Macron’s shock decision to call early parliamentary elections on Sunday that threatens to destroy the president’s centrist alliance.
According to a recent opinion poll, the second round of decisive races would be fought mainly between candidates assembled by the left bloc and the far right, with Marine Le Pen’s Rassemblement National expected to make significant gains.
Investors were worried about the prospect of a radical new government with big spending plans. Finance Minister Bruno Le Maire warned this week that a far-right victory could lead to a “debt crisis” similar to the turmoil in the UK market under former Prime Minister Liz Truss.
RN’s policy of reducing value-added tax on energy, fuel and food alone would cost 24 billion euros a year, Macron’s campaign said, citing figures from the economy ministry.
“They will be less friendly to them.” [the EU] and the things they’re talking about from a policy point of view don’t suggest they’re going to come with a lot of fiscal responsibility,” said James Athey, fund manager at Marlborough Group. “Even a result that is not an outright RN win is unlikely to be stable at all. And markets hate uncertainty, instability and volatility.”
The four left-wing parties on Thursday concluded a unity pact for the June 30 and July 7 elections. On Friday, they unveiled a joint program that includes unfunded spending pledges worth tens of billions of euros.
The leftist no-cost program would reverse Macron’s planned increase in the retirement age to 64 and freeze food and energy prices.
The left would raise income taxes on the well-paid and reintroduce a wealth tax.
“We will finance this program by dipping into the pockets of those who can afford it the most,” said Olivier Faure, leader of the Socialist Party.
The left’s program also “rejects” the EU’s budget rules, which called for a deficit of less than 3 percent of GDP.
New French media projections based on European Parliament election results suggest that only about 40 of Macron’s MPs and only a handful from the center-right could qualify for the second round. Some pollsters question the methods used.
Increasingly traditional poll projections based on electoral intentions indicate that the vast majority of MPs in the new parliament will be in favor of major spending commitments.
Concerns about French markets “range from the stalling of the reform process, a possible downgrade to growing concerns over talk of a breakup of the eurozone,” said Mohit Kumar, chief European economist at Jefferies.
Banks – which would be exposed to slowing economic growth and are expected to hold significant government debt – were among the worst-performing stocks. Crédit Agricole, BNP Paribas and Société Générale fell 12.9 percent, 13 percent and 15.7 percent respectively this week.
Macron’s move also affected the French stock market. The euro fell against the dollar while the Stoxx 600 across the region is on course for its worst week since October last year, with German, Italian and Spanish stock indexes all losing ground. By contrast, Wall Street’s S&P 500 added 1.6 percent this week.
“When the Americans wake up, they are selling Europe and especially France, which is the weakest link at the moment,” said John Plassard, senior asset specialist at Switzerland’s Mirabaud Group.
Barclays, which has advised clients for months to have a higher-than-benchmark weighting in European stocks compared to the US, cut its position on Wednesday, advising “caution in the region for the time being given the political situation in France”.
French government bonds were also affected. The spread between benchmark French and German yields – a market barometer for the risk of holding French debt – rose to 0.81 percentage point on Friday, the highest level since 2017.
This article has been amended to correct the value lost by the French market