France can’t afford a Le Pen government

It is possible that President Macon had some clever plan when he called a general election in the wake of catastrophic European election results last night. After all, he has a reputation for always being several moves ahead on the political chessboard. And yet one point is surely clear. France can’t afford a Le Pen government – and its election may well trigger a crisis in the French debt markets. 

It is, perhaps, not quite such a foregone result as Britain’s election a few days earlier. And yet after the second round of voting on 7 July, it looks almost certain that Marine Le Pen’s National Rally will emerge as the largest party in the French parliament, and will be able to form a government. The markets, to put it mildly, did not like the look of that. On Monday morning, there was a sharp selloff in equities, with the French stock market index the CAC-40 falling by almost 2 per cent, and government bonds spiking sharply higher, especially compared to their German counterparts. The banks, which hold a lot of French debt, were especially badly hit (BNP Paribas was down almost 5 per cent). Investors don’t like the look of a Le Pen administration.

It is not hard to understand why. Of all the major G7 economies, France is already in the deepest fiscal trouble. Over the last year, its credit rating has been cut twice, the latest downgrade from Standard & Poor’s at the start of this month. Even with the Eurozone economy recovering from the pandemic, France is still running a deficit of 5.1 per cent of GDP. Meanwhile, its economy has stalled, with growth of only 0.2 per cent in the latest quarter, less than half the level in Britain, which of course is also one of the weakest economies in the world. The ratings agencies did not have much confidence in the ability of Macron’s finance minister Bruno Le Maire to deliver the promised €20 billion of spending cuts promised for the next year. They will have even less confidence in a government led by Marine Le Pen or one of her allies.

Le Pen, after all, is a high welfare, big state, economic nationalist. She wants to preserve the French social model, while putting up more barriers to imports, and in the past she has flirted with leaving the Euro. In government, she will have no interest in cutting spending, especially sensitive measures like the cuts to unemployment benefits that Le Maire was planning. The problem is, France is sitting on a mountain of debt. Its debt to GDP ratio has hit 110 per cent, only behind the likes of Japan and the US, which have far larger economies. It is not in a position to take on the bond markets. In reality, France can’t afford a Le Pen government – and this election could easily trigger a crisis in the country’s debt.