Analysts agree that the fiscal risks for France would increase if Marine Le Pen’s National Rally wins an absolute majority, although the latest polls suggest this outcome is unlikely.
The French They go to the polls this Sunday for the decisive second round of the legislative elections. This vote will determine the composition of the French National Assemblyin which 577 seats are at stake, of which 289 are necessary for the absolute majority.
In the moment in which voters prepare to votemuch is at stake for the future direction of the legislative and economic landscape of France.
Latest polls: The extreme right would not reach the absolute majority
In a tactical move to avoid dividing the vote against the extreme rightthe centrist alliance of Macron and the leftist New Popular Front have removed more than 200 candidates from this week’s runoff ballots, creating what is known in France as the republican front.
Projections based on five recent surveys indicate thatThe far-right National Group (RN) and its allies would obtain between 190 and 250 seats. However, this would still be insufficient to reach the threshold of 289 seats needed to pass laws without problems.
The leader of the National Group, Marine Le Pen, warned in an interview with the French television network ‘CNews’ of the possibility of a political blockade: “If no one gets the absolute majorityand we are the only ones who can, no law will be passed.
It is expected that the leftist New Popular Front get between 140 and 200 seats, while it is estimated that the centrist group of Macron secure between 95 and 162 seats.
The results of the second round of elections will greatly influence economic policies and France market outlookas analysts and economists suggest.
How would a total victory for the National Rally affect the French economy?
“The lack of absolute majority would significantly limit the party when implementing his radical political program. This should avoid a fiscal crisis similar to Liz Truss in the United Kingdom” wrote ABN Amro senior economist Bill Diviney and rates strategist Sonia Renoult.
Even if the National Rally secures an absolute majority, ABN Amro believes that market dynamics and EU regulations would probably avoid the worst case scenario. However, they recognize that there will be more fiscal deviations compared to the current administration.
After the first round, the 10-year Franco-German spread sand reduced about 5 basis points, up to 75 basis points, but ABN Amro expects it to widen again in the coming quarters.
According to Alexandre Stott, market strategist at Goldman Sachs, the immediate objective of any newly formed government will be 2024 budget. The outgoing government aimed to reduce the deficit to 5.1% of GDP from 5.5% in 2023, with a spending cut of 0.3% of GDP announced in February.
An undecided Parliament could lead to a slight tax deviation in relation to this orientation. On the contrary, it is expected that a National Group Government with a majority quickly implement a proposal VAT cut on energywhich would cost around 0.4% of annual GDP without compensatory revenue measures, putting further strain on public finances.
“An absolute majority in the National Assembly would give discretion to implement some of the costly proposals in his platform, such as repeal pension reform 2023,” Stott wrote. Goldman Sachs estimates that the French public debt It could exceed 115% of GDP in 2026, under an absolute majority of the extreme right.
According to Stott, There is great uncertainty around fiscal policy in 2026 and beyond, as a political blockade in the framework of a hung Parliament could lead to new legislative elections and a different government in the second half of 2025.
Furthermore, the perspective of 2027 presidential election could weaken any government’s incentives to carry out substantial fiscal consolidation.
A cut in VAT on energy
Stott outlines three possible ways for elections to impact inflation. First of all, the VAT cut of 14.5 percentage points proposed by the National Rally for energy could temporarily reduce French headline inflation by up to 1.4 percentage points.
Second, the expected zero to negative impact on aggregate demand in both possible outcomes could slightly reduce core inflation.
Thirdly, some of the proposals of National Group on Competition and Immigration Policyalthough they partly conflict with European treaty law, could increase underlying inflation.
