France’s political chaos signals weak government and lower global profile

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France looks headed for political instability after a surprise win by a left-wing coalition in Sunday’s legislative election left no party able to claim the majority needed to govern.

The New Popular Front — which includes the Socialists and far-left France Unbowed — is poised to get between 171 and 205 seats in the National Assembly. Marine Le Pen’s National Rally, which pollsters last week had seen winning the most seats, is expected to come third, getting between 130 and 152 seats, while President Emmanuel Macron’s centrist alliance is set to place second with 152 to 180.

Will all three groups falling far short of the 289 required for an absolute majority in the 577-seat lower house, it’s unclear how the country, which doesn’t have a tradition of coalitions, will form a government that is able to pass laws.

French Prime Minister Gabriel Attal announced that he would present his resignation to Macron on Monday, which would start the process for the formation of a new government. 

The euro slipped at the start of trading, as investors digested a result that few had anticipated and brings back to the fore concern about France’s fiscal problems, given parties’ commitment to a major increase in public spending.

The Institut Montaigne estimates that the campaign pledges by the New Popular Front would require nearly €179 billion ($194 billion) in extra funds per year. The far-right National Rally’s plans would cost about €71 billion, while Macron’s party and its allies would incur extra spending of close to €21 billion.

Le Pen put a positive spin on the results, pointing out that National Rally, which had 89 spots in the previous legislature, is on course to get 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 result means no single alliance has the numbers to to govern with an absolute majority, fragmenting the legislature into three distinct groups with divergent agendas. Macron will wait for the new configuration of the National Assembly before making any further decisions on naming the next prime minister, according to a statement from an Elysee official.

France will now face two options, which have little precedent in the history of the modern republic. Macron could try to cobble together a coalition among willing but not always like-minded parties, but that would require the New Popular Front to break apart and reconfigure behind the president without its more radical elements.

Or Macron could name a technocratic administration that could bridge the period of political turmoil. Both solutions will likely mean a weakened government that will have trouble passing any meaningful legislation and with less influence on the international stage.

“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 Sunday night. “Central political forces now have a responsibility they cannot duck: They must work for an agreement without dishonor that will stabilize the political situation.”

Jean-Luc Melenchon, the leader of France Unbowed, told supporters Sunday that his New Popular Front would implement its program in its entirety and that he would refuse to enter into a deal with Macron. But Socialist leader Olivier Faure struck a more conciliatory note, saying it’s the party’s job to “find a path” to respond to the needs and demands of French people.

French assets tumbled in the days after Macron announced the snap election four weeks ago, but bounced late last week when traders started to price out an absolute majority for Le Pen’s far-right party, and embrace the prospect of a gridlocked government in which neither right nor left had unchecked power.

While a lower-than-expected seat count for Le Pen’s party and a bump for Macron’s bloc thus came as a relief to some traders, the win for the left bloc is likely to hurt French assets in the weeks to come.

For Vincent Juvyns, global market strategist at JPMorgan Asset Management, that could pop up in the spread between French and German bond yields, which he sees widening.

“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 want 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.”

Sunday’s projections offer some vindication for Macron’s call to dissolve parliament following a crushing defeat to Le Pen’s party last month. He was been widely criticized for the decision after his party finished a distant third in the first round of voting last week in which Le Pen seized the initiative. 

The past week has seen frantic efforts to activate the so called Republican Front — an arrangement in which mainstream parties strategically pull candidates from certain races to bolster votes against the National Rally. Macron’s party withdrew 76 candidates from runoff contests where they had little chance of winning, in order to avoid splitting the anti-Le Pen vote. The New Popular Front withdrew 130. 

National Rally President Jordan Bardella criticized the strategy, saying that the approach orchestrated by the Elysee palace “is not going anywhere.” 

Antonio Barroso, deputy director of research at Teneo, wrote in a note that the formation of a new government would be complicated and could take a long 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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