What do European election results mean for the economy?

A new government in the UK and France’s second round of parliamentary elections revealed surprises – but what will they mean for the state of Europe’s economy?

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What will election results in France mean?

Two of Europe’s biggest countries saw elections last week, which cemented an expected victory in the UK and dealt a surprise in France.

France’s second round parliamentary vote on Sunday revealed a shock result with the Nouveau Front Populaire (NFP) "the New Popular Front", which is a loose coalition of four leftist parties – the Socialist Party (PS), the main centre-left party in France's post-war politics, as well as the Greens, the Communists, and the far-left France Unbowed (La France Insoumise (LFI)) taking the largest number of seats with President Emmanuel Macron’s centrist group, “Ensemble”, coming second and Marine Le Pen’s Rassemblement National, (RN) coming a surprising third.

The centre-right Les Républicains came fourth.

"The President’s supply-side reforms are also opposed by the left-wing LFI
 and are unpopular with the electorate."

There have been widespread fears about the spending plans of both the far left and far right in terms of the country’s economy.

“It is unclear how a new government can be formed in the hung parliament that emerged from Sunday’s polls,” said Van Luu, Global Head of Solutions Strategy – Fixed Income and Currencies at Russell Investments. “Financial markets were worried about a far-right RN majority but also wary of a prominent role for the hard-left LFI under the leadership of Jean-Luc Mélenchon.

RN had laid out policies for the 2022 presidential election that were estimated to have a price tag of €100 billion including reversing Macron’s increase in the retirement age.

“That said, the President’s supply-side reforms are also opposed by the left-wing LFI and are unpopular with the electorate,” said Luu. “Despite his party outperforming expectations and their first-round result, Macronism has taken a big blow over the last month. He may have to work with a prime minister chosen by the NFP or appoint a technocratic “government of national unity”.”

Economic impact

The future direction of France's economy will be a major piece of the puzzle for upcoming coalition building.

There had been widespread anxiety about the direction of the economy after the election. “If a new parliament emerges with a governing majority, we expect a more uncertain economic outlook for the eurozone,” said Lombard Odier’s paper on the election after the first round. “This would create the greatest risks for other European assets such as eurozone sovereign bonds and the euro. We would expect French equities to continue selling off, especially in the case of a left-wing majority French government.”

“Political uncertainty has been a heavy weight around the neck of European markets, especially French assets,” said Luu. “A good barometer of political risk emanating from the election is the spread of French over German government bonds (Bunds) with 10 years maturity. This spread had risen from around 0.5% before the election was called to more than 0.8% before the first round of the election.

“The most immediate risk is a financial crisis and France's economic decline."

This dropped back to around 0.7% when left and centrist parties resolved to tactically block the RN from winning a majority.

“The EUR/USD exchange rate is a similar indicator of perceived political risk and usually correlates inversely with the spread,” said Luu. “Unlike the latter, EUR/USD has barely budged from its 1.08 level during the recent period of electoral uncertainty.”

BlackRock said the broad market reaction to the election outcome was “relatively muted”. “The spread between French and German 10-year government bond yields was steady and has narrowed since Macron called the snap election a month ago when it widened to levels last seen during in the euro area debt crisis,” said its analysis.

France’s outgoing economy minister Bruno Le Marie said on X (formerly Twitter) that the result could lead to several issues. “The most immediate risk is a financial crisis and France's economic decline,” he said. “The application of the New Popular Front's programme of rupture would destroy the results of the policy that we have pursued for seven years, and which has given France work, attractiveness and factories. This project is exorbitant, ineffective and dated. Its legitimacy is weak and circumstantial. It should not apply.”

Wider European outlook

The French election came just three days after the UK’s centre-left Labour Party came to power after 14 years in opposition and delivered a landslide victory. On her first full weekday in the job, Chancellor of the Exchequer Rachel Reeves announced a high-level plan on encouraging growth including ending the de facto ban on onshore wind farms in the UK. The announcement saw some positive industry reaction.

This decision was in line with what many saw coming from the new government around more green investment being a top priority. “In terms of investment strategies, we can expect sectors related to clean energy and infrastructure to experience a boost based on Labour’s pledged policies in these areas,” said Yazmin Boden, Partner at GSB Wealth. Other key sectors likely to benefit include banking, construction, and retail, she said.

“I have repeatedly warned that whoever won the general election would inherit
 the worst set of circumstances since the second world war."

However, Reeves also warned that the UK economy had many negative factors pressing on it, which could mean it was some time before the country saw positive change.

“I have repeatedly warned that whoever won the general election would inherit the worst set of circumstances since the second world war,” she said in a speech on Monday morning. “What I have seen in the past 72 hours has only confirmed that. Our economy has been held back by decisions deferred and decisions ducked. Political self-interest put ahead of the national interest. A government that put party first and country second.”

She said the new government “[faced] the legacy of 14 years of chaos and economic irresponsibility”.

She added that she had instructed Treasury officials to provide an assessment of the state of the UK’s spending inheritance, which she would present to parliament before the summer recess.

“This will be separate from a budget that will be held later this year. And I will confirm the date of that budget alongside a forecast from the Office of Budget Responsibility in due course,” she said.