Unlock editor summary for free
Rula Khalaf, editor of the FT, picks her favorite stories in this weekly newsletter.
French shares tumbled on Friday as the prospect of a far-right government and a left-wing opposition rattled European financial markets, deepening a sell-off that wiped 150 billion euros off the main Paris index.
The Cac 40 lost more than 6 percent in the five trading sessions after Emmanuel Macron’s shock decision on Sunday to call early parliamentary elections, its worst weekly performance since March 2022.
On Friday alone, the index fell 2.7 percent, with banking shares sharply lower on predictions that a new left-wing bloc with big spending commitments and Marine Le Pen’s far-right National Union could effectively wipe each other out Macron’s centrist alliance.
The president’s hopes of making common cause with the main center-left and center-right parties appear to have been dashed by the new left alliance and the turmoil on the traditional right.
Finance Minister Bruno Le Maire warned this week that a victory for the RN, which defeated Macron’s party in last Sunday’s EU election, could lead to a “debt crisis” similar to the market chaos under former British Prime Minister Liz Truss.
James Atty, a fund manager at Marlborough Group, said the far-right group looked unlikely to “come in with a burden of fiscal responsibility” and was likely to clash with Brussels.
“Even a result that is not an outright victory for the RN is unlikely to be stable at all,” he added. “And markets hate uncertainty, volatility and instability.”
As investors worried about the possibility of a new populist French government with big spending plans, the regional Stoxx Europe 600 index also suffered its worst week since October last year, with German, Italian and Spanish indexes all lower.
Barclays cut its “overweight” recommendation on European stocks this week, recommending “caution in the region for now given the political situation in France.”
As fears of political instability spread, the euro fell 1% against the dollar this week to just under $1.07.
Mohit Kumar, chief economist for Europe at Jefferies, said markets were concerned about issues ranging from “a slowdown in the reform process, a possible downgrade to growing concern over talk of a breakup of the eurozone.”
The spread between benchmark French and German yields – a market barometer of the risk of defaulting on France’s debt – rose to 0.82 percentage points on Friday, the highest level since 2017.
Banks, which will be exposed to a slowdown in economic growth and also hold significant government debt, are among the worst-performing French stocks. Crédit Agricole, BNP Paribas and Société Générale all fell this week by 11%, 12% and 15% respectively.
“When the Americans wake up, they sell Europe and especially France, which is the weakest link right now,” said John Plassar, senior asset strategist at Mirabaud Group in Switzerland.
New forecasts by French media highlighted the challenges Macron faces in the two-round contest on June 30 and July 7.
Projections based on European Parliament results suggest that only about 40 of Macron’s MPs could qualify for the second round of races for the 577-member National Assembly, along with a handful of the centre-right.
While some pollsters have questioned the poll’s methods, more traditional polls also suggest the vast majority of new lawmakers would support huge spending commitments.
Citing figures from the economy ministry, Macron’s campaign said the RN’s policy of cutting value-added tax on energy, fuel and food alone would cost €24bn a year.
Four left-wing parties that formed a common front for the election also announced unsecured spending pledges worth tens of billions of euros on Friday.
The left’s no-spend program would reverse Macron’s planned increase in the retirement age to 64 and freeze food and energy prices.
“We will finance this program by reaching into the pockets of those who can afford it the most,” said Olivier Faure, leader of the Socialist Party, referring to plans to raise income taxes on the well-paid and reintroduce a wealth tax .
The left’s agenda also “rejects” the EU’s budget rules, which require a deficit of less than 3 percent of GDP.
This article has been amended to correct the value lost from the French market
