This is not the scenario emerging from the polls. But if Marine Le Pen is elected president of the republic on Sunday night, the consequences for the financial markets will be immediate. The next morning, the “spread”, which represents the difference between the level of the German yield (the reference, the 10-year Bund) and that of the French yield (the OAT, the 10-year bond) will suddenly explode. of course, as it developed this Thursday around 47 basis points (Bund: 0.91%, OAT: 1.39%). This increase will mean that investors will sell their French bonds. The value of the latter will fall as investors will sell them to buy the ones that yield more. Indeed, French sovereign debt will be perceived as riskier in the eyes of investors compared to other assets.
“A victory for Le Pen would lead to a downward revision of GDP growth forecasts, as well as a rise in French bond spreads and a depreciation of the euro”, summarize the experts of S&P Global Market Intelligence in a note. The European currency has already depreciated by 9.3% against the dollar in one year.
Rising budget deficit
Investors believe that many of the measures in Marine Le Pen’s program are inflationary and will widen the budget deficit and increase the cost of debt. Despite a public debt that has fallen from 100% to almost 116% of GDP due to the health crisis, France has not lost the confidence of the markets. The 2014 Nobel Prize in Economics, Jean Tirole, underlined this topic in a column published in the columns of “La Dépêche du Midi” that “The lack of foresight of Marine Le Pen’s program will not reassure the latter, who will see a European version of Argentina in France”†
One of the measures included in the program is a reduction in VAT from 20% to 5.5% on basic energy products (petrol, heating oil, gas and electricity), as well as on basic food products. an incentive to raise wages by 10% for employees up to three times the minimum wage, by exempting these wage increases from employer contributions. From a tax point of view, the candidate wants to introduce an income tax exemption for persons under the age of 30, regardless of their situation. In addition to the violation of equality before the French constitution, the program does not specify its financing, which should again weigh on public finances.
Likewise, retirement from age 60 will only increase the scheme’s deficit, which is the budget’s first expenditure item. “Marine Le Pen’s program is a Prévert-style list of additional expenses, grossly underestimated at 68 billion euros per year, financed by unfortunately partly fictitious revenues”, joked Jean Tirole, who foresaw that the candidate RN’s economic program is “concealing and unfounded” and “will impoverish our country permanently”.
An opinion shared by the experts at S&P Global Market Intelligence: RN’s protectionist policies would likely lead to a worsening investment climate in France, which translates into lower growth. The proposed increases in social spending and cuts in energy taxes would likely result in a larger budget deficit by 2022, which is most likely throughout Le Pen’s tenure.”
However, analysts note that if the far-right candidate wins, “It is likely that some of the tax and spending proposals in the RN manifesto will be watered down to mitigate some of the negative market reactions following the election.” However, this limited limitation would not prevent a potential “negative impact on the prices of French stocks and bonds”.
The illusions of immigration policy
Because on the revenue side, the RN counts on its immigration policy, the workhorse of the far-right party, to save 16 billion euros. It would limit access to social assistance only to French people and access to solidarity benefits for people who have worked in the territory for at least five years. Measures which are not only particularly discriminatory, but also have very harmful consequences for purchasing power and consumption in France, as they would impoverish a part of the population and people living on French territory.
Finally, almost all of these measures underline the abstract and utopian character of the extreme right-wing party’s sovereign political voluntarism. And this because the RN ignores the European Union of which France is one of the 27 members and especially of the 19 members that make up the eurozone with a common currency whose monetary policy is conducted by an independent institution, the Central Bank European Union ( ECB).
However, the context does not advocate an independent French policy as proposed by Marine Le Pen. With inflation rising in the eurozone every month, the ECB is preparing to phase out its purchase of government and corporate debt before raising its rates.
Moreover, even if the Maastricht criteria are suspended due to the pandemic, Member States’ budgets are still subject to a preliminary examination by Brussels. And France, like the other members, cannot ignore the recommendations without bumping into the other members, especially Germany, the leading European economy.
In addition, “to continue the recovery of public finances in the medium term”, it is indicated in the 2021-2027 stability program proposed by the current government in Brussels: †To ensure the sustainability of public debt over time, the dynamics of public expenditure between 2022 and 2027 will be limited to +0.7% per year (excluding the effect of the stimulus and support measures), when prioritizing efficient spending , to promote growth, inclusion and environmental and digital transitions.” On a European scale, it is rather time for an austerity policy to reduce the debt accumulated during the pandemic.
The memory of Matteo Salvini .’s lost bet
Finally, the scenario of a far-right executive coming to power has already played out in Italy. In 2018, League leader Matteo Salvini had his best score with the slogan “No Euro” on a populist sovereignist line, formed a coalition with the Five Star Movement to rule the country. He held the position of Vice-President of the Council and Minister of the Interior. During the 14 months of the League’s government, the spread between Italian and German bonds had widened and the cost of paying down a debt, which represented 130% of GDP, had risen, with financial markets worried about the tense relations with Brussels. In 2019, strong in popularity, the League’s breakup saw the coalition return to voters and be able to rule alone. But the reversal of alliances will prevent the holding of parliamentary elections.
Today it is interesting to note that the League has let go of its anti-euro-sovereignist line, has supported the accession of former ECB president Mario Draghi to the presidency of the council and… is participating in its government ! A lesson to think about for the RN!
