France's Parliamentary Elections: A Threat to EU Cohesion?
The upcoming parliamentary elections in France on Sunday pose a significant threat to the cohesion of the European Union. Financial markets are particularly anxious as the possibility of a Eurosceptic, far-right government looms. Experts warn that a confrontational stance with Brussels could destabilize the entire monetary union and harm the euro.
Financial Market Reactions and Risks
Uncertainty in the financial markets has surged, evident from the euro exchange rate and the risk premiums on French government bonds. The risk premiums on French government bonds compared to German 10-year government bonds spiked by 30 basis points after the announcement of the new elections. Currently, the yield gap stands at 71 basis points. The right-wing Rassemblement National (RN), led by Marine Le Pen, has pledged to adhere to EU rules, but financing their costly spending plans without breaking EU debt rules remains questionable.
ECB's Potential Intervention and EU Commission's Legal Actions
The European Central Bank (ECB) has a bond-buying instrument called the 'Transmission Protection Instrument' (TPI) to support countries in distress. While ECB chief economist Philip Lane has stated that the French bond market movements do not warrant intervention, former ECB Governing Council member Ewald Nowotny suggests that the ECB could intervene if the situation worsens. Meanwhile, the EU Commission is considering initiating an excessive deficit procedure against France due to its spiraling national debt, which could theoretically result in hefty fines.
- The centrist government in Paris under President Emmanuel Macron has struggled to contain the national debt, leading to potential EU legal actions. Despite the RN's softer rhetoric, their control could hinder the green transformation and capital market reforms in Europe.
- France's credibility in fiscal policy is already at stake, with its deficit projected to be 5.3 percent this year, far exceeding the EU's upper limit of three percent. The EU has historically turned a blind eye to France's budget gaps, but this leniency may not continue if the far-right gains power.
- Experts like Jeromin Zettelmeyer from the Bruegel think tank believe that while the RN is not pushing for an exit from the euro zone, their governance could increase challenges for Brussels. VP chief economist Thomas Gitzel also anticipates that an RN-led government would not shake the EU to its core but would certainly create more headwinds.
