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The author is Head of Policy Research at Algebris Investments
Does the success of right-wing extremist politics threaten the European economy and its attractiveness for international investors?
This is the question investors seem to be asking themselves after Marine Le Pen’s far-right Rassemblement National party won a landslide victory in the European elections, French President Emmanuel Macron surprisingly called for new elections and shock news emerged that an unusual alliance between parties on the French left could emerge.
The CAC 40 plunged into its worst week in two years after the election, erasing much of the year’s gains while bond yields rose. The spread between French and German bond yields has widened to levels not seen in seven years. Meanwhile, the French finance minister warned that France was heading for a financial crisis.
It would be an exaggeration to conclude that France is on the brink of economic disaster and it would be wrong to assume that the impact will be severe across the continent. But there are risks at both national and EU level that could have longer-term consequences for businesses and markets.
In France, the reaction was knee-jerk. Immediately after the surprise political decision, investors went into risk aversion mode while digesting the fallout. However, if the election shows a strong result for the left, we are likely to see further selling of French assets. Both the far-right and far-left platforms are calling for the reversal of Macron’s reforms and contain populist promises that are difficult to reconcile with EU fiscal rules. A strong left would also signal a particularly worrying anti-business, anti-growth, eurosceptic shift. This is where the real risks for France lie.
Since the results of the European elections, many have drawn parallels between France and Italy under Prime Minister Giorgia Meloni, arguing that her right-wing party has not had an overly negative impact on the Italian economy and business community. But this comparison is not particularly apt.
The situation is more similar in Italy in 2018, when elections produced an unusual coalition of two populist parties. Held together by mutual antipathy towards Brussels, the Italian government of 2018 collapsed after barely a year, but survived long enough to trigger a dispute with the European Commission over the state budget that led to a rise in risk premiums on Italian public debt.
Financial markets act as judge, jury and executioner of governments with reckless spending plans and can put the brakes on them. Britain under Prime Minister Liz Truss is another good example, and last week’s market moves suggest that investors may be starting to price in the risk of a similar scenario in France.
At the EU level, the danger of a Eurosceptic France is compounded by that of a weak Germany. Chancellor Olaf Scholz’s disastrous election result will weaken the German government for the rest of its term, both domestically and on the European stage. The powerful “Franco-German engine” of integration could therefore lose momentum, giving the right room to set the agenda.
While the right has abandoned the demand for a post-Brexit exit from the Union, its vision of Europe is different. Europe-wide polls show that climate policy is not a priority for right-wing voters, who want to focus more on defence. A strengthened European right could take the opportunity to use the Green Deal’s revision clauses to delay or weaken some provisions. Aside from being obviously bad for the planet, this could make Europe less attractive as a destination for green investment.
From an investor perspective, the key short-term disputes will be those over the next EU budget, including the extension of the EU’s Next Generation spending plan, and over the EU’s own resources. Given this uncertainty, global investors may be less inclined to take European risks.
In a recent speech, Macron warned that Europe is mortal and its survival depends on our choices. His decisions so far have put France under pressure. I do not believe that the rise of populism necessarily represents a fatal economic threat to the EU or France, although history shows that it promises volatility and could discourage investment.
The danger for Europe is more subtle. The European elections have revived the narrative of a divided Europe, where socio-economic views seem to be turning against the EU’s stated political priorities. The choices Europe makes to overcome this deeper fracture and address the causes of the far right’s success will truly shape its future.