European Markets Surge As French Election Results Ease Investor Fears Over Potential Fiscal Turmoil

European financial markets reacted positively to the results of the first round of the French legislative elections, alleviating concerns about unchecked government spending in Paris.

Additionally, lower-than-expected inflation in Germany fueled optimism about continued interest-rate cuts by the European Central Bank, boosting risk sentiment.

What Happened: The far-right National Rally party, led by Marine Le Pen and Jordan Bardella, won the first round of the snap parliamentary election with 33% of the vote.

Read Now: Trump Campaign Signals Intent To Withdraw US From Paris Climate Accord Again

While significant, this result was less than some polls had anticipated and did not secure an absolute majority in the first round. The New Popular Front, an alliance of left-wing parties, came in second with 28%.

President Emmanuel Macron's centrist coalition placed third with 20%.

This result is seen as a blow to Macron, who has been in office since 2017. He dissolved the French Parliament on June 9 following the European parliamentary elections. The second round is set for Sunday, July 7.

The final outcome remains uncertain, with a National Rally majority possible but not the most likely scenario. Discussions are ongoing between centrist and left-wing parties to prevent a far-right majority in the second round.

Prime Minister Gabriel Attal emphasized the “moral duty” to prevent the far-right from achieving an absolute majority. Attal suggested candidates from Macron's coalition should withdraw from the second round. Macron called for a “broad, clearly democratic and republican rally” to unite left, center, and conservative factions against the far right.

Why It Matters: Political and economic analysts view a National Rally majority in the French National Assembly as a major risk to France’s public finances. France is burdened with a debt of around €3 trillion, more than 110% of its gross domestic product, and a deficit of €154 billion, representing 5.5% of economic output.

The European Union has placed France under the Excessive Deficit Procedure (EDP) to curb spending in countries exceeding the EU’s 3% GDP-deficit ratio.

Policies proposed by the far-right often involve increased spending and reduced fiscal revenues, potentially worsening France’s debt situation and straining its EU relations. Jordan Bardella, Marine Le Pen’s 28-year-old protégé, has campaigned for policies such as lowering the retirement age, reducing energy taxes, and indexing pensions to inflation. A hung parliament could hinder the National Rally’s ability to implement these measures, potentially keeping French spending in check and avoiding major market upheaval.

In other news, Germany’s preliminary inflation data for June showed a 2.2% annual increase, down from 2.3% previously and below the expected 2.3%. This increases the likelihood of further ECB rate cuts this year.

Market reactions: The Euro STOXX 50 index, tracked by the iShares MSCI Eurozone ETF EZU, climbed 1.1% by 09:40 a.m. in New York. Major French banks, including Societe Generale, Credit Agricole, and BNP Paribas, saw gains of 4% to 5%, along with Italy's UniCredit, which rose 4%.

The French CAC 40 index, monitored through the iShares MSCI France Index Fund EWQ, increased by approximately 1.8%, leading other regional indices. The Euro also strengthened, rising 0.4% against the U.S. dollar to over 1.0750, eyeing its third consecutive positive session.

Read Now:

• Biden’s Family Rallies Behind Him After Disastrous Debate Performance Against Trump

Image: Pixabay