Euro slips as France's New Popular Front secures most parliamentary seats

Market Reactions and Investor Concerns

The euro fell by 0.3% early Sunday during Asian trading time, right after France's New Popular Front party won the legislative elections. The euro was trading at 1.083 per dollar before the slip to reach 1.08 after the French elections news dispersed. Today, it gained some value and is trading at 1.082 per dollar.

The left-wing New Popular Front alliance secured 182 out of 577 seats in the National Assembly, and incumbent President Macron's centrist alliance is projected to take 168 seats, marking a significant defeat for the Ensemble group.

With the likelihood of a hung Parliament and unclear coalition possibilities, a minority government, where power is shared between a prime minister and a president from opposing parties seems likely.

A gridlocked parliament could result in a government unable to implement crucial reforms, such as measures to reduce France's substantial government debt, which amounted to 110.6% of the country's GDP at the end of last year.

French markets have been unstable since Macron's unexpected decision, which followed his party's loss to the far-right in a vote for European Union lawmakers in June. The centrist President has implemented pro-growth economic reforms in Europe's second-largest economy, which investors now fear could be reversed under a drastically different parliament.

And since the leftists won the majority number of seats, here's what we know about their fiscal plans and how it'll impact the French economy:

Fiscal Plans and Economic Impact

The leftist New Popular Front (NFP) alliance, not known for fiscal restraint, has ambitious plans. Leader Jean-Luc Mélenchon has indicated that decrees could be issued as early as this summer to repeal Macron's pension reform and raise the minimum wage.

The NFP also plans to implement a 10% pay increase for civil servants, raise housing subsidies by 10%, and hire more teachers and healthcare workers. These measures will require an additional €150 billion in public spending, financed by higher taxes on the wealthy.

The alliance, including France Unbowed, the Socialist Party, the Greens, and the Communist Party, promised to boost voters' purchasing power and reverse Macron's pension reform, lowering the retirement age from 64 to 60.

Macron criticized the left's coalition as “extreme,” warning that its extensive public spending program, partly funded by tax hikes on high earners and wealth, could be detrimental to France, which is already under scrutiny by EU watchdogs for its debt.

Jan von Gerich, Chief Market Analyst at Nordea in Helsinki, remarked to Reuters, "The economic program of the left is much more problematic than that of the right. While the left won't govern alone, the outlook for French public finances deteriorates with these results, leading to higher risk premiums in French assets beyond the initial market reaction."

The coalition's focus on state spending has unsettled markets, especially considering the current state of France's finances.

In March, France made headlines with a fiscal deficit of 5.5% of economic output for 2023, up from 4.8% the previous year, surpassing the government's target of 4.9%.

Macron’s government had pledged to reduce the deficit to under 3% by 2027 to meet EU goals. Alexandre Ouizille from the New Popular Front stated before Sunday's vote that the party would not increase the deficit, though she added, "We won’t reduce it."

In the meantime, investors will closely monitor developments in Paris to assess how this new political landscape might impact fiscal stability.