French election: Public spending is not set to rise significantly

Initial projections, alongside statements from Macron and Melenchon on Sunday, indicate that the most probable outcome is that no party will achieve an absolute majority, resulting in a 'hung parliament'. Hence, public spending in France is not set to rise significantly.

Projections indicate that National Rally (RN) won the first round with around 33.5% of the votes, which translates to 230-305 seats in the National Assembly. A party needs 289 to gain an absolute majority. The left-wing New Popular Front (NPF) came second with around 28.9% (120-200 seats) and Macron’s centrist alliance (Ensemble) third with around 21.4% (60-125 seats). The final result is determined on Sunday 7 July.

The most likely scenario (55% probability) is a ‘hung parliament’ in the National Assembly after the second round. In this main scenario, we thus expect the 10y yield spread between France and Germany to tighten by some 30bp to 40-60 bp within 3 months as fears over spending increases fade.

Due to record-high voter turnout, approximately 300 constituencies will have three candidates in the final round. However, both Macron and left-wing leader Melenchon have pledged to withdraw candidates within the next 48 hours to defeat the RN.

In the “cohabitation” scenario (35% probability) where Le Pen’s party, Rassemblement National (RN), wins an absolute majority and Jordan Bardella becomes the next prime minister, we also expect the 10y yield spread between France and Germany to tighten, albeit to a less extend and trade between 50-60 bp within 3 months.

The first round of the election makes ‘hung parliament’ most likely

Initial projections, alongside statements from Macron and Melenchon on Sunday, indicate that the most probable outcome is that no party will achieve an absolute majority, resulting in a 'hung parliament'. Hence, public spending in France is not set to rise significantly. The second most likely scenario is an absolute majority for the National Rally, especially if third candidates from the NPF and Ensemble do not withdraw as previously stated. Notably for the markets, the scenario where the left-wing NPF secures an absolute majority is considered the least likely, so the worst fears of spending increases should fade. 

The most updated projections from four pollsters’ show that the National Rally (RN) won the first round with around 33.5% of the votes, which translates to 230-305 seats in the National Assembly. Gaining an absolute majority requires a party to secure 289 seats, and while it is uncertain if National Rally (RN) has achieved this, it appears most likely that they have not. The left-wing New Popular Front (NPF) came second with around 28.9% (120-200 seats) and Macron’s centrist alliance (Ensemble) third with around 21.4% (60-125 seats). The projection is not the actual result of the first-round, but it indicates that RN had a slightly worse result than polls suggested and Ensemble and NPF a slightly better result.

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