French Elections Preview: Euro to suffer after the calm, as specter of extremists, uncertainty rise

More Meloni, less Truss – that is the notion of markets after the latest debate between the leading candidates in the French parliamentary elections. Fears over a populist policy that would crash Europe's second-largest economy have receded, but that could be disrupted as markets open in Asia on Monday. EUR/USD may suffer.

Here is a preview of the first round of France's parliamentary elections on June 30.

French President Emmanuel Macron shocked the world – including close advisors – by announcing snap elections after suffering a beating in the European Parliament vote. French stocks and the Euro were hit by uncertainty and concern that the far-right Rassemblement National (National Rally) may enact some of its policies. Investors are weary of its leader, Marine Le Pen.

Since Macron's announcement, left-leaning parties provided a surprise of their own, organizing quickly under a new political formation called Nouveau Front Populaire (New Popular Front). The leading force behind the big tent is Jean-Luc Mélenchon, whose policies are seen as even more extreme than those of Le Pen.

French opinion polls show Macron's party in third place

Opinion polls show both parties lead over Macron's Ensemble Citoyens (Together Citizens). 

French polls of the polls. Source: FT

President Macron would continue to control foreign policy, but would lose control over domestic matters – most importantly, economic policy. There is a fear that a government led by the extremes would trigger a "Liz Truss moment" – crashing markets with populist policies that lack funding. In 2022, then-UK Prime Minister (PM) Liz Truss sent British bonds tumbling, and GBP/USD sank to around 1.03.

However, the latest debate between the candidates for French PM yielded hope. The 28-year-old Jordan Bardela of the far right and the center-left politician Olivier Faure both sounded moderate, closer to incumbent PM Gabriel Attal.

That soothed markets, which hope that even a victory for less-business-friendly candidates would resemble Italy's Giorgia Meloni, who proved cooperative with the EU, calming market fears.

French complex voting system adds to uncertainty

Voting is held on Sunday, and polls close at 20:00 local time / 18:00 GMT. The system is complex, with an outright victory in any of France's 577 seats given only to those winning 50% of the vote. If no candidate reaches this goal, the second round is held between all candidates who receive 12.5% or more of all those registered to vote. That results in two, three or even four-headed run-offs. 

Moreover, the counting of the votes concludes during the night – when markets in Asia are already open – and candidates who made it to the second round may still quit. For example, representatives of the center-right Les Republicans (The Republicans) may make way for a Macron-backed candidate. 

The results of the first round would show French preferences – confirming or disproving the polls. However, the composition of parliament would be hard to assess when markets open early on Monday, or even late on Monday or Tuesday after several candidates quit.

France is set to return to scaring markets

I expect this uncertainty to cause markets to rattle and the Euro to suffer. Moreover, PM candidates' discipline may erode on election night. The National Rally's Jordan Bardela may circle back to rhetoric that would weigh on markets. 

The best outcome for markets is a victory for Macron's centrist party and a continuation of reforms led by him and PM Attal. Markets also like the smaller center-right Republicans. With the first-past-the-post voting system, the centrists have a chance to form a government, perhaps with help from moderate defectors from the leftist bloc, which is made up of four parties. 

However, anger in France over inflation, immigration, and other topics may propel the extremists to power – more likely the far right – and that scares markets. The calm may not prevail. 

Analysts would rush to project the outcome of the second round, held on July 7, and the picture could scare markets. Only on July 8, if parliament does not include a majority for the extremes, would markets calm. A hung National Assembly is not the best for governance, but markets would prefer Macron losing control over populists gaining it.