When it comes to France’s turbulent politics, the current impasse is probably the best investors could have hoped for. The second round of French legislative elections delivered a widely expected hung parliament, but not its predicted makeup: Rather than coming in first, Marine Le Pen’s far-right and anti-immigrant National Rally finished third. In a shock twist, the leftist New Popular Front alliance emerged victorious, with the party of President Emmanuel Macron and its allies in second place.
This is because leftists and centrists ended up coordinating. In many local races, candidates dropped out to avoid dividing the vote against the far right. Still, no party has an outright majority, which plunges the country into political gridlock.
This was, counterintuitively, the preferred outcome for financial markets. The CAC 40 initially tumbled when the elections were called in June, driven by fears of a potential National Rally government challenging the European Union with fiscally expansive plans. Then the French stock benchmark perked up, as the first-round results suggested that the far-right wouldn’t get a majority.
Yet markets remained volatile because the rise of the New Popular Front raised even greater concerns. The policies of this coalition, in which leftist firebrand Jean-Luc Mélenchon is a key leader, also include more government spending, on top of widespread tax increases. On Monday, the CAC 40 initially dipped.
Investors may have been reacting to Mélenchon’s statement that there will be no deals with the centrists. But it quickly rebounded, with a small gain in early-afternoon trading compared with Friday’s close. This latter reaction makes more sense.
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