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French shares tumbled on Friday after the prospect of a far-right government with the left as the main opposition roiled European financial markets, deepening a sell-off that has wiped almost €100 billion from the value of Paris’ main index.
The Cac 40 is on track for its worst week since March 2022. It fell 2.9 percent by mid-afternoon, led by a renewed sell-off in banking stocks.
The index has fallen more than 6 percent in the five trading sessions since Emmanuel Macron’s shock decision Sunday to call early parliamentary elections, in which the president’s own centrist alliance risks being wiped out.
According to recent opinion polls, the runoff elections would be fought mainly between candidates from a left bloc and the far right, with Marine Le Pen’s Rassemblement National expected to make significant gains.
Investors are concerned about the prospect of a new radical government with big spending plans. Finance Minister Bruno Le Maire warned this week that a far-right victory could lead to a “debt crisis”, similar to the turmoil in the British government bond market under former Prime Minister Liz Truss.
RN’s policy of cutting taxes on energy, fuel and food alone would cost 24 billion euros a year, Macron’s campaign said, citing figures from the Ministry of Economy.
“They will be less friendly to them [the EU] and the things they’re talking about from a policy perspective don’t suggest they’re going to come with a lot of fiscal responsibility,” said James Athey, fund manager at Marlborough Group. “Even a result that isn’t an outright RN victory is unlikely to be stable at all. And markets hate uncertainty, instability and volatility.”
Four left-wing parties signed a unity pact on Thursday for the elections, which will take place on June 30 and July 7. On Friday they unveiled a joint program that includes unfunded spending commitments worth tens of billions of euros.
The left’s free program would scrap Macron’s planned increase in the retirement age to 64 and freeze food and energy prices.
The left would raise income taxes on the well-paid and reintroduce wealth taxes.
“We will finance this program by reaching into the pockets that can most afford it,” said Olivier Faure, leader of the Socialist Party.
The left-wing program also “rejects” the EU’s fiscal rules, which required a deficit of less than 3 percent of GDP.
New projections from French media based on the European Parliament election results suggest that only around 40 of Macron’s MPs could qualify for the second round, and only a handful from the centre-right. Some pollsters question the methods used.
Increasingly traditional opinion polls, based on voting intentions, suggest that the vast majority of MPs in the new assembly will favor massive spending commitments.
Concerns about French markets “range from a slowdown in the reform process, possible credit downgrades, to growing concerns about rumors of a breakup of the eurozone,” said Mohit Kumar, chief economist for Europe at Jefferies.
Banks – which would be exposed to slowing economic growth and hold significant government debt – were among the worst performing stocks. Crédit Agricole, BNP Paribas and Société Générale are down 12.9 percent, 13 percent and 15.7 percent respectively this week.
Macron’s move has also resonated beyond the French stock market. The euro has fallen against the dollar, while the region-wide Stoxx 600 index is on track for its worst week since October last year, with the German, Italian and Spanish stock indexes all losing ground. In stark contrast, Wall Street’s S&P 500 index is up 1.6 percent this week.
“When the Americans wake up, they will sell Europe and especially France, which is the weakest link at the moment,” said John Plassard, senior asset specialist at Mirabaud Group in Switzerland.
Barclays, which for months has been recommending that clients maintain a weighting of European equities relative to the US that is higher than that of the benchmark, cut its position on Wednesday and advised “being cautious on the region for the time being given the political situation in France”.
French government bonds have also been affected. The difference between French and German yields – a market barometer of the risk of holding French government bonds – rose to 0.81 percentage points on Friday, the highest level since 2017.
This article has been amended to correct the loss of value on the French market