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Roula Khalaf, editor of the FT, selects her favorite stories in this weekly newsletter.
The writer is head of policy research at Algebris Investments
Does the success of far-right politics threaten the European economy and its appeal to international investors?
That’s the question investors seem to be asking in the wake of the landslide European election victory for Marine Le Pen’s far-right Rassemblement National, French President Emmanuel Macron’s surprise call for early elections and the shocking news of an unlikely alliance between the parties of the European Union. Frans left.
The Cac 40 tumbled to its worst week in two years after the election was called, wiping out much of the year’s gains as bond yields rose. The spread between French and German government bond yields has widened to levels not seen in the past seven years. Meanwhile, the French Finance Minister warned that France was heading towards a financial crisis.
It would be extreme to conclude that France is on the brink of economic disaster, and it would be wrong to assume that there will be serious consequences for the entire continent. Yet there are risks at both national and EU level that could have longer-term consequences for companies and markets.
France has experienced a knee-jerk reaction. In the immediate aftermath of the surprise political decision, investors shifted into risk-off mode as they digested the fallout. However, if the elections show a strong performance for the left, we will likely see more sales of French assets. The far-right and far-left platforms both call for the reversal of Macron’s reforms and contain populist promises that are difficult to reconcile with EU budget rules. A strong left would also signal a particularly worrying Eurosceptic shift against business and growth. This is where the real risks lie for France.
Since the European election results, many have drawn parallels between France and Italy under Prime Minister Giorgia Meloni, arguing that her right-wing party has not been too negative for Italian business and the economy. Yet this is not the most apt comparison.
The situation is more analogous in Italy in 2018, when elections produced an unlikely coalition of two populist parties. The 2018 Italian government was held together by a mutual dislike of Brussels, and collapsed after just a year. Yet the country lived long enough to feud with the European Commission over the national budget, leading to a rise in the spread on Italy’s sovereign debt.
Financial markets are effective as judge, jury and executioner of governments with reckless spending plans and can apply the brakes. The UK under Prime Minister Liz Truss is another good example, and market movements over the past week suggest that investors may be starting to assess the risk of a similar scenario in France.
At EU level, the risk of a Eurosceptic France is compounded by that of a weak Germany. Chancellor Olaf Scholz’s dismal election result will weaken the German government for the remainder of its term, both at home and on the European stage. The powerful ‘French-German engine’ of integration could therefore lose steam, leaving room for the right to set the agenda.
While the right has dropped calls to leave the bloc after Brexit, its view of Europe is different. Polls across Europe show that climate policy is not a priority for right-wing voters, who favor more attention to defense. A strengthened European right could seize the opportunity of the review clauses in the Green Deal to delay or weaken a number of provisions. Not only is this clearly bad for the planet, but it could also make Europe less attractive as a destination for green investments.
From an investor perspective, the most important short-term battles will be over the next EU budget, including the rollover of the EU’s “Next Generation” spending plan, and over the EU’s own resources. Given this uncertainty, global investors may be less inclined to take European risks.
In a recent speech, Macron warned that Europe is mortal and its survival depends on our choices. His choice so far has put pressure on France. I don’t think the rise of populism necessarily poses a deadly economic threat, either to the EU or to France, although history suggests it does promise volatility and could discourage investment.
The risk for Europe is more subtle. The European elections have revived the narrative of a fractured Europe, where socio-economic views appear to be shifting against the EU’s stated policy priorities. It is the choices Europe will make to reconcile this deeper rift and address the root cause of the far right’s success that will truly determine its future.