By Thomas Gillet and Brian Marly, Sovereign and Public Sector

The outcome of the European elections in France (AA/Negative) reflects the country’s high degree of polarisation and fragmentation as the far-right party Rassemblement National obtained more than 30% of the votes or about 15 percentage points above President Emmanuel Macron’s Renaissance.

The upcoming French parliamentary election over coming weeks, will be pivotal in determining the ability of President Macron to steer France’s fiscal agenda and reform momentum in the run-up to the next presidential election in 2027. However, it is unclear to what degree French voting preferences in parliamentary elections will differ from the European election which typically favours protest votes.

Highly uncertain outcome with contrasting credit implications for near- and medium-term
We see three possible electoral outcomes.

Macron-victory: On the upside, a broadening of the current governing coalition to include other centrist parties could ensure policy continuity and mitigate the influence of radical political forces in the near term. Such an outcome would moderately support the reform momentum, which has stalled since Macron’s party and its allies lost their absolute parliamentary majority in 2022.

In this scenario, even partial progress on reforms reducing larger than expected fiscal deficits and tackling labour market rigidities would to some extent support France’s credit fundamentals. However, the diversity of policy priorities among potential coalition partners could challenge Macron’s ability to build consensus on what reforms the government should pursue.

Status quo: Another possible outcome would be a broadly similar configuration in parliament. The impact on the reform momentum could be neutral as the political capital used up by Macron in calling snap elections would be balanced by regained legitimacy around his policy agenda. Even so, the lack of an absolute majority would remain a major constraint for the presidential party with little impact on the ability to execute reforms.

Cohabitation: On the downside, further gains from opposition parties would raise the risk of a cohabitation where Macron shares executive power with an opposition-led government. Such a scenario, in which Macron must work with a prime minister from the Rassemblement National, would likely lead to political gridlock until the next presidential election and may increase the risk of business unfriendly policies and/or further fiscal loosening in the short-term.

In this case, we would expect President Macron to be further hindered in his ability to execute structural reform and reduce the fiscal deficit from a higher-than-expected 5.5% of GDP in 2023 to less than 3% by 2027, as planned under the 2023-2027 programming law. This consolidation path implies additional savings of around EUR 50bn, or 2% of GDP in the coming years according to the French Court of Auditors, which would be delicate to deliver under a more fragmented and polarised parliament.

Distinct implications for presidential election
The three scenarios may also have different implications for the 2027 presidential election.
Prolonging the status quo could result in another weak government until 2027 and further strengthen the Rassemblement National for the presidential election while a Macron-victory would only support a candidate with a similar reform agenda provided the government can truly deliver in its last two years.

The prospects of a cohabitation leave significant uncertainty for the 2027 election. While the accession to power of a Rassemblement National government may reveal the party’s limitations in implementing its agenda, weakening its electoral appeal ahead of the presidential elections, a period of political gridlock may also further fuel frustration with established political institutions and entrench support for radical parties.

Overall, France’s dynamic political environment and unclear policy agenda to address its key credit challenges support our Negative Outlook.

Scope’s next calendar review date is on 18 October 2024.