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Macron loses majority: French legislative reaction by Adrien Pichoud at Syz Bank

Only 8 weeks after having been re-elected as President of the French Republic, Mr Emmanuel Macron has suffered a significant setback over the weekend. The coalition of parties defending the President’s political agenda has failed to reach an absolute majority in the Parliament, unlike during Mr Macron’s first term.

This election was characterized by a very low turnout and by voters’ frustration after having been trapped in a binary and nuanceless choice during the second round of the Presidential election (Macron or the Far Right).

The composition of the new French Assembly creates an unprecedented situation in France’s modern political history, in which a freshly elected president will not have a majority in Parliament to push his political agenda forward.

The prospects for a coalition with one of the three other main blocs, the leftist coalition, the far right party or the moderate right party, are virtually nonexistent, as all of them have campaigned on their differences and opposition to the President’s agenda.

And a heteroclite coalition of minority parties to form a majority is not possible as it would have to cover the entire political spectrum except for the center, from the far-left to the far-right. It’s an unusual situation of political gridlock in France that raises a number of questions and uncertainties.

This situation seriously jeopardizes the domestic agenda of Mr Macron and the reforms that were presented during the presidential campaign. While punctual agreements may be found with opposition parties on specific topics, especially international or regalian matters, it seems unlikely at this stage that the Presidential party will manage to gather a majority for emblematic reforms such as pushing back the age of retirement.

As such, the reform-minded President will find himself constrained by the Parliament’s composition. France’s long-term growth prospects could therefore be negatively impacted as gridlock and inaction will only postpone and possibly compound some of the existing flaws in the economy. However, such Gridlock scenario is not necessarily negative for the economy and financial markets in the short-run.

Parties that could have raised significant uncertainty around France’s implication in the European project are not in a position to alter the current course. They are in a position to oppose and block President’s proposals, but not in a position to pass politically-tainted legislations of their own.

Indeed, the reaction on financial markets does not reflect any shock from this election for global investors. It rather reflects a justified slight increase in the risk premium attached to French assets, likely due to the uncertainty triggered by this unusual situation: the CAC 40 underperforms European peers but still record a positive session at the time of writing, French sovereign rates are up along with other Eurozone peers and the Euro is gaining some ground vs the US dollar.

Those elections’ results are certainly a blow for Mr Macron and his coalition of supporters. They question the positive dynamic of the French economy’s medium and long term prospects as economic reforms, environmental policy and the social agenda are at risk of stalling. It is also a big live test of the ability to compromise and build consensus for French political parties little used to the exercise.

If they rise to the challenge, the outcome could be a rejuvenation of the political life in France and possibly the basis for a more lively and solid democracy. If they fail to do so, the country might soon become ungovernable and the President might be tempted to call for new legislative elections in the hope of managing to gather a majority. With no guarantee and the risk of an even less favorable outcome…

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