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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is head of policy research at Algebris Investments
Is the success of far-right politics threatening the European economy and its appeal to international investors?
That is the question investors seem to be asking in the wake of a landslide European election victory for Marine Le Pen’s far-right Rassemblement National, French President Emmanuel Macron’s surprise call for a snap election, and shock news of an unlikely alliance between parties of the French left.
The Cac 40 plunged to its worst week in two years after the election was called and erased much of the gains for the year, while bond yields jumped. The spread between French and German bond yields has widened to levels not seen in not seen in the past seven years. Meanwhile, the French finance minister warned that France was headed for a financial crisis.
It would be extreme to conclude that France is on the cusp of an economic disaster, and wrong to assume severe ripple effects across the continent. Yet, there are risks at both a 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 switched to risk-off mode while they digested the ramifications. If the election shows a strong performance for the left, however, we will probably see more selling of French assets. The far-right and far-left platforms both call for undoing Macron’s reforms and contain populist promises that are hard to reconcile with EU fiscal rules. A strong left would also signal an especially concerning anti-business and anti-growth Eurosceptic shift. This is where the real risks lie for France.
Since the results of the European elections, many have drawn parallels between France and Italy under Prime Minister Giorgia Meloni, arguing that her right-wing party has not been overly negative for Italian business and the economy. Yet, this isn’t the most apt comparison.
The situation is more analogous in Italy in 2018, when elections delivered an unlikely coalition of two populist parties. The 2018 Italian government was held together by mutual dislike of Brussels, and it collapsed after barely one year. Yet, it lived long enough to open a spat with the European Commission on the national budget, which led to a rise in the spread on Italian government debt.
Financial markets are effective at being the judge, jury and executioner of governments with reckless spending plans and can apply the brakes. The UK under Prime Minister Liz Truss is another great example, and market movements over the past week suggest investors may be starting to price the risk of a similar scenario in France.
At the EU level, the risk of a Eurosceptic France is compounded by that of a weak Germany. Chancellor Olaf Scholz’s dismal electoral result will weaken the German government for the rest of its term, at home and on the European stage. The powerful “Franco-German engine” of integration could therefore lose steam, leaving space for the right to set the agenda.
While the right has abandoned calls for exiting the bloc after Brexit, its idea of Europe is different. Europe-wide polling indicates that climate policies are not priorities for right-wing voters, who favour more focus on defence. An emboldened European right could seize the opportunity of the revision clauses in the Green Deal to delay or water down some provisions. Aside from being obviously bad for the planet, this could make Europe less attractive as a destination for green investments.
From an investor perspective, the key fights to watch in the short term will be those on the next EU budget, including the rollover of the “Next Generation” EU spending plan and on the EU’s own resources. Given this uncertainty, global investors may be less inclined to take on European risk.
In a recent speech, Macron warned that Europe is mortal, and its survival depends on our choices. His choice so far has put France under pressure. I don’t think the rise of populism necessarily represents a lethal economic threat either to the EU or to France, though history suggests that it does promise volatility and could discourage investment.
The risk for Europe is more subtle. The European elections have revived he narrative of a fractured Europe where socio-economic views seem to be shifting against the EU’s stated policy priorities. It is the choices that Europe will make to reconcile this deeper fracture and address the root cause of the far-right’s success that will really shape its future.
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