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  • Writer's pictureJonathan Wilmot

Who Can Govern France?

Updated: Jul 9

Things fall apart; the centre cannot hold;

Mere anarchy is loosed upon the world,

WB Yeats: The Second Coming (1920)

France and the UK have traded places. Not long ago our new Prime Minister Liz Truss was effectively fired by the UK bond market's (over) reaction to her fiscal plans. Her brief tenure undermined the UK's reputation for political stability and made us the laughing stock of Europe. Now it is France whose political stability is in question, and whose bond markets are at risk. More than that, so is the whole future of the European project.

The election in the UK is still underway as we write, but there is no ambiguity whatsoever about who will be forming the next government in the UK, and about who will be Prime Minister. Nor about the fact that Keir Starmer and Rachel Reeves will (initially at least) follow very centrist and orthodox policies rather than run big fiscal risks, or resort to punitive taxes. For once the election is not about who will govern, or even very much about how they will govern, it's really about the future of the Tory Party, who might lead it in the future, and whether it can even stay in one piece.

But whatever happens to the Tory party the UK is about to become an island of political stability in a sea of uncertainty.

By contrast we don't know much about who will form the next French government, how they will govern in practice or indeed whether the country will be governable at all.

Both the first round results and the polls suggest the country is now starkly polarised between the (Far) Right and the (Far) Left, most of whose stated policies are incompatible with EU laws and obligations. The Centre did not hold.

Marie Le Pen's (Rassemblement National) will win the most seats but are very unlikely to get an outright majority. It has been Macron's gamble all along that in that outcome he would offer them power and have them either refuse to form a government, or assume power and mess things up.

Despite earlier statements to the contrary, it now seems that RN will accept the opportunity to form a minority government and try to pass their favoured legislation with help from "sympathetic" members of other parties. It's not clear how much they will be able to do in practice, and perhaps they won't mind that too much. Because of course the real prize here is the Presidential Election in 2027. And Marie Le Pen's best chance of winning that election might well be to take a leaf from Meloni's playbook: do your best to change the EU from within rather than flout EU rules from without, as Syriza did in Greece (they lost that battle badly and have never recovered).

Or to put it differently, in order not to fall into Macron's trap they will have to govern more responsibly than their program suggests. As this has become clearer markets have calmed down a bit: French bank stocks have rallied, OAT yields have stopped rising and the euro has recovered somewhat.

Armageddon deferred perhaps, rather than cancelled, and not really a proper answer to the bigger question "who can govern France? But a relief for markets nonetheless.

Neville Hill gives a bit more colour below.


"If RN do chose to govern as a minority then their platform would be diluted and they would be limited in what they could pass. There are some areas of policy ‘overlap’ with the left Popular Front, which may mean they can pass some meaningful measures. But both sides are pretty hostile to each other, so there’s a good chance there’s no co-operation or co-ordination. Possibly the left could abstain in areas they are supportive of and allow the measures to pass. Most of these areas of overlap would involve fiscal loosening. Macron can not block/veto measures, but can only delay their passage.


Pensions: Both RN and NFP want to repeal Macron’s 2023 pension reform that raised the pension age to 64 from 62. The NFP want to cut the pension age to 60. The RN have said that repealing the pension reform is not a massive priority. 


Energy bills: Both want to lower energy bills for consumers. The left NFP want to reverse a gas price increase that has just taken place. The RN want to lower energy prices to the French domestic production cost (which is a drop of around 30%) – I assume this would involve disengaging from EU energy markets. 


Wealth tax: The RN want to replace the existing real estate tax with a financial wealth tax; the NFP want to reintroduce the full wealth tax (covering real estate and financial assets). So some potential for overlap here, but also potential for disagreement. 


Minimum wage: Both want to either increase the minimum wage or reduce social security contributions on low paid work. 


In general, this sort of co-operation would involve fiscal loosening, and further put France in breach of the new Stability and Growth Pact rules (indeed, all possible outcomes from Sunday’s vote will leave France in that sort of position). That matters inasmuch as if a country is running a looser fiscal policy than the European Commission advocates, then they can’t rely on ECB support in bond markets if spreads widen in a disorderly way. 


So there is a risk of a Truss-style bond blowout (especially as there’s no FX channel to take some of the steam). But of course, with 2027 in focus RN will have a strong incentive to allow their minority position to moderate their actions and prevent any financial dislocations, so that they can demonstrate they are capable of governing. 


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