French voters have done what Macron asked by swerving left
Every now and then on the morning after general elections somewhere I find myself writing the line that the people have spoken but we don’t know what they have been trying to tell us. In the UK elections of Thursday that was not the case. The electorate was very clear. The low turnout of 59.8% told us that they have little faith in politics and politicians. The very low vote for Labour of 33.7%, the lowest ever for a winning party of any hue, told us that they don’t much like Labour and of 23.7% that they like the Conservatives a lot less. That Reform outpolled the Liberals by 14.3% to 12.2% but only won 5 seats as opposed to the latter’s 72 is a travesty in the eyes of many although the Liberals who have for decades militated for proportional representation this will now surely not be the principal rallying cry. FPTP might have overcooked the result in favour of Labour but at least on Friday morning the United Kingdom had a government. The same cannot this morning be said of France.
I’m not sure who other than members of the Rassemblement National themselves ever thought that Marine Le Pen and Jordan Bardella would ever be able to secure a majority in the Assemblée Nationale. I was certainly not one of them. Both Le Pen and her father have repeatedly made it to the Presidential second round run-off but have never really been able to attract voters beyond those who had backed them the first time around. The unholy electoral alliance of the Left and the Centre achieved its goal of preventing the RN of becoming the largest party. And now what?
The Nouveau Front Populaire or NFP is already a hotchpotch of centre left to extreme left groupings led by Jean-Luc Mélenchon who when standing for the presidency was dismissed as what in the UK is generally referred to as the Loony Left. As far back as anyone can remember there has been nothing to compare with the ideological warfare which the Left has been fighting within its ranks. As far back as the 19th century and the schism between Marxian dialectic materialism and Bakuninian idealism has plagued the French Left. The Revolution of 1789 is in the eyes of Anarchists – strictly with a capital and not a small “A” – proof of the superiority of radical revolutionary action and to this day there remains within the French Left a genetic strain of Jacobinism. This is perpetuated in Mélenchon.
It is a further feature of French politics that leaders emerge with their own party. La France Insoumise belongs to Mélenchon as much as Renaissance, formerly La République en Marche, belongs to Macron and the Rassemblement National belongs to Le Pen. Les Républicains was in its own way unique as it had been the party of Charles de Gaulle which had, however, been passed on to Georges Pompidou who passed it on to Valérie Giscard d’Estaing and so on. Having run the country for most of half a century, the Républicains have collapsed to 5.1%. Parliament is now split more or less three ways between the Left, the Centre and the Right which for all intents and purposes not only makes the formation of a working government all but impossible, it also leaves the country if not ungovernable, then at least ungoverned.
France might have better food and better weather than the UK and in some parts a better health service but that’s about it. On Wednesday I popped into the Big Smoke to have lunch with a French friend who no longer lives there, no longer wishes to live there but still retains a vote. She had observed that at one of the major rallies of the NFP there was much flag waving. Palestinian flags were to be seen but, so she told me, not a single Tricolore in sight. A gallic shrug.
At the very least Brussels can breathe easier. The fiscal position of France remains critical but with a hung parliament it might not end up being as bad as it might have been had Mélenchon won well enough to be able to implement his central electoral promise to dial back Macron’s single greatest and at the same time most controversial achievement by reducing the retirement age back to 60. France’s debt/GDP was at 110.7% at the end of 2023 and is now most likely still at or around the same level. Macron’s inability to address this issue has prompted the ratings agencies to act, the latest being a downgrade by Standard and Poor’s to AA-, but as of now it has become significantly less likely that progress will be made.
Government bond markets have been punishing France for its political instability and although the 10 year OAT yield dropped from 3.35% to 3.21% in the week between the first and second round of the elections as it became progressively clearer that the RN was in no way going to gain power, the shock of seeing the NFP in the driving seat might have them change their mind again. The French electorate has done exactly what President Macron had asked of them, has not given the RN a mandate and in doing so has lifted La Grande Nation out of the frying pan and has placed it straight into the fire. Bonne chance mes braves.
I spent seven very happy years working for the Banque Nationale de Paris. We didn’t get paid a lot, but it was a benign environment in which foreigners like myself could work unmolested by in-house politics. Our French colleagues spent day and night knifing each other in the back but we non-French were never going to be part of the hierarchy, so we were left alone to get on with doing our jobs. As more or less the only Brit who was entirely fluent in French I had the privilege of being able to cotton on to much of what was going on between the warring French factions although I then had to take great care not to find myself aligned with any of them. I digress.
I was working for Barclays in Zurich in the foreign exchange department in the early 1980s and was there when over one weekend the French franc was devalued by give or take 25%. It had been reasonably well flagged so the world and his wife was trying to get themselves short of the franc. Sell francs you don’t have on Friday in order to buy them back much cheaper on the Monday. Borrow the ones you need in order to deliver for just three days. The interest rate for short-dated borrowings went through the roof and although I was not on that desk, I saw overnight rates on francs as high as 1,400%. This is over 40 years ago and the conversation at the time was that France had overstepped the mark and that fiscally it was about to fall off the cliff. I can barely remember a single year since then when the country has not been marked as a dead man walking and yet it has remarkably succeeded in not only staying afloat but also thriving. It might have failed in its quest, barely concealed and ever present, to displace Germany as the beating heart of the EU but its central role within the Union has and will stand it in good stead when it is in need of a safety valve to help it through its ideological and fiscal nightmare.
Northern neighbour Belgium has spent most of the past ten years without a government and the Netherlands has only in the past few days found itself with one. The hard-right Geert Wilders’ PVV found it impossible after its clear election victory to find coalition partners but now, under the leadership of an unelected bureaucrat Dick Schoof a government of sorts has been cobbled together.
Maybe time to re-read James Burnham’s masterful 1941 “The Managerial Revolution” which predicts the rise of the technocrat.
International financial markets have taken the new British Labour government in their stride. Sterling has remained solid against the dollar as well as against the euro, gilts took one look and then went back to sleep, and equity markets are content the new chancellor of the Exchequer Rachel Reeves will provide a solid pair of hands. I have for a number of years known Sir Robert Stheeman who has through thick and thin managed the UK’s Debt Management Office and who a couple of weeks ago and after two decades of running the show has gone into well-earned retirement. Retirement from the DMO maybe although I can’t see him for long sitting at home tending the roses. His successor is Jessica Pulay whom I have never met but who has a long history at the DMO on the back of a career that saw her at Goldman Sachs, at Morgan Stanley and at Deutsche Bank. Our worst fears that the government – the old one – might try to parachute in a civil servant with an HM Treasury rather than a market background proved to be unfounded. I’m sure its important to some people that we now have a female Chancellor and a female head of the DMO although personally I don’t give a toss whether they wear skirts or trousers as long as they know what they’re doing. It would appear, at this point in time at least, that in both cases it’s a tick in the “yes” box.
That said, my recent adage “New faces, same policy options” still stands. The government’s huge majority in the House of Commons gives it more or less free reign although the unity of the centre left, the left and the hard left will most probably not last for long so that PM Sir Keir Starmer would be advised to get as many of the big changes he and his team envisage with great haste and while the goodwill remains intact. Starmer does not have a great reputation for being either decisive or good at facing down opposition. He has swept into unprecedented power with not much of a popular mandate. How he copes with that and with a big black hole in the government’s coffers has to be seen. I would suggest that by the time of the next elections the MP with the greatest period of presence in the House and with the longest amount of time on his feet will have been Nigel Farage.
The brave new world begins today; new it will be, and much bravery will be required. Whether the latter will be for the account of the political leadership or for the taxpayer has to be seen.
Back in the real world, Fed Chairman Jay Powell will testify on Wednesday before the House Financial Services Committee. He will most probably give us nothing new. Inflation is contained but not falling fast enough to justify too early a rate cut. Tick. The economy is still expanding albeit at a slower rate. Tick. Unemployment is at 4.1% a little higher but still historically low. Tick. “Is, Mister Chairman, the US banking system solid and resilient enough to take a meaningful slowing of the economy?” “Erm…I’m glad you asked that question…”
Opinions differ on that subject and only a fool would expect Powell, if at all asked the question, to answer with anything other than an emphatic and unreserved affirmative. Many in markets are not that convinced and the recent comment by one of my correspondents that the US Treasury market is trading future bank defaults should not be taken as entirely fatuous. I hear that the great options short on US rates which shocked markets a week or so ago and which priced in a 300 basis point cut by May next year is being added to.
This week brings the opening of the US Q2 reporting season with Citi, Wells Fargo, BONY Mellon and JP Morgan first on the docket. Be careful of what you believe and remember Chuck Prince, former Citi CEO, who completely misread the signs in the Summer of 2007, proudly told the world that he along with his bank was still dancing and by November along with Citi’s profitability was gone.
US inflation figures on Thursday. I’m not sure they’re what we should be focusing on.
So, off we trot into a new week. Risk asset markets resolutely refuse to heed warnings that tech might be overstretched. They have evidently taken lessons at the Prince School of Contemporary Dance. The summer lull is drawing closer so nobody should be shy in taking a little bit of risk off the table. Elsewhere, the England football team has followed Sir Keir Starmer by rising without trace and it now finds itself in the semi-finals of the Euros. The England XV gave good account of themselves for the first 50 minutes playing the Kiwis in Dunedin and only lost by a single point. Close but no cigar. Oh, and Hamilton won the British Grand Prix at Silverstone. Don’t much care for the man but credit where credit is due. My greetings to Nataniella who after two years, seven months, and eight days has completed her military service in Israel. Her mother is both proud and relieved; she had been serving perilously close to the Gaza border on October 7th. Oh, sorry, I forgot that that was a false flag attack funded by America and carried out by British special forces…. How silly of me.
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