Le Pen victory could lead to market turmoil

Fears over the potential impact of a Le Pen victory on Britain’s economy and global financial stability deepened today, after the Bank of England warned of possible market turmoil caused by a year of world elections.

“Policy uncertainty associated with upcoming elections globally has increased,” warned the Bank, in its half-yearly Financial Stability Report. And, in an exceptional year in which over 80 countries – covering more than half the world’s population – are heading to the polls, “This could make the global economic outlook less certain and lead to financial market volatility.”

Officials at Threadneedle Street appear particularly concerned about the impact of so many elections on global government debt. “High public debt levels in major economies could have consequences for UK financial stability,” the report warned.

France heralded a special mention: the Bank reported that an uncertain political and economic outlook “could lead to market volatility, including in sovereign debt markets, as already observed in response to the unexpected news of the French parliamentary elections over the summer.”

The Old Lady did not explicitly mention Marine Le Pen but the subtext was clear enough. 

In France’s snap vote – called by Macron in the wake of his party’s humiliating defeats at the EU elections – Le Pen’s hard-right National Rally is expected to emerge as the largest party. Some polls suggest the leader of the National Rally party is close to sealing the majority required to form a government.

Which means any jitters in French bond markets are largely down to perceptions of her party’s fiscal policies. 

Why are the markets said to be so fearful of Le Pen? 

Because she isn’t afraid to borrow. The National Rally’s programme envisages additional public spending and tax cuts in addition to plans for expansion of security, defence and the judicial system which Goldman Sachs estimates would cost a further £10bn.

The US bank predicts a debt surge under Le Pen, in a country already contending with the biggest debt in the eurozone. 

While national debt is far from a rosy picture in Britain –  where the debt burden is approaching a 60-year high of almost 100 per cent of GDP – in France, things are decidedly worse: national debt is currently running at 111.6 per cent of GDP.

Of course, turbulence in the French bond markets won’t be solely down to trepidation over the success of Le Pen’s party. As The Editorial Board wrote last week, it may also reflect panic at the prospect of hard-left Popular Front leader Jean-Luc Mélenchon, an unapologetic Marxist who has pledged €106bn in extra spending, getting his hands on the fiscal tiller. 

Brussels and the markets would almost certainly prefer another Macron government, but they are out of step with French voter sentiment. 

Le Pen’s National Rally is projected to win 33 per cent of votes in the first round of the French elections being held this Sunday, followed by the New Popular Front on 28 per cent, with Macron’s centrist Renaissance party trailing on 18 per cent.

Some of the more excitable financial analysts are predicting that a Le Pen victory will unleash Liz Truss-esque market chaos in Paris. 

If so, as the Bank of England had duly reminded us today, there would be ripple effects in Britain. Though the knock-on effect in other EU countries could be far more dramatic. If France’s economy soars out of control, it could drag down the euro with it. As a warning shot, Germany’s finance minister has already said that the ECB will not intervene. 

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