Elections for the European parliament took place last week. When reading the results, two main elements appeared quite clearly. First, the majority that had controlled the previous EU parliament, made up of Christian Democrats (EPP), Socialists and Democrats (S&D) and Liberals (Renew Europe), will continue to control the newly elected parliament. The three parties will hold 406 seats together; well above the required 361 seat majority, with a safety margin of 45 seats that should be large enough to contain the potential dissenters in each group (which always materialise when there is a secret vote). Given the numbers, no other majority is possible. More specifically, the right-wing majority that some leaders were hoping to build, comprised of the EPP, European Conservatives and Reformist (ECR) and Identity and Democracy (ID), won only 324 seats, and so is far away from the minimum number of seats required to hold a majority in parliament.
Second, the left-wing parties (S&D and Greens) as well as the Liberals have lost seats (-44 in total) in favour of the EPP (+ 14), the radical Left (+2), and especially the radical right-wing parties (ECR +7) and (ID +9).
In sum, while it is undoubtable that there has been a shift to the right in this EU parliament, if we look at the numbers only, the cataclysmic effect of the rise of right-wing parties has failed to materialise. Things look different however when one looks at the national repercussions of the vote, especially in France and Germany.
In Germany, the largest party in the governing coalition, the SPD, finished in third place, behind the resurgent CDU and the rising AfD in these European elections. The radical right party AfD, in particular, has surged in Eastern Germany, where it has reached 30% of the votes in some instances. While this is not going to have immediate implications, the CDU has already started to discuss whether an alliance with the AfD may be considered possible, thus breaking a taboo that had seemed impossible to consider.
But the largest effect has been felt in France, where President Macron dissolved parliament and called for a parliamentary election on June 30-July 7, which may have momentous consequences for Europe.
In our recent trip reports from France we had highlighted how Macron had failed to leave a legacy in terms of policies, and most importantly had failed to build a clear succession plan. Now these failures risk deflagrating in the most consequential manner. Especially if we consider that the head of the neo-Gaullist party (Les Républicains – LR) has also infringed the so-called “pact républicaine” that has remained in place since the beginning of the Fifth Republic; that is, to leave the National Front (the post-fascist party founded by Jean Marie Le Pen) out of government at all costs. In fact, Mr Éric Ciotti has made an opening towards forming an alliance with Marine Le Pen at the next elections, thus causing a revolt in his own party, but breaking a taboo similar to that prevailing in Germany.
Even without a pact between the Rassémblement National (RN) and LR, the polls show damning numbers for Macron, considering that the radical left and the radical right are ahead in virtually all constituencies. At this point, it is very likely that Macron will be forced into a co-habitation with a prime minister of a different political colour. This may be Jordan Bardella, from the RN.
What would be the consequences of such an outcome? In theory, Macron could show what the RN could do negatively once in power, while still having a massive power of interference in government policies, and with foreign policy remaining as it does in the hands of the President of the Republic. His gamble is that the French people will not want to give the RN full powers by electing Marine Le Pen as President in 2027. But things may go differently: Bardella may prove to be moderate and mainstream while constrained by the presence of Macron, and then reveal his true colours once Le Pen becomes President.
Through all of this, the market is very nervous, and has sold OATs since the announcement, with the 10y OAT – Bund spread having reached 83bps recently.
Markets believe that the future Bardella’s government will be less fiscally responsible than the current Attal’s executive. In case of a victory by Macron, the OAT yield will retrace. In case of a victory by the RN it will initially widen, and two scenarios may then play out: either the RN proves as destructive as feared, in which case the spread will continue to widen further, or the RN proves to be more moderate than is feared, in which case the OAT-bund spread will shrink in coming months.
