La France is in the international spotlight. The political chaos triggered by European elections and by President Emmanuel Macron's decision to call early elections by the end of the month it is having repercussions on the rest of Europe both from a political and economic-financial point of view. And this is precisely the topic at the center of the new episode of the podcast “On the 4th floor” with Alessandro Fugnoli.
The Kairos Partners Sgr strategist explains to listeners what voters' fears are, but also focuses on the markets' concerns and what could happen after the vote on June 30th.
France: voters' fears and the loss of purchasing power
What worries French voters who will be called to the polls at the end of the month to elect the new Parliament? “It's at the top of everything the loss of purchasing power of recent years", explains Fugnoli, according to whom "the analogy with what is happening in America is evident, where voters put the economy and, in particular, inflation at the top of their concerns".
In recent years, outgoing governments have tried to regain consensus by creating growth and employment with public spending financed by central banks. This, in Europe as in America, has created an inflation that has already eroded, since the beginning of the decade, just under 30 percent of the purchasing power that salary increases they only partially managed to compensate.
“For two years families have been hearing that inflation is falling and has now almost disappeared, but they see that the price level does not return to the starting level and they understand that the loss of purchasing power, if it is not quickly compensated for in some way, will become permanent”, underlines the strategist.
France: what worries the markets?
In the background are the markets. Since the beginning of the year, the American stock market has risen by 15%, while the French one is at zero and in the week following the European elections it lost 8% of its value.
What worries the markets, according to Fugnoli, is not so much inflation the “propensity of governments to spend if this exceeds a certain level. The problem is that the political struggle and the search for consensus lead all parties, both orthodox and heterodox, to spend as much as possible", he explains, highlighting that "Macron himself, who seven years ago presented himself as a champion of fiscal rigor , is preparing to deliver to the next government a public deficit rose to 5.5 percent".
Macron has also made unpopular decisions such as raising the retirement age from 60 to 64, but he has spent heavily on other fronts, including increasing the salaries of public employees.
France: what will happen after the early elections?
The prediction of the Kairos strategist is clear: ""After the vote, the incoming government, right or left, will try to increase the deficit by a couple of points".
However, everything will depend on the election result: if no one manages to gain an absolute majority, France will face a coalition government or a caretaker government, which will only deal with ordinary administration and will hardly launch significant new spending programs. “In 12 months, in this case, Macron will have the power to dissolve parliament again and return to the vote,” predicts Fugnoli.
If instead there will be an absolute majority, Macron and the Constitutional Court will have the power not to sign new laws or to cancel laws already approved. In the end, it will be difficult for the French deficit to really grow much.
“In short, either a strong government will emerge from the polls that will try to legitimize itself as a government that spends, but without exaggerating, or weak solutions will prevail that will not have the possibility of resorting massively to spending,” concludes Fugnoli.
Stock exchange and markets: what to do with France?
“There will therefore come a time when France, in particular your bag, it may become interesting again and involve the other European markets in the recovery", anticipates Fugnoli who, however, advises waiting: "Before the vote, however, it will be prudent to buy on weakness only the other European stock exchanges”. And then? “If there are no complications, direct purchases on France could be considered, holding lastly the French banks. These, in fact, will be forced to purchase public debt securities if foreigners, until yesterday large buyers of OAT, they will decide to stay away,” he predicts.
In summary, “the French events abruptly interrupted the process of diversification from America to Europe that was taking shape. On a structural level, however, the American economy will slow down gently in the coming months, while the European one will continue to accelerate. This is why the gap that has formed between the American stock exchange and the European stock exchanges will at least partially close again within a reasonable timeframe", concludes Fugnoli.
