Euro, French bond slip on Left emerging single-largest bloc in France elections

Euro slipped and French bond futures declined in early trade on Monday, July 8, as a coalition of socialists and far-Left group has emerged as the single-largest bloc in France's parliamentary election.

Euro declined by around 0.2% to $1.0819 in Asian trade, whereas the futures of long-term French bond dropped by 20 ticks, leading to an implied yield of 3.13%.

The results that emerged late on Sunday showed the leftist coalition -- the New Popular Front -- winning at least 181 seats in the 577-member Parliament. Ensemble, the liberal centrist coalition of President Emmanuel Macron emerged second with 160 seats, and Marine Le Pen's far-right National Rally stood third with 143 seats.

None of the coalitions has crossed the halfway majority mark of 289 seats, which means that political wranglings will continue over the next few days to stitch a post-poll alliance. There is a likelihood of Macron joining hands with the Left coalition, despite the sharp differences over handling of the economy, French political analysts said.

Fiscal deficit concerns

The likely inclusion of the Left in the government has stoked fears of widening fiscal deficit, which is the reason behind the slide in Euro and French bond.

The New Popular Front, ahead of the elections, had promised a spree of welfare measures, which includes the reversal of the seven years of pro-business reforms under Macron, and a hike in the minimum wages for workers.

To implement its promises, the Left would require additional funds of EUR 95 billion ($138.74 billion), which is six times the spending proposed by Macron and double of what is proposed by Le Pen, French think tank Institut Montaigne had said ahead of the voting.

Left's proposed expenditure would widen France's fiscal deficit, which already stands at 5.5%, higher than the 3% of GDP allowed under the European Union (EU)'s economic goals.

Even without any additional expenditure, France's debt would rise to 112% of the GDP in 2024, the International Monetary Fund (IMF) had warned.

In May, S&P Global Ratings had downgraded France's rating, as the Macron government failed to cut fiscal deficit following the high expenditure incurred during the Covid-19 pandemic.