France is only one accident away from disaster

Imagine if last week’s British election had resulted in a coalition government between Labour, the Liberal Democrats, the Greens – and George Galloway. Hard to imagine, you might think. But something similar has just happened in France.

At this moment, France and Europe are celebrating the defeat of Marine Le Pen and her far-right Rassemblement National in the second round of Sunday’s parliamentary elections. The winner is the left-wing New Popular Front, a group of four parties. This is indeed a moment to remember. But one should be careful what one wishes for. The most important political result of these elections is not the glorious victory of the united front of anti-fascists, but political fragmentation. It is happening all over Europe. The Netherlands is a pioneer. There will be more fragmentation in Germany too. Fragmentation is the defining European experience of the 2020s.

The new French government will be supported by a coalition of traditionally opposing parties. These could include former Gaullists, Emmanuel Macron’s centrists, two other centrist parties, Socialists, Communists, Greens and possibly Jean-Luc Mélenchon’s La France Insoumise, one of the most radical left-wing parties in Europe.

The extreme right is now the official opposition. It was able to maintain its share of the vote at around one third. This is roughly the same as the share of the vote that the Labour Party won in the British general election last week.

The right feeds on France’s dysfunctional economic and social model. The French public sector is bloated. Even after recent reforms, the French pension system is a ticking time bomb. The economy is trapped in 19th century agriculture, the 20^th Century industry and 18^th Mercantilism of the century.

Macron will be remembered both for his incendiary liberalism that brought him to power in 2017 and for his reckless gamble that led to the current political chaos. In the last presidential election in 2021, the French elected him but denied him the majority he would have needed to implement his agenda. Macron’s party performed better than expected on Sunday, but its number of MPs almost halved. The Macron era is well and truly over. But no other era has begun. France is stuck in a long interregnum, a gray area that poses increased political and financial risks.

The Rassemblement National also had no answers to France’s economic problems. It is the focus group version of the extreme right. Its only notable idea that would have had a chance of being implemented is a reduction in VAT on electricity and gas. The more radical things, such as the withdrawal of immigration policy from the EU, would have had to wait until the 2027 presidential election at the earliest.

I don’t want to downplay the impact of a far-right victory in the general election on France and the rest of the EU. But if Jordan Bardella, the leader of the Rassemblement National, had become prime minister and pursued his silly economic agenda, he would have been partly responsible for the disappointment that was to come. The centre and the left have kept the far-right out of power with their tactical alliance, but beyond that there is no unity and certainly no focus on economic renewal. Whatever you probably associated with a Le Pen presidency in 2027 will not have diminished with these elections.

The scenario that worries me most is a sovereign debt crisis between now and 2027. That would be a euro crisis on steroids. France falls into the category of countries that are too big to fail and too big to bail out.

France is a country with a relatively high public debt – 110 percent of annual economic output. The French private sector is in an even worse financial position. In May of this year, the trend of the French public deficit was still rising compared to previous years. Economic growth is low. The dynamic is toxic.

What will keep the rainbow coalition in power is not a shared agenda, but what Americans call debt-financed electoral giveaways. This cannot last.

Given this political uncertainty, I do not believe that France will be able to attract many foreign investors in the coming years. The next presidential elections in spring 2027 are within the time horizon of most investors. Would you invest in a country where there is a constant threat of a far-right government that threatens to ruin the EU single market? Or a far-left government with irresponsible fiscal policies?

Less investment means less growth and less fiscal space, which leads to either more borrowing or more austerity. In this scenario, France really needs a radical center, but the center no longer has the votes it needs.

It was widely feared that a right-wing government would trigger a financial crisis. However, in the past, it has often been the other way round: financial crises have led to right-wing governments, as happened in Europe in the 1930s, in Latin America in the 1970s, and more recently.

The cause of a French financial crisis would be a vicious circle of low growth and rising debt, which could leave the government facing a difficult choice: default or, more likely, accepting a bailout from the International Monetary Fund or the EU. Both would be a national humiliation and a gift to the far right.

Financial crises have causes and triggers. The deeper causes of the French crisis are easy to see: a rotten economic and social model, unsustainable fiscal policy and political deadlock. The triggers are harder to predict: it could be a government crisis, another economic shock or the bankruptcy of a major bank.

After the elections, the country is just one accident away from disaster. That is Macron’s legacy.