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French people tend to say that the Germans are naysayers! But this time round, they though thought it was opportune to roll the dice by not confirming the opinion expressed some two weeks ago! Analyses suggest that many disoriented voters weren’t able to imagine the consequences of the next step.

In fact, the president has swapped a more or less stable government set-up, based on a bad compromise, for a deal with the devil. The bottom line is that a far-left approach has never created value and economic growth for a country, but rather destroyed much of it.

For quite some time now, Western democracies have been put under considerable strain and the latest event doesn’t stop the pendulum swing from going farther out as the next event is waiting for next door as we all watch Joe Biden’s struggle not to end-up himself in a chaotic situation. In France, the previous governments have implemented hard-won pro-business reforms that could be rolled back in a relatively short time, meaning some disastrous consequences for the country’s finances.

The new normal of instability in a developed country and founding member of the EU, may last until the summer of 2025 when the President can dissolve the parliament again.

Who is the left-wing leader?

Jean-Luc Melenchon is the son of a post office worker and a teacher, both descendants of Spaniards and Italians who emigrated to French Algeria at the turn of the century. Jean-Luc Melenchon was born in Tangier, now Morocco, when it was an international zone. At the age of 11, his parents moved to France where he later studied philosophy. He performed some freelance jobs as a journalist and proofreader and soon he got involved in Trotskyist politics. He joined the Socialist Party in 1976 at the age of 25 and was elected to various regional, national, and European legislative positions. He’s a fan of Hugo Chavez (who ran Venezuela into bankruptcy) and Fidel Castro and is keen on fiery speeches, which he performs without a teleprompter and using his trademark mix of humor and anger.

The 72-year-old left winger is anti-euro, anti-NATO, and boldly critical of wealthy people. He has an ultra-strong dogmatic approach whereby he thinks that wealth must be equally distributed between all citizens. He also defends the idea that the State is always solvent and one can open the spending floodgates, people need to work less to become richer — or else to keep the population happy. A pure wishful way of thinking which is strong manipulating people.

The vote of defiance (versus the moderated right-wing parties) will not bode well with long-term bond and equity investors. The implications of his rhetoric — now no longer an idle threat — will most likely become true for France’s deficit.

What are the investment ramifications?

Neither the Euro nor the French market will benefit in the long term. The latter gets a taste of eurozone 'periphery' turmoil. The end of the election is the beginning of a more turbulent period for France and the stakes at risk are big.

Under the previous government, France built up, quite rightly, the image of a top European destination for foreign investments. While there are no immediate changes to the commitments made, we believe that any company engaged in any kind of process will think twice before going any step further.

For now, the youngest prime minister said on Sunday that he will submit this resignation. This is not a surprise but rather a tradition. President Macron has two choices: a) he could ask him to stay on for the Olympics that kick off in Paris this month, and b) install a technocratic government that handles the day-to-day business but does not deliberate on any changes – hence the country would enter into a deadlock situation, internally and externally. Would that be any good for the country and Europe, no!

Public finances

While the immediate impact on France’s public finances is modest, the more worrying effects are further out. There are two possible scenarios: To respond to the required changes, the new government is to deliver a net fiscal giveaway of 0.5% of output that would keep the spread of French bonds over German equivalents at about 75 basis points, roughly the average since the snap election was called. Alternatively, the other is a bigger giveaway totaling 1% of gross domestic product, this would widen the spread to 100 basis points — and swell debt as a percentage of output to more than 118% of output, respectively GDP.

What are the broader ramifications?

The French hung parliament, while not being efficient, is likely the best solution for European equities. Volatility is expected to remain high and the political risk premium is expected to increase over time in the absence of broader reforms for the European Union. In the fixed income segment, French government bonds do not appear appealing: the fundamental outlook for French sovereign credit is deteriorating, while others such as Spain and Portugal are improving. None of the incumbents addresses the issues of debt reduction. Hence, the long-term credit outlook is negative as debt charges are expected to increase, adding to the already high level of debt ratio, and elevated fiscal deficits.

Foreign view about the French election results:

Andre Ventura, leader of Portugal's far-right party Chega:

• It is a disaster for the economy, a tragedy for immigration, and bad for the fight against corruption.

Capital Economics, London:

• France may have avoided the "worst possible outcomes" for investors, of an outright majority for either Le Pen or the leftists. However, a hung parliament means it will be difficult to pass the budget cuts that are necessary for France to comply with the EU's budget rules.

Nordea Market Analysis, Helsinki:

• While the initial French election results still raise many questions, financial markets are likely to greet the vote with some relief. The results appear to show that the more moderate forces still ally in the second round against more extreme candidates, which also has repercussions for the next presidential election.

  That said, the economic program of the left is in many ways much more problematic than that of the right, and while the left will not be able to govern on their own, the outlook for French public finances deteriorates further with these results. Thus, it is reasonable to expect somewhat higher risk premia in French assets to prevail beyond the initial market reaction.

BRADESCO BBI – Equity Strategy, LONDON

• There’s going to be a little bit of relief that the far right fell short much more than expected but we’re still left with an uncomfortable surprise of the left wing doing much better than expected.

  That’s going to probably bring an end to this tentative euro and French stocks rally we’ve seen over the last couple of days. It represents more uncertainty from an angle that markets had maybe taken their eye off.

  One caveat though is that a big slug of this euro rally had nothing to do with what was going on in France. It had a lot to do with the dollar weakening on clearer signs of the U.S. economy slowing.