Expectations ahead of the vote was that the far-right Rassemblement National party would win the most seats in the second round of the French parliamentary elections on 7 July. But it was the left-wing New Popular Front coalition that emerged the biggest party. With only 180 out of 577 seats, it was a long way off an absolute majority. The centrists of President Macron’s Ensemble party came second with 168 seats, the Rassemblement National and its allies in third with 143, and the centre-right trailing with 67 seats. With all of the main groups far from an overall majority, we’re firmly in hung parliament territory.

While the left won the most seats, the real winner was the so-called Front Républicain – the agreement between the centrist and leftist parties to stand aside where necessary to concentrate the non-Rassemblement National vote. In fact, almost all non-Rassemblement National MPs won their seats thanks to this.

The formation of a new government looks unlikely in the short term. Some far-left members of the New Popular Front want President Macron to appoint a prime minister from among their ranks quickly, but this seems unlikely given the split in parliament, and as there’s no deadline for him to do so. Several of the centre-left members of the New Popular Front admit that there will need to be agreements made within parliament first for anyone to be able to govern effectively.

With MPs due to vote for a president of parliament and July’s Olympic Games in Paris, we believe that President Macron will bide his time. Indeed, current Prime Minister Gabriel Attal tendered his resignation in the aftermath of the second-round vote, but President Macron refused, preferring near-term continuity.

Even though France isn’t used to coalitions, we believe the centre and left will have little choice but to work together as President Macron is unlikely to allow the left to form a minority government on its own. If they can’t agree, the alternative is a frozen legislature until parliamentary elections can be held once again in June 2025. Or, as a last resort, President Macron could resign, bringing forward both presidential and parliamentary elections. 

In the meantime, a key consideration is whether the New Popular Front will remain intact. This coalition of the left was only created a few days before the second vote, and it contains politicians with very different views; there have already been signs of fragmentation. 

Another scenario sees Ensemble and the centre-right join forces, in contrast with the New Popular Front, to become the first group in parliament – and therefore entitled to ask to nominate a Prime Minister from within their ranks (again with a relative majority).  

With no overall majority for either extreme, markets have a positive view of the outcome.

Having previously widened, the spread between French government bond yields over Bunds has narrowed. We still think that these spreads are likely to remain in a 60-65bp range until a coalition is formed.

Uncertainty will remain high until Macron appoints a new prime and a coalition (hopefully) formed.

News about any potential coalition is therefore likely to drive the market in the near term. A centrist coalition could see spreads tighten further towards 55bp, while any coalition featuring Ensemble should result in the far left’s demands being moderated, preventing too much fiscal duress.

Rassemblement National’s failure to win an overall majority is also seen as positive for the European Union.

Even the party winning the most seats would probably have been viewed as disruptive for EU-French relations, but this too has been averted. With anti-EU rhetoric likely to be contained for now, Italian and Spanish government bonds could continue to outperform French government bonds in the near term.

Essentially, the elections have been a wake-up call for a market which, in our view, was too optimistic about France’s economic prospects.

Forecasts of the French deficit have been revised upwards this year, resulting in credit rating downgrades. Despite this, French government bond spreads were tightening earlier in 2024, driven by investor sentiment rather than fundamentals.