Financial markets went into France's Sunday election bracing for a good old-fashioned freakout — but the results from the first round of voting were too confusing to trigger a selloff. 

On the contrary, initial reactions on Monday suggested a measure of relief, with stocks jumping and the euro recovering as some of the nightmare scenarios contemplated ahead of the poll faded.

On Sunday, as expected, the hard-right National Rally (RN) of Marine Le Pen and Jordan Bardella emerged as the strongest force from the first of two rounds of voting, gaining some 34 percent of the nationwide vote. The ad hoc alliance of progressive forces known as the New Popular Front (NPF) polled second with 28 percent, while President Emmanuel Macron’s liberal coalition, Ensemble (Together), trailed in third place with 20 percent. 

France’s two-round voting system, however, makes it all but impossible to extrapolate a final breakdown of seats after next Sunday's run-offs, with three of the country's largest polling companies estimating the RN could wind up with anywhere between 230 and 295 seats. With 289 seats needed for a majority, and given the huge scope for tactical voting in the second round, the RN is given only a slim chance of forming the next government alone.  

As such, uncertainty — which markets hate more than anything — will continue; indeed, much of the initial relief had faded by lunchtime.

Two years of deadlock seen as likeliest outcome

None of the scenarios ahead are appealing to markets: even a one-party government under the RN would set France up for two years of effective gridlock, given the extensive powers of the presidency under the French constitution.

Past examples of cohabitation, in which the government and the president are from different parties, may have worked to a degree, but that's unlikely to be the case this time, said Armin Steinbach, professor of law and economics at HEC Paris, given the vast ideological differences between Macron and RN leader Le Pen.

“Foreign policy will create lots of problems,” from nominating a new EU Commission in Brussels to continuing to fund Ukraine, Steinbach said in emailed comments. “In return, Macron will delay RN projects, will not countersign laws or call the Constitutional Council. Government action will be paralyzed.” 

Economic policy, however, could see a slightly more constructive approach. If Le Pen is able to get her protégé Jordan Bardella installed as prime minister, “she would probably focus on winning the 2027 presidential election, staying on the more moderate track that she has signaled during the campaign,” said Holger Schmieding, chief economist with Berenberg Bank, in a note to clients on Monday. 

Paradoxically, it may not be any single leader that poses the greatest threat to French financial stability, but the lack of one altogether.  

Schmieding noted that a gridlocked government could find itself attacked from both sides by the NFP and RN. While they may be “polar opposites” on issues such as immigration and culture, they have both opposed Macron’s pro-growth reforms and could unite tactically on issues like pension reform and energy subsidies to unpick the work of the last government. 

If that were to happen, the long-term concerns that have troubled the market for years would suddenly become far more pressing, and not just in a narrowly French context. 


FRANCE NATIONAL PARLIAMENT POLL OF POLLS

All 3 Years 2 Years 1 Year 6 MonthsSmooth Kalman

For more polling data from across Europe visit POLITICO Poll of Polls.

“In the extreme, if high debt cripples the credibility of fiscal policy or the creditworthiness of the sovereign, it can hamstring monetary policy: a tightening would simply heighten those concerns and fuel inflation, typically through an uncontrolled exchange rate depreciation,” the Bank for International Settlements warned in its Annual Economic Report, released on Sunday.

To be sure, the eurozone has matured since the last crisis in 2011, creating what some market participants describe as “a series of guardrails or backstops” to reassure investors. In addition, Europe’s banks appear to be in a much better position to deal with sustained volatility than they were with the sovereign debt crisis.  But that might not be enough to outweigh all the remaining shortcomings of the currency union, or to prevent it from being wrecked by one of its economic stalwarts.

Cooperation and consolidation, or confrontation? 

Most of the eurozone's new guardrails and backstops, such as the European Stability Mechanism or the European Central Bank’s various facilities for buying bonds and keeping borrowing costs under control, assume a cooperative stance from any government in bad enough trouble to need them. 

But the platforms of both the RN and the NFP don't allow investors to assume such cooperation — or, indeed, anything to stop a relentless increase in France’s debt burden. Both parties, for example, promised in their campaigns to reverse Macron's decision to increase the retirement age from 62 to 64, a key part of the French president's deficit reduction efforts.

Moreover, even Macron has failed to bring France’s chronic budget deficits under control. Standard & Poor’s downgraded the country's long-term credit rating at the start of June, saying “France's track record of budgetary consolidation over the past decades has been weak. It has not reported a primary budget surplus since 2001.” 

Until the global financial crisis, France’s public debt was roughly similar to Germany’s. Since then, however, while Germany has squeezed spending hard to keep debt below 60 percent of GDP, France’s has soared to 110 percent. Within the EU only Italy and Greece have higher debt ratios, while in absolute terms France’s debt pile is now the largest in Europe at €3.1 trillion.

Crucially, on current trends, Paris cannot identify a moment when that will start to improve.

The worst-case scenario, in which irresponsible or poorly-timed policy choices would lead to a ‘Liz Truss’ moment in which “bond vigilantes” caused market chaos by dumping French debt, is still only a remote possibility. But markets might still wake up to the prospect that in the long run, a deadlock is likely to be just as bad for France's finances.

Giorgio Leali contributed reporting.

It's election season in France - there's never been a better time to read Playbook Paris. Get expert election analysis from POLITICO’s top reporters straight to your inbox every day at 7AM. Stay on top of the game – read Playbook Paris. Sign up here.