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There are more elections on the horizon-the Législatives to determine the composition of the Assemblée Nationale will be held on 11 and 18 June.  Although President Emmanuel Macron’s economic programme should boost the French economy, full implementation would be difficult if he does not win a majority in parliament. Andy Cates, Chief Eurozone Economist, takes a look at some of the possible scenarios that could emerge from the parliamentary elections and its impact on France’s political and economic destiny.

French politics again

On 11 and 18 June voters in France will head to the polls again to vote for the 577 députés (i.e. members) of the 15th Assemblée Nationale, i.e. the lower house of the legislature. Each député represents a single-seat constituency and the composition of the Assemblée Nationale will be crucial for President Macron as his pro-growth agenda. Without a like-minded parliamentary majority, many of his pro-growth reforms will be in jeopardy

An uphill battle for a majority

We believe it will be difficult for En Marche (EM) to win a parliamentary majority. Not only will it have to battle tooth and nail for control of the legislature with The Republicans (LR), the party will also face stiff electoral challenges from both the Front National and La France insoumise (FI)-the far-left party led by Mr Mélanchon.

Although Mr Macron won the second round of the Presidential election with 66.1% of the vote, we still have to assume that his — and, therefore, EM’s — ‘core’ vote is much closer to his first round return of 24%. Many of the voters that voted for Mr Macron in the second round only voted for him to prevent Marine Le pen from winning the presidency. It is therefore only fair to assume that many will revert to their first-choice party on 11 June.

Furthermore, Mr Macron pledges to draw half of his party’s candidates from civil society (i.e. with little or no experience of fighting an election campaign) and to not enter into local electoral pacts may make it even more challenging for his party to secure a majority. Even if EM is able to field candidates for all 577 seats, as Mr Macron has claimed, it is likely that EM candidates will face one or more candidates from a party that has historically enjoyed a greater level of ‘core’ support in the region.

Four scenarios

Pulling all that we know presently together, we think there are four main scenarios for the outcome of the legislature elections.

35% probability-A post-election EM-led majority ‘coalition’

In this scenario EM fails to win a majority, but outperforms current expectations by winning a large plurality. The two most obvious parties to be pulled into a subsequent coalition are – the centrist Democratic movement (MoDem, which won only two seats in 2012) and the centre-right Union of Democrats and Independents (UDI, which is associated with 14 seats currently through affiliated parties). A coalition would (excusably) let Mr Macron off the hook as far as awarding portfolios to individuals that already have ministerial experience is concerned.

30% probability-An LR majority

Long thought to be the most likely, an LR majority still looks to be a significant possibility. By convention if nothing else, this would likely oblige President Macron to appoint a member of LR as his prime minister (possibly François Baroin). Even though LR ought to be fully supportive of Mr Macron’s reform proposals (which are more modest than those put forward by its own presidential candidate, François Fillon), in practice we would worry that an LR government, bitter over having lost an election it thought was in the bag, would be more obstructive than constructive as it sought to undermine Mr Macron with an eye to the 2022 election cycle.

15% probability-A post-election LR/EM majority coalition

This scenario could also involve other parties (notably the MoDem and the UDI), but the coalition would essentially be between LR and EM, as the two largest parties —a de facto grand coalition. However, even if LR manages to win more seats than EM, with Mr Macron in the Elysée it would likely be seen as the ‘junior’ partner. Its members are well aware of the electoral fate that has ultimately befallen junior coalition partners in Germany, the Netherlands and the UK in recent years. Consequently, we are assigning a relatively low probability to this scenario.

10% probability-An EM majority

Although logic suggests this scenario to be somewhat far-fetched, we would not rule it out given all the twists, turns and upsets of this French election cycle so far. In principle, from an investor perspective at least, this should not be a bad outcome. However, whether that proves to be the case or not may hinge in part on whether Mr Macron sticks to his pledge to not appoint former ministers to his government and to pick half his cabinet from ‘civil society’.

What does this mean for investors?

We still believe the election of Mr Macron as President should be positive for the French economy. A very high level of political uncertainty has arguably been stifling private sector spending in recent months and the removal of this uncertainty should fuel pent-up consumer and investment demand in the months ahead. Mr Macron has also pledged to restore efficiency in the French economy and his proposals for government investment, corporate taxes and labour market reform should be positive for the French economy. Simulations that have been run on the Oxford Economics model to assess the impact of his policies suggest – with full implementation - that Mr Macron’s programme could add 0.5 percentage points to baseline GDP levels by 2022 and 1.2 percentage points to potential output.

For the broader region, we believe Mr Macron’s pro EU stance will generate some of the necessary reforms that will help marshal greater economic and financial stability in the eurozone.

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