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Investors are concerned about the potential for a financial crisis in France if the political center collapses in upcoming parliamentary elections, leading to far-right populists taking control of the country. President Emmanuel Macron called for snap elections after his party lost to the far-right in a vote for EU lawmakers, causing market instability in French stocks and government bonds. Speculation suggests that Marine Le Pen’s National Rally could become the dominant force in parliament, posing challenges for reducing France’s high government debt and budget deficit.

If Le Pen’s party gains power, there is a risk that France’s debt pile could increase due to her costly fiscal and protectionist agenda. This scenario could resemble the financial crisis that occurred in the UK when former Prime Minister Liz Truss introduced plans to increase borrowing for tax cuts, resulting in market turmoil and her resignation shortly after. French Finance Minister Bruno Le Maire expressed concerns about the possibility of a financial crisis in France, highlighting the country’s higher borrowing costs compared to Portugal and the impact of political instability on financing debt.

Credit rating agencies are closely monitoring France’s economic situation, with S&P downgrading the country’s credit score in May due to budgetary concerns. Markets are reacting to the potential political upheaval, with rising interest rates on government bonds and widening spreads compared to German equivalents. Stock markets in France have also experienced declines, while the euro has weakened amidst uncertainty surrounding the upcoming elections. An opinion poll showed Macron’s centrist bloc falling behind the National Rally and left-wing parties in terms of voter support.

The National Rally has proposed increased public spending and reduced VAT on certain items, raising concerns about the impact on public finances. Experts warn that these policies could further strain France’s budget and affect the country’s sovereign rating. Moody’s has identified the snap elections as a risk to fiscal consolidation in France, posing a credit negative situation. While the European Central Bank could intervene to prevent a crisis, it may require France to implement sound fiscal policies before offering assistance.

In conclusion, the upcoming parliamentary elections in France have raised fears of a potential financial crisis if far-right parties gain power, impacting the country’s debt, budget deficit, and credit rating. The risk of market instability has led to increased interest rates on government bonds, wider spreads compared to German bonds, and declines in stock markets and the euro. Policymakers are concerned about the potential economic consequences of policies proposed by the National Rally, with experts warning of the need for fiscal discipline to prevent further strain on France’s finances. The European Central Bank could step in if needed, provided France implements sound fiscal policies to address its economic challenges.

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