France votes today - and the banks are preparing for a mega-crisis

Merkur France votes today - and the banks are preparing for a mega-crisis 1 hour • 3 minutes reading time Financial markets sound the alarm The ECB has an instrument at its disposal in case France slides into a financial crisis after the election today. But will it really be used if the financial markets turn against France? Paris - The words "Because it's France" were used by Jean-Claude Juncker, then President of the European Commission, in 2016 to justify Brussels' decision to once again grant France leniency in terms of budget rules. But this leniency could change if the new elections in France on June 30 produce a Eurosceptic, far-right government. Experts fear that such a confrontational course with Brussels could destabilize the entire monetary union and weaken the euro. Bruno Le Maire, France's finance minister, even warns of a possible financial crisis in the wake of the new elections. Banks warn of euro crisis after the 2024 French election The risks for French government bonds are increasing, as Thomas Gitzel, chief economist at Liechtenstein's VP Bank, explains: "The uncertainty on the financial markets has increased, as can be seen from the euro exchange rate and the risk premiums on French government bonds." After the announcement of the new elections, the risk premiums (spreads) on French government bonds rose by up to 30 basis points compared to German federal bonds with a term of 10 years. "The spreads have thus reached their highest level since the European debt crisis in 2011." The far-right Rassemblement National (RN) party led by Marine Le Pen has promised to adhere to the EU rules set out in the Stability and Growth Pact. But it remains unclear whether the expensive spending plans can be financed without violating EU debt rules. There is also the question of whether the European Central Bank (ECB) will have to intervene if the financial markets turn against France. Holger Schmieding, chief economist at Berenberg Bank, warns of this scenario: "If a country can simply ignore the rules and get help from the central bank, many will doubt the future value and cohesion of the euro." ECB prepares to react after today's election in France The ECB has a previously unused bond-buying instrument called the "Transmission Protection Instrument" (TPI) at its disposal, which can be used to support individual countries in distress. With this instrument, the ECB could support France by purchasing its government bonds in a targeted manner and prevent a divergence in the financing costs of the individual euro countries. The application of the TPI, however, requires that the countries concerned meet the EU's requirements for national budgets. Philip Lane, chief economist at the ECB, told Reuters that the movements in the French bond market do not appear "disorderly". This means that they do not meet one of the conditions for intervention by the central bank. However, Ewald Nowotny, a former ECB Council member from Austria, can imagine that the ECB will intervene if the situation becomes critical: "There is of course the possibility that Frankfurt will intervene if the problems with France have negative external effects on other countries such as Italy." Macron's debt policy criticized: EU initiates proceedings against France The EU Commission is planning proceedings against France due to its high level of debt. The centrist government under President Emmanuel Macron has so far failed to contain the growing national debt. The EU Commission is therefore seeking an excessive deficit procedure against France, but also against Italy and other countries. At the end of this procedure, fines running into the billions could theoretically be imposed. Gilles Moëc, chief economist at the AXA Group, states: "The fact that France is again threatened with EU criminal proceedings for excessive debt is a reminder that the country no longer has any financial leeway." The EU has long been lenient with France, which has had budget deficits that are too large for 25 years according to EU rules. The credibility of French fiscal policy is therefore already at stake ahead of a possible shift to the right in Paris. The euro zone's second-largest economy is expected to have a deficit of 5.5 percent of economic output in 2023. A deficit of 5.3 percent is expected this year. However, EU debt rules only provide for an upper limit of three percent. Two rating agencies have already downgraded France's credit rating. Jeromin Zettelmeyer, director of the Bruegel think tank in Brussels, does not believe that the RN's rhetoric so far indicates a major confrontation with the Commission that could trigger a financial crisis.