Hung Parliament, ungovernable France?

N o political party has obtained the absolute majority after the French general election. In theory, several government coalitions are possible, but much less so in practice. We think the bar is probably too high for a grand coalition. However, some alliances or a “legislative pact” under a minority government remain likely . In case of failing negotiations, France could enter a phase of political gridlock . The budget will be the top priority of the next government. Under the new European fiscal rules, France will have to present a fiscal adjustment trajectory estimated of around 0.9 pp of GDP per year for 4 years or 0.5 pp of GDP for 7 years. The 10Y OAT-Bund spread seems to have found a new equilibrium in a range of between 60 and 70 bp. We keep our target for the 10Y OAT-Bund spread range between 60bp and 80bp by year-end. Scenarios Comment Probability Small coalition government / Legislative pact - Ensemble / Moderate left - Ensemble / Moderate right - Other Such government could work for some time but would remain fragile ++ ++ - Broad coalition government - Broad center coalition - Left-center coalition Too many political differences between parties -- -- Minority government - New Popular Front - Ensemble - Other Fragile majority and strong risk of no confidence vote -/+ -/+ - Political gridlock - Technical or technocratic government - Macron’s resignation S nap elections in one year Tail risk scenario + --