What’s a year without a political crisis in Europe? Until recently, the European elections were well down the list of events that could potentially induce a bout of market volatility. The French electorate were unambiguous; their preference had shifted towards the right-wing party, National Rally (RN), leaving President Emmanuel Macron’s party, Renaissance, languishing with just half the number of votes that RN managed to secure. On the back of this, President Macron was seemingly left with no other option but to call snap Parliamentary elections.

While the European elections threw up an unambiguous result, the Parliamentary elections were so inconclusive that the nation currently has no replacement government, nor does it appear to be in an immediate position to form one. In a strong turnout, the French electorate softened their support for RN in favour of the left-wing alliance and Macron’s centrists. So balanced was the voting that no party holds nearly enough seats to form a majority government. Traditionally, fragmented parliaments are rare in France with clear majorities typically the case, enabling the appointment of a prime minister an easier task for the president. In this case however, a divided left bloc with few cohesive mandates means no obvious candidate has emerged. Among the combinations in forming a government, the most likely outcome is a cross-party alliance between the centrist left and the moderate right. While seemingly politically challenging, it appears to be the most practical solution. In any event, a divided parliament ensures no clear or expedient path to political stability.

The political situation in Ireland appears more benign. The 2020 general election saw a surge in support for the Governments main opposition party, Sinn Féin. Their popularity sprung from the fact that Ireland, and most notably the Government, was sleepwalking towards a supply driven housing crisis and that Sinn Féin had the solutions to avoid this. A share of 24.5% of the votes in the previous general election was perhaps the reality check the current coalition government needed and has since then implemented many of the suggested solutions that Sinn Féin proposed. In more recent times, Sinn Féin have struggled to find their niche and have lacked a definitive stance on important issues such as immigration. In the recent local and European elections Sinn Féin ran 335 candidates, including one in every single local election area in the country. However, supporters failed to return to the ballot boxes and instead the status quo was maintained with the two main parties, Fine Gael and Fianna Fail, taking most of the votes while independent candidates saw similarly strong levels of support.

One would be forgiven for assuming that the current government would call their own snap election but, this has been downplayed by several high-profile party figures with many in favour of waiting until next March and allowing the current government to run full term. In more recent times, the Budget delivery date was brought forward by one week to 1^st October. In doing so, this gives the Government the remainder of the month to enact such measures as the finance bill. Perhaps such enactments are tantamount to the Government running full term and thus allows the calling of an election in early November. Bookmaker odds imply a greater than 75% chance of an election taking place in 2024.

The divergence between France and Ireland extends beyond the political. Recently, the European Union reprimanded France for running excessive budget deficits leaving the country subject to the Excessive Deficit Procedure which enforces remedial actions in addition to significant fines. France currently runs a budget deficit of 5% of GDP and its debt-to-GDP ratio of 111% is akin to that of Italy’s before the Euro crisis in 2010. Under a politically benign backdrop this appeared widely acceptable for the second largest economy in the EU however, the left bloc has spending plans that could swell the deficit further. Such unfunded spending plans would be swiftly punished by market forces and push French yields to even loftier levels relative to their EU counterparts. This comes at a time when, without continued spending cuts, France’s deficit is expected to grow to 5.7% this year and 5.9% in 2025.

In contrast, the latest Quarterly Bulletin published by the Central Bank of Ireland highlights the positive fiscal backdrop Ireland continues to enjoy. Budgetary surpluses of over €8 billion are expected out to 2026 with a surplus of €8.4 billion, 2.8% of GNI*, expected this year. At the same time, expenditure levels continue to rise. The Summer Economic Statement outlines the Government’s forthcoming budgetary strategy. Expenditure growth of 6.9% continues to breach the self-imposed 5% growth rate. Such expenditure translates to an overall spending package of €8.3 billion being made available for 2025. In contrast to France, robust tax revenues for the first half of 2024 have afforded the Government the opportunity to appease the electorate via reduced taxes and further commitments towards capital and current expenditure. The Irish economy will likely enjoy further budgetary surpluses in the coming years and subsequently, debt servicing costs and issuance levels are expected to remain relatively contained.

Reflecting the notable divergences between Ireland and France, we have seen Irish bonds significantly outperform their French counterparts, particularly post the European elections.  For much of 2023 and in the years prior, Irish borrowing costs were higher than those that France enjoyed. However, this year, the pendulum has swung significantly in Ireland’s favour thanks in large part to our positive fiscal backdrop and subsequent reduced issuance needs. Assuming the forecast budgetary surpluses are realised, Ireland will likely enjoy a continuation of reduced borrowing requirements and relatively cheaper funding levels. It is well recognised that beneath the surface tax revenue is underpinned by a small number of firms. For the short-term however, Ireland will likely maintain its status as one of the few eurozone economies enjoying a budget surplus. Meanwhile, French fiscal frailties are likely to remain a concern for investors who are likely to require a significant yield premium to take on the risk of political instability and unfunded expenditure increases.