Political regime change

It has been a busy week or so in politics around the world.  Last Thursday’s UK election delivered a landslide victory for the Labour Party (411 seats v 121 for the Conservatives), supported by widespread tactical voting: Labour’s vote share was 34% v 24% for the Tories. 

This provides a stable basis for governing, and the new government has started well in terms of policy announcements, Ministerial appointments, as well as tone.  This is important because the UK faces deep challenges; the UK has been the weakest economic performer across the G7 since Covid. 

This political stability contrasts with France.  Last Sunday’s second round of voting in the legislative elections delivered a surprise result, with the left wing grouping (Nouveau Front Populaire) taking first place (although not a majority), followed by Mr Macron’s Ensemble, with Ms Le Pen’s Rassemblement National in third place (having threatened to place first).  This was the result of the left wing grouping coming together, and many candidates dropping out to avoid splitting the vote against the RN.

This is uncharted territory for France.  There are multiple possible scenarios for assembling a new government, but none of these will be straightforward.  Some coalition between parties in the centre and on the left is plausible (excluding Mr Melenchon’s far-left party).  Even so, significant political instability is likely with difficulty in pursuing a coherent policy agenda.  The reforming agenda of Mr Macron is over.  Mr Macron’s gamble of snap elections has strengthened the extremes, weakened the centre, and raised political risk: it has not been the ‘clarifying event’ he promised, although it is clear that there is a substantial anti-RN vote.

Among other things, this political instability will make it difficult for France to address its fiscal issues; the EU has already started an Excessive Deficit Procedure against France.  A collision between France and EU institutions is increasingly likely: ‘le spread’, the gap between French and German government bond yields, is a useful risk proxy.  More broadly, French political uncertainty combined with a weak German government will compromise the ability of the EU to work coherently.

The full note is available at: https://davidskilling.substack.com/p/political-regime-change