Election upheavals in Britain and France have redrawn the political landscape of Europe, and the ripple effects could reshape the economic and business environment in both countries, as well as France and the UK’s trade dynamics with other countries.
In her most recent discussion on Sirius XM’s Business Briefing programme, London Business School’s Linda Yueh discussed the potential economic ramifications for France following the snap election which has seen a hung parliament and a political split into three blocs, with the potential for the political environment taking weeks for MPs to build coalitions.
A rush of tactical voting to hold back a surge of far-right support has resulted in a divided and complicated political environment in France.
In the UK, voters’ economic anxieties, and fatigue with a revolving door of prime ministers, propelled Labour to a landslide win, toppling the Conservatives after 14 years in power.
But across the English Channel, despite the left-wing New Popular Front coalition securing the most seats in France’s hung parliament, the political uncertainty has produced an unwelcome shock to the business community, resulting in a slowing down of investment and a hiring freeze, as companies hedge against possible tax increases.
With a hung parliament any new French government will struggle to drive more economic reforms, or find common ground on fiscal policy, with seemingly intractable divisions when it comes to taxes and government spending.
Yueh notes a warning from the Economy minister Bruno Le Maire, expressing concern that the country faced difficulties by either continuing to curb expenditure, or go down the route of significant tax rises. Furthermore, if the plan is to borrow, there is likely to be a strong negative market reaction.
Macron’s government had identified stringent spending cuts, but those measures are unlikely to go ahead as all the parties involved in forming the next government have promised increased spending.
The UK has already experienced first-hand just how quickly market sentiment can turn in such situations. Liz Truss served just 49 days as prime minister in 2022 after her plans for sweeping unfunded tax cuts sent shockwaves through the gilt market. A sobering lesson for any government.
