What will early elections in France bring to the economy?

French President Emmanuel Macron has called for early elections, and some experts say this move is not only a political adventure, but also poses significant risks to the French economy. At present, the financial markets are panicked about the prospect of the far right National League gaining more power in the second largest economy in the eurozone, which could lead to parliamentary paralysis and trigger populist fiscal waste, exacerbating France's already overwhelmed budget.

After Macron announced the snap election on Sunday, there was an immediate shock in France. The euro fell for a second day against the dollar, the CAC40 stock market index in Paris fell about 3 percent, and the yield on the 10-year benchmark government bond, a barometer of economic and political risk, surged to a new high for the year.

Ratings agency Standard & Poor's downgraded France's credit rating earlier this month, citing political fragmentation as a risk factor, according to the survey. While France is not yet in the same risk category as debt-laden Italy, bond buyers now view French debt as an investment with similar risks to Portuguese debt. At a news conference on Wednesday, Macron quickly seized on the market alarm as a sign that voters should mobilize against the national rally. He cautioned that turmoil in debt markets can quickly spill over into the real economy. After all, higher borrowing costs and huge debt bills would leave the government with less money to spend on hospitals, schools and public transport.

Moreover, the volatility of the market has raised concerns among European and international partners. These phenomena have caused a considerable impact on the daily life of the French people: the cost of credit has increased, and home loans have become more expensive. Macron insists his liberal government has the "seriousness and consistency" to manage the economy. He called a national election after suffering a drubbing in the European Union elections, hoping to unite against the far right. But even if the far right fails to win an outright majority, it could still create political gridlock and cause chaos.

Macron's call for early elections could even put France in breach of EU deficit rules, raising tensions with Brussels. Next week, the European Commission is expected to release a report focusing on profligate countries, including France. Credit rating agencies were also quick to sound the alarm after the election results were announced. "Given the dire fiscal situation that the next administration will inherit, potential political instability is a credit risk," notes analyst Sarah Carlson and her team. They expect France's debt burden to continue to grow, reaching 115% of GDP by 2027, up from 98% in 2019 and 64% in 2007.

It is worth mentioning that during the epidemic and the energy crisis, France's fiscal expenditure increased significantly, and now it has to tighten its belt. Paris is cutting public spending by 20 billion euros this year and plans to cut at least another 20 billion euros by 2025. On June 19, the European Commission will publish a report on France and 10 other countries with "excessive deficits" in 2023. France's budget deficit is well above the ceiling of 3 per cent of gross domestic product and was 5.5 per cent of GDP last year. Once the 3 per cent limit is exceeded, countries must reduce their deficits annually for a number of years until debt levels decline steadily or stabilize at acceptable levels determined by the Committee. However, Paris is "unlikely" to reach the 3% level in 2027.

In theory, countries should be fined for excessive debt and deficits, but the EU has been giving France considerable political leniency. At the moment, however, the growing political crisis in France, the rise of the far right and the decision to call an early election have caused market jitters. Credit agencies and experts have warned that political instability and a possible National Alliance victory would undermine France's efforts to cut public debt, which is already at alarming levels.

Overall, Macron's decision to call an early election carries huge risks, both politically and economically. If the far-right forces rise further, France's economy and political situation will face greater uncertainty and challenges. Whether France can achieve fiscal stability in the next few years will be a severe test for Macron's government and French society as a whole.