Is the Left-Wing Reign Over? European Markets Wobble as Far-Right Rises in EU Parliament

Analysts predict that although short-term volatility is inevitable due to the right-wing shift in the European Union (EU), a gradual return to normalcy is expected as fundamentals recover.

As anticipated, far-right parties made significant gains in the European Parliament elections held from June 6-9. Among individual countries, France saw the greatest expansion of far-right influence, with the National Rally (RN) led by Marine Le Pen expected to secure around 32% of the vote. Consequently, French President Emmanuel Macron decided to dissolve the parliament and hold early elections on June 10, similar to the steps that the U.K. has taken.

Due to the decision for early elections, France will elect 577 members of the lower house in the first round of elections on June 30, followed by a second round on July 7. However, even if the majority party changes through this election and the Prime Minister is replaced, Macron will remain in office until 2027.

Researcher at Shinhan Investment Securities Oh Han Bi identified “policy uncertainty and fiscal deficit” as the market’s primary concerns.

If the National Rally secures a majority in the early elections, Macron will be forced to run the government with a Prime Minister with different political tendencies. Significant disruptions are expected in the implementation of major policies.

While France’s fiscal deficit is expected to reach 5.5% of GDP by 2023, far-right parties, including the RN, are promoting massive spending pledges. According to new fiscal rules to be implemented next year, France must adjust its structural deficit by 0.5% each year until the overall fiscal deficit falls below 3%.

Oh analyzed, “Although there are concerns, the right-wing shift event was not a big deal in retrospect.”

Indeed, this is not the first time individual European countries have moved towards the right-wing. The U.K.’s Brexit in 2016, Le Pen’s performance in the French election in 2017, and the election of Italy’s Meloni in 2022 all led to severe financial market volatility and stock market crashes.

However, even considering the most extreme scenario, such as Brexit, the stock market demonstrated a faster recovery than expected.

The stock market tended to recover after adjusting for a maximum of two weeks following the election day under the assumption of no additional risks.

Oh stated, “Furthermore, although Europe’s fundamentals are gradually in a recovery phase, and while there is heated debate over the path of interest rate cuts after June, the interest rate cut cycle has begun. Le Pen is downplaying the possibility of Frexit and the demand for Macron’s impeachment, which the market is worried about.”

However, the trend of reflecting these risks in the stock market is expected to continue as the uncertainty of exit poll survey data exists and elections are being held rapidly within three weeks.

While short-term volatility is inevitable, after absorbing the early election event, the European stock market is expected to gradually recover with the help of a recovery in fundamentals.