Chapter 1: What is the main topic discussed in this episode?
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Well, look, let's start with Lionel's latest piece about this, talking about Sébastien Lecornu, supposed to be Emmanuel Macron's last chance man to keep his presidency on the rails through 2027. Is Sébastien Lecornu going to be able to do anything in the next 48 hours that he hasn't been able to do over the past month, Lionel?
Well, look, the new rule of French politics is it's not over until it's over, but it feels over. It's nearly over? The reason why I said that is because I think that snap parliamentary elections, which has been something that Macron's been trying to avoid ever since he called the last one last year, that for me has... dramatically ramped up in probability.
So that to me looks like a very likely option. So what Macron's done is basically put that on the table and said, okay, this is basically happening and you now have 48 hours to avoid that. Okay, so in other words, the dividing line of parliament used to be pro or anti Macron, willing to work with him or not. Now Macron wants the parliament to be pro or anti snap elections.
So basically all the parties around Macron, especially the center-left, have to basically decide, are they going to risk their own jobs by letting parliamentary elections happen? Or are they going to have one last, last, last attempt at a coalition? But frankly, all of the energy, all of the kind of gravity I feel is slipping away hour by hour.
Marcus, let me bring you in here because we've got the oats bunch spread now at 86 basis points. And what analysts keep telling me is this isn't a crisis yet. So how much would it have to widen for this actually to be considered a crisis in the bond market?
A sharper move above 100 would concentrate some people for sure. You know, the point here is that the ECB has some reserve weapons if it needs to, transmission protection instruments, which has never been tested and won't be under these circumstances.
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Chapter 2: What crisis is France facing after Macron's ultimatum?
It's just that why buy France? That's your answer. You're not getting any new money in. And if in doubt, you're going to, you know, if a bond matures or you've got a better option, you're going to slide out of France. And that's where it's a slow, gradual death.
Lionel, I mean, on that question of why buy France, the conversation that we've had with Jean Delbar from Bloomberg Economics and plenty of others over the past couple of days has been this isn't a fiscal crisis yet. This is a political crisis. And realistically, nothing's really changed in the past, probably since François Bayrou, perhaps since Michel Barnier. Nothing's really changed either.
Chapter 3: Can Sébastien Lecornu save Macron's presidency in 48 hours?
They'll figure it out in the end. What changes in that dynamic? Where do we get to the end of the road of sort of the Gallic shrug?
Well, I think, as Marcus was hinting, I've called France le big short, right? It is le big short on a relative basis because the political crisis is unfolding very slowly and everyone can see what's happening and you can model it out.
Longer term, I think this is a political risk story in that an election changes a lot and Marine Le Pen and her number two, Jordan Bardella, are the politicians to beat. Now, the two big questions, the two planks of Macron's legacy so far have been Stable tax policy and an economic policy in France that is predictable and pension reform and a general reform agenda.
Those two things have been rewarded by investors over the past decade. Those two things are starting to crack because, as we've discussed, all the parties around him, especially on the far left, on the far right, want to brush those away. They do not want stable taxation. They want more budget freebies. And they want to roll back pension reform.
Those are the things that I think really could derail the French story even further, because then you get back into the old France, the pre-Macron France, but with a lot more debt and a lot worse budget deficit, which I think spooks European partners a bit more.
Just on the politics, the two of Macron's closest allies have sort of started to disown him, essentially. Edouard Philippe, who, OK, had gone and set up his own shop, but was still a friend to Emmanuel Macron. Gabrielle Attal, the head of Macron's own party, saying on television last night she doesn't understand the president's decisions anymore.
Is everyone now just positioning themselves for the next set of elections and trying to distance themselves from Macron?
Totally, totally. And that's completely logical. Macron himself betrayed his predecessor, François Hollande, his father figure. This is the rule of French politics. I think what's slightly new, I guess, is that Edouard Philippe, in calling for a new presidential election, is really willing to... get out there and say, let's make history again. It's a kind of daunting proposition.
I think he's now concerned that Marine Le Pen is the politician to be even in a presidential election. Edouard Philippe had been groomed as the kind of potential heir of Macron. I think polls are quite alarming in the sense that they're showing whether it's Le Pen or her number two, Bardella. they're really comfortably in the lead for a presidential election.
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Chapter 4: What are the implications of snap elections for Macron's government?
We would be talking, you know, it would be very, I'm sure, friendly towards a wealth tax. And indeed, of course, running back that pension reform, which has been so so expensive to get it through. And so, you know, important, pivotal, I think, for how the markets view French debt.
So this really is this tactic of Macron again is that with the snap election last year and again threatening elections, it's to try and scare the National Assembly into doing what he wants. Let's hope that something comes out of this which is sensible and a government can be formed. I mean, if nothing happens, if nothing stands water, actually, the budget deficit will improve.
But the question really is, is that maybe it's 2027 and the presidential election or before that, if we do get either a hard left or indeed the Le Pen socialism version, France is going to be in a very different, painful world. Mostly the market expects this not to happen. And at the moment, that's why we're only inching slightly higher.
Can we put to bed comparisons to the Liz Truss era when we think about the situation looking at France today, Lionel?
Well, I think Liz Truss and Brexit are kind of useful barometers of what happens when a country sort of tests its reputation and long-held perceptions from the market. Basically, I think, as Marx has said, the ECB is there, the euro is there, OK?
France is too big to fail, so I think that there will be a question of, OK, if there's a staring match between Frankfurt and Berlin and Paris, who's going to move first? But I think trust is frankly a useful reminder not to take things too far. And I am concerned that if the politics gets more radical and...
Le Pen becomes a little less mainstream and her number two decides to go a bit more radical as well on issues like pensions and taxation. You could get a much worse economic situation over the next few years and you could end up with something approaching a trust moment, even if it's not exactly the same. So I don't think you could put it entirely to bed.
Marcus, is the other ingredient for this to turn into a trust situation that there needs to be a structural idiosyncrasy in the French bond market like we had with LDI in the UK?
Good question.
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Chapter 5: How does the market view the current French political situation?
So that's one potential thing. But that, again, will be very much a slow burn. I think we'll see that coming from quite a long way away.
Lionel, can you just give us a sense to wrap up this conversation of where the French public are in all of this as well? I do get the impression from the limited conversations I have that everyone's just a bit sick of it.
Is that a fair assessment? Yeah. Sick, tired, disgusted, fed up, whatever you want, whatever adjective you want. The thing is that there's always a... there's two potential outcomes, right? Either France becomes a country, almost like the Netherlands or other countries where the politics is crazy, but somehow people carry on, businesses carry on, the economy carries on. We've seen a bit of that.
Or my concern is that we get much, much worse to come. There seems to be a nihilistic, almost nihilistic view in society, huge distrust of politicians, loss of faith in policy, disgust almost with the political class. And that I think is very dangerous for the future. And just in the short term, what do you think is going to happen this week?
I think Macron is going to keep doing these kind of Hail Mary moves. But as I said, I do think parliamentary elections are the most likely outcome, if not the end of this year and the start of next year.
OK, Lionel Aron here with me in Paris and Bloomberg Opinion. Marcus Ashworth joining us as well. Thank you to you both for talking us through the various aspects of this unfolding crisis. You can read the latest from both Marcus and Lionel at Bloomberg.com forward slash opinion.
I'm Carol Masser. And I'm Tim Stenevek, inviting you to join us for the Bloomberg Businessweek Daily Podcast.
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