Le Pen’s far-right National Rally election gains

The left-wing New Popular Front, meanwhile, is projected behind with 27%, while President Emmanuel Macron’s Renaissance party is predicted to clinch 20% of the support, as of June 27.

The shift away from centrist politics has spooked investors and analysts, who warn of implications ranging from “political paralysis” to “immediate financial crisis.”

But predicting the outcome of France’s final vote on July 7 is less clear-cut, given the complexity of France’s voting system.

CNBC takes a look at the likelihood of a far-right French victory and the impact for markets.

Under France’s two-stage voting system, all parliamentary candidates who receive at least 12.5% of locally registered voters progress to the second round runoff — a feat that the National Rally is likely to achieve in a large number of constituencies.

But even with sweeping gains in the first round, the party could be stumped at the final hurdle by voters using “le vote utile” — or tactical voting — to keep them out.

That was seen as part of Macron’s gamble when the French leader called the surprise vote following the National Rally’s record 31.3% gain in this month’s European Parliament elections. Others say the president hopes to discredit his competitors ahead of France’s 2027 presidential election, with Macron since claiming there will be “civil war” if either extreme wins.

Voter turnout for the national election is also expected to be larger — and therefore more representative — than the 51% who cast their ballot in the EU vote.

With that in mind, analysts see a 30% to 40% chance of the National Rally winning the 289 seats needed to secure an absolute majority in the 577-seat National Assembly.

A more likely outcome, however, would be major gains for the far right, with the National Rally potentially becoming the biggest party in France but ultimately falling short of a majority and leading to a highly divided hung parliament.

Such a stalemate could leave France with lower trend growth, elevated yield spreads and a “worse reputation globally,” Holgier Schmieding, chief economist at Berenberg Bank, told CNBC Monday.

Already, France’s blue-chip CAC 40 index is heading for its worst month since May 2023, having lost as much as 6% since the vote was announced on June 9. The spread between French and German borrowing costs — a key indicator of French political risk — has also jumped to its widest in more than a decade.

A majority government for either the far-right or the ultraleft alliance, meanwhile, could spark a far more dramatic outcome.

“Spendthrift agendas” from either party — whose policies both include lowering the retirement age and cutting income tax — could result in an “immediate financial crisis,” Schmieding suggested.

Citi analysts said in a note on Thursday that markets were currently “too optimistic” about a benign outcome, adding that its higher probability scenarios of a gridlock or extreme parliament could lead to a 5% to 20% fall in French equity valuations.

“Combined with our finding that French equities tend to be more volatile than peers’ around elections, this could be reason to expect additional choppiness from here,” the analysts noted.

The CEO of Paris-based Euronext, Europe’s biggest stock exchange group, sought to quell investor concerns earlier this week, telling the FT that neither the left nor the right would be able to implement their more extreme policies amid checks and balances from the president, ratings agencies and the EU.

On Monday, Jordan Bardella — Le Pen’s 28-year-old protege, who could become prime minister under a strong showing for the National Rally — was seen stepping back on some more extreme measures, vowing to implement “reasonable” spending plans. That includes an aim to bring France’s deficit back to the EU limit of 3% of the GDP.

Even with more measured fiscal plans, however, a parliamentary gridlock could make such policies difficult to enact. Bardella, for his part, has recently stressed that he would “need an absolute majority to govern,” in a bid to boost his backing.

“You start with deficit at 5.5%, debt at 110%, you’re unable to do anything for the next three years, which means that deficits are just not coming down. To me that’s the biggest issue that France faces right now,” Jefferies’ chief financial economist for Europe, Mohit Kumar, told CNBC’s “Squawk Box Europe” Tuesday.

The same issue would likely apply across other policy areas too, with an enlarged National Rally most likely failing to win support for many of its key plans. That, Kumar warned, would lead to “political paralysis.”

Le Pen, for instance, is unlikely to move on her far-right, anti-immigration stance — a position that would be unpalatable to an enlarged ultraleft alliance of parliamentarians. Meanwhile, the centre has opposed the right’s crime and security plans.

Populist Le Pen may, however, be willing to moderate her position on other issues such as EU coordination and fiscal policy, mirroring Italy’s nationalist Prime Minister Giorgia Meloni, who is often credited for her functional relations with pro-EU peers.

“[Le Pen] has been Euroskeptic, but I think there is a definite toning down of views,” Kumar said. “In that respect, maybe she becomes more like Meloni.”

Schmieding agreed that Le Pen could become more moderate if elected, saying that she may channel her inner Meloni in order to secure the ultimate prize: the 2027 French presidency.