French Prime Minister Sébastien Lecornu abruptly resigned on Monday morning, just three weeks after his appointment, preempting what appeared to be an inevitable ousting. Lecornu was expected to unveil his policy agenda before the National Assembly on Tuesday, but both the Socialist Party and the National Rally had warned that without a drastic policy shift, they would trigger a no-confidence vote. French bonds and stocks slumped on the emerging political crisis.
President Emmanuel Macron's office issued a one-sentence statement, confirming that Macron had accepted the resignation of Lecornu. This comes amid turmoil over the composition of his cabinet, a coalition of centrists and conservatives.
Lecornu told reporters his resignation was primarily due to the inability to compromise across the political spectrum: "I was ready to compromise, but each political party wanted the other political party to adopt its entire program."
He told reporters in the courtyard of the Matignon Palace, the prime minister's headquarters, that he had spent weeks trying to forge a viable path forward with politicians, unions, and social partners from both political sides, but had achieved no breakthroughs.
Jean Garrigues, one of France's top political historians, told local media that Macron will likely be forced to dissolve the National Assembly once again.
"A fresh dissolution might lead to an increase of seats for the National Rally in the lower house, but it's unlikely that they'll get an outright majority," Garrigues stated in the interview.
UBS analyst Simon Penn provided clients with the three possible pathways for Macron to move forward:
He can try another technocrat type
He can call a general election
He can quit and call a full presidential election
The Bloomberg Economics team provided readers with the visualization.
Penn warned that France is entering a dangerous political environment:
French PM Lecornu has resigned less than a month after he was appointed (Sept. 9). On face value Lecornu looks to have quit before he was forced out. He was due to present his policy proposals to the National Assembly on Tuesday, but leaders of the Socialist and National Rally had already warned that unless there was a total change in direction they would call a vote of no confidence immediately after Lecornu stopped speaking.
Furthermore, the press and public reaction to the appointment of a near unchanged cabinet from the Bayrou administration has been somewhat scornful. President Macron has attempted three times to try for the same policies and failed three times. As the famous quote from Jean-Claude Juncker goes: "We all know what to do, but we don't know how to get re-elected once we have done it."
The latest failure puts French politics into very dangerous territory – more so than the markets seem to be pricing. The lessons of the UK in the 1970s are worth bearing in mind – a government in the early 70s attempting what today would be described as austerity; failing and being replaced by socialist policy, that today might be described as populist. It took mass strikes, power blackouts and an IMF bailout before UK voters were willing to accept the necessary medicine that came in the form of the 1979 Thatcher government.
Meanwhile, across other Wall Street desks this morning, analysts are desperately trying to make sense of the political turmoil and what comes next. Barclays analysts expect parliamentary elections, adding that a Macron resignation is "unlikely."
Political turmoil sent the CAC 40, the benchmark French stock market index, down 1.5% by early afternoon trading in Paris. French bonds also dropped.
More market commentary from UBS analyst Justinus Steinhors: "The Euro Stoxx 50 falls 80bp, retreating from highs. Yields jump on political turmoil: in France, PM Lecornu resigns after less than four weeks in office."
Alexandre Baradez, chief market analyst at IG in Paris, warned, "What's new this morning is the beginning of contagion from France to the rest of the European banking sector. The drop of the sector is 100% linked to France. Given that banks have outperformed the markets so much, all the elements are aligned for some profit-taking on these stocks."
Allianz CIO and Chief Economist Ludovic Subran told Bloomberg that it's not the time to panic.
Lecornu's resignation makes him the shortest-serving prime minister in the history of France's Fifth Republic, founded by Charles de Gaulle in 1958.
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