06:28 AM EDT, 09/06/2024 (MT Newswires) -- French President Emmanuel Macron announced Thursday the appointment of Michel Barnier as his new prime minister which came nearly two months to the day after the second round of parliamentary elections on July 7, noted MUFG.

The post-election gridlock meant naming a PM was always going to be difficult, wrote the bank in a note to clients. Barnier, from Les Republicans party will have two key tasks ahead -- the first to form a cabinet that avoids a no-confidence motion and submitting a budget to parliament by the deadline of Oct. 1.

The choice does initially look like a reasonable one, stated MUFG. Barnier ran in the presidential primaries in 2021 on a policy platform that some called 'hard-right'. Some policies would have breached European Union law like a moratorium on immigration to freeze the arrival of immigrants in France and a "constitutional shield" to lock down migration policy to decide annual visa quotas. So on the policies of immigration, he could find some common ground with the far-right RN.

The President of RN, Jordan Bardella stated on X that RN "will judge his policy decisions, and his actions." He added that RN's policies on purchasing power, security and immigration needed to be addressed and that RN "reserved all political means of action if these are not taken into account." So it does seem given the far-left will oppose the choice of Bernier as PM that RN will have the ultimate control on whether a no-confidence motion would prove successful going forward.

The lack of reaction in the financial markets is understandable, according to the bank. In a way, the choice of a PM was the easier first step and the greater challenges will be making progress in terms of forming a government and proposing a budget that can pass parliament without triggering a no-confidence motion.

The RN will likely reserve judgment and Marine Le Pen has stated that a policy speech to parliament will be a key event (no fixed date yet). For the financial markets, the take on this is likely that France was in gridlock before the Barnier announcement and it's still likely in gridlock now with Barnier faced with very difficult tasks.

In that sense OATs and the Bund/OAT spread may well take more direction from incoming United States economic data and the prospect of the first rate cut from the Federal Reserve on Sept. 18, added MUFG. Similarly, the impact on the euro (EUR) from politics in the EU will likely remain limited for now.