GREEKS WILL GO to the polls on Sunday in a snap general election, triggered by the failure of the parliament to elect a president. Quite often, financial markets look through elections and politics and are more focused on financial measures like interest rates, inflation and economic growth.
Not this time.
The year 2015 is going to be a significant one in the European Union, as citizens in eight member states will be able to vote, beginning with Greece.
In a union of 28 member states, the electoral cycle is a constant feature but the difference this time will be the common tapestry and issues that many elections will be fought over.
Eight elections, one common issue
The battle lines are reasonably well-drawn between core parties looking to maintain the path of austerity and the integrity of current institutional arrangements and more populist ones, both right and left, who look to some degree of reversal and roll-back. These eight elections almost all come down to this single common issue.
Clearly, Greece is the most immediate and perhaps most stark in terms of how the debate will be framed, but later in the year there will be even more relevant cases such as Spain in the final quarter.
While campaigning and governing are two different things, policy statements and opinion poll performances from the likes of populist parties such as Syriza in Greece or Podemos in Spain will have an impact on markets.
It matters now as this is a critical time for the EU, and the eurozone in particular. We are waiting to see the shape of ECB president Mario Draghi’s proposals to ignite the eurozone economy and reboot inflation closer to target.
And Draghi has made it very clear that governments and fiscal authorities have a role to play in this revitalisation. In his comments at Jackson Hole, Wyoming in August, he spoke of the need for a greater role for fiscal (government taxation and spending) policy alongside the ECB’s monetary policy and the importance of stronger coordination among the different member state governments.
This grand bargain between monetary policy and fiscal policy becomes a challenge if there are dramatic changes at government level – or, more critically, government policy across the eurozone.
Who’s going to the polls this year?
Greece will be followed by Finland in April and the UK in May. May will also see regional elections in Italy and Spain. After a summer lull, the final few months of 2015 will see people in Denmark, Portugal and Spain and France cast their votes. Here in Ireland, we may well have elections shortly after that, in early 2016.
Greece has crystalised many of the issues that all voters will face. The debt burden that faces most of the eurozone stands at 175% of GDP in Greece. Deflation, as we now have in the eurozone, raises the real value of debt. An exit from eurozone features less on the market’s worry list than in previous occasions.
We can see how peripheral bond yields have been much better behaved through the recent series of parliamentary votes. However, debt restructuring is a major plank in the Syriza manifesto in Greece. Podemos in Spain also features debt restructuring in its wish list. Any bond buying programme is likely to take full cognisance of this.
A re-drawing of political fault lines?
It may well be that one of the consequences of the eurozone crisis will be a fundamental re-drawing of the political fault lines in practically all economies.
There are, of course, other factors at play such as income inequality and globalisation, but the economic carnage which has seen, as an example, the employment rate (those of employment age actually working) in a country like Spain fall from 66% in 2007 to 56% in 2014, casts a long shadow. In Greece that number is below 50%.
The response to the political advance of right and left wing populist parties in the eurozone may well be grand coalitions that didn’t seem plausible in the past.
For financial markets that might work, but then the onus is on the ECB, with its Quantitative Easing programme, the exchange rate, lower energy costs and whatever fiscal strategies that new governments embark upon, to dovetail with Draghi’s policy moves and succeed in delivering growth.
Eugene Kiernan is Head of Investments at Appian Asset Management, which is regulated by the Central Bank of Ireland. The views expressed do not constitute investment advice.
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