Global Daily – Europe’s political risks

by: Nick Kounis , Aline Schuiling

Global-Daily-Insight-11-November-2014.pdf ()
  • The Catalan unofficial poll is a reminder of political risks in the Eurozone
  • Spain will hold general elections next year amid a surge in the polls of the left-wing party Podemos
  • Greece’s own anti-establishment party Syriza will try to trigger an early election next year

Political risks in the eurozone remain

The Catalan poll was a reminder that political risks in the eurozone have not evaporated. Next year, Spain will have a general election, while there is also a chance that Greece will as well. In both cases, left wing anti-establishment parties are in the lead. Political risks are crucial because financial stability in the single currency area is being propped up by the ECB’s sovereign safety net (the OMT programme), which is conditional on governments following EU-IMF programmes if they get into trouble. Ultimately, the public may not vote to rock the boat in a real election, especially with economies improving. In addition, noisy opposition parties have a history of being co-operative governments when they get into office. So we do not expect a major re-escalation of sovereign risk. However, the political risks are certainly worth a closer look.


Catalonia’s independence poll

Sunday’s nonbinding vote on the future of Catalonia, resulted in 81% voting in favour of independence. However, turnout was low (2.25mln of the 5.4mln eligible voters took part) and it seems safe to assume that the show-up at the polls was the highest amongst pro-independence supporters, with a poll for independence amongst total eligible voters likely to be a much closer call. Still, the results of the vote are putting pressure on the Spanish government to start negotiations with the Catalan government about some form of extra self-determination, which could include fiscal policy.

 Rise of Podemos sign of general discontent

Another challenge is the rise of Spain’s new left-wing party Podemos, which was founded in January. The party has surged in the opinion polls in recent months. Indeed, it is now ahead of the ruling Partido Popular of prime minister Mariano Rajoy. The party wants to reform the political system. Moreover, it proposes that a number of strategic sectors of the Spanish economy should be placed under public control and all citizens should receive a state-funded basic income. Government debt will be audited to assess how much is legitimate. The popularity of Podemos is probably related to a number of major corruption scandals that have recently hit Spain’s political establishment and business sector. Combined with the impact of the housing crisis, the jump in unemployment and the drop in wages during the past few years, this has fuelled left-wing sentiment in Spain. Regional elections are due in May 2015 and general elections are due in the Autumn of that year.

Greece could risk early elections, with Syriza flying high

Political risks in Greece are also significant. The current coalition government, led by Prime Minister Antonis Samaras’ centre-right New Democracy party, has only a small majority in parliament. Although elections are not due until May 2016, the opposition Syriza party, which is against the Euro-IMF programme, is trying to force early elections. To do this, it is using the ending of the term of the current President in March 2015. The government will need a majority of 180 votes in the 300 seat parliament to elect the new President, while the coalition only has 154 members of parliament, though it could be helped by independents. Opinion polls suggest that Syriza may win the next election. So if it were to be able to force early elections and come into power, it could place Greece’s external financing in jeopardy. Although Greece has returned to the bond market, investor confidence is probably partly based on the idea that there is a backstop if necessary. Given that Syriza would likely reverse reforms conducted under the Euro-IMF programmes, that backstop would disappear. In addition, Syriza has said it would default on the country’s outstanding government bonds if it came in to power. In practice, voters have tended to turn away from Syriza and towards the ‘traditional’ parties in elections. It still seems likely that the coalition will manage to hold on until 2016, when its popularity may get a boost for the improving economy.