Financial Blog 21/01/2015: Election Preview – Greek general election, Sunday 25th January 2015

Europe may be about to go under a transformative year, with a string of elections ready to cause an upset to the traditional avenues of power across the continent. This potential chain of change begins on Sunday as Greece goes to the polls.

After the ECB meeting led to QE of €60 billion in asset purchases a month, from March until September 2016, and more volatility on the markets, the Greek election looks ready to set more cats among an already very startled bunch of pigeons on Sunday. The focus of much fervent analysis, this election may provide insight for us here in Britain at what happens when an extreme upstart party begins to curry favour with the electorate in the run up to an election. Whilst UKIP do not have the same level of support in the UK as Syriza do in Greece, the situation provides some apt parallels for the British observer, as well as a reflection of the political discord that is spreading across Europe.

In the latest poll Syriza took their lead to 33.5%, compared to the 27% for the incumbent New Democracy, whose failure to elect a new president led to this snap election. If Syriza were to win, leader Alexis Tspiras would become the youngest ever Greek leader at 40 years old, far below the average age of 64, just one aspect of this election that is against the run of history. However, whilst Syriza are leading in the polls, they are not leading by enough. Normally a party would need to achieve 36-40% of the overall vote to secure power; with only a few days left until the election, it is unclear whether Syriza would be able to garner the increase in votes they would need for an outright victory. Instead, the power to play kingmaker may lie with minority party Potami, a centrist party who’s wooing by either Syriza or the ND may be the deciding factor for the election.

This is all well and good; elections in the Western world are common place, and the markets should be able to factor in the usual volatility that surround any potential change in power. However, this election has become both a specific headache for the Eurozone due to the policies of Syriza, and a general barometer of the political climate in Europe, both of which will have long-term repercussions for the markets. Syriza, who have disrupted the normal two-party discussion in Greece (the other member of the former ‘big two’, PASOK, now only holds 5% of the vote after the introduction of austerity measure post-crisis) are ready to put the wind up the Eurozone.

They are an anti-bailout party who want to renegotiate Greek debt and end the austerity measures that many in Greece feel have plagued the country since the economic crisis. There is a sense in the Eurozone that a Syriza victory will lead to the floodgates opening and continue to promote the anti-Europe sentiment that has swept through much of the continent. There are also fears that Greece will exit the currency union, with the awfully named ‘Grexit’ becoming a hot topic of discussion. There was controversy in Germany as it appeared that Andrea Merkel was comfortable with Greece leaving as long as they adhered to the re-payment plan agreed in the wake of the €240 billion bailout. Merkel’s government vehemently denied these claims, but it nevertheless highlighted the conflicted feelings towards Greece currently circulating in the Eurozone.

However, talks of a ‘Grexit’ seem to be coming from outside the country itself, as polls show that a large majority of the Greek public are supportive of the euro, and want to remain part of the currency. It now remains to be seen whether the bigger members of the union (cough*Germany*cough) use threats of a ‘Grexit’ to keep Syriza in line in the case of their victory. In Draghi’s speech on Thursday he implied that Greek debt purchases could happen, but that ‘some additional eligibility criteria will be applied in the case of countries under an EU/IMF adjustment programme’. There is a sense here that this ‘criteria’ will be how well a potentially Syriza-led Greece behaves according to the Eurozone’s rules.

It will be in the markets’ interest to monitor number-crunching that occurs on Sunday carefully, as the feeling prevails that if Syriza win the dam holding back the deluge of potential European instability will fall. This is because Greece doesn’t exist in a vacuum; a victory for Syriza, regardless of where they fall on the political spectrum, will give renewed confidence to the extreme minority parties like Podemos in Spain and UKIP and the Green Party in the UK, all who have increased their popularity in the run up to key elections for both countries this year. On top of this is a tight presidential election to come in Italy on the 29th January, where Prime Minister Renzi is caught between appeasing his own centre-left Democratic Party and his opposition, the centre-right Forza Italia led by the infamous Silvio Berlusconi. Unpredictable elections become more difficult for the market to factor in the outcome, and with two of the EU’s biggest members set to undergo this process, QE may not provide the long term stability Draghi and co will have hoped for.

The Eurozone has had a torrid time of it recently; the €60 billion a month QE decision by the ECB on Thursday was meant to help the region out of its current troubles. However, despite the Central Bank’s best intentions, the power of democracy exists to disrupt the order of things if as the public sees fit, and the EU may have to swallow the fact that it isn’t satisfying the people it is meant to serve as the year goes on.