Eurozone: Political risk shifts to Iberia

Azad Zangana senior European economist and strategist at Schroders warns that while a Greek exit from the Eurozone (Grexit) has been averted for now, political opposition accross Ibera might become an increasing factor of concern for European creditors.

Schäuble ends Greek fantasy
It took German Finance Minister Wolfgang Schäuble’s suggestion that Greece be allowed to leave the currency union for the Greek government to pay attention. The shock that came from the proposal being publically put on the table finally struck home that the risk of leaving the Eurozone had become very real. With the knowledge that around 80% of Greeks did not support Grexit, Prime Minister Tsipras was forced to accept all of the conditions that were being demanded by creditors.

However, little did anyone know that Tsipras’s Finance Minister, Yanis Varoufakis, who had been a very obstructive figure throughout the negotiation process, had secretly been hatching “Plan B”. According to the Greek press, this involved his commissioning of a team to hack into Greece’s independent tax service, in order to acquire individuals’ private identification numbers for the
purpose of setting up a parallel payments system – essentially preparing for leaving the euro. The public reaction has understandably been negative. Many are outraged that such planning was taking place while the government had  always claimed that euro membership was not at risk.

In our view, Greece leaving the Eurozone was a high probability, but low impact event for the rest of Europe. The wider European financial system has little financial exposure to Greece remaining. If contagion is to spread, it would be through two channels: sentiment in financial markets and politics. As the crisis escalated, sentiment in financial markets clearly worsened, but the impact on
peripheral government bond yields was small compared to past episodes. As for the political channel, Syriza’s success in winning the last Greek election boosted the popularity of anti-austerity and anti-establishment parties elsewhere in Europe.

The next opportunity to gauge the level of support for these parties will be the upcoming legislative elections in Spain and Portugal. While Greece is small and can be contained, a crisis in Spain in particular would be a total disaster for the monetary union.

Spain: Can Rajoy hold on?
Spain must hold a legislative election by the 20th of December this year, with the 29th of November touted as the most likely date. Prime Minister Mariano Rajoy, leader of the centre-right People’s Party (PP) will seek a second term following the landslide victory in 2011 to defeat José Luis Rodríguez Zapatero’s previous Spanish Socialist Workers’ Party government (PSOE). The centre-left Socialist Workers continue to be the main opposition to the PP, but a new force entered the political sphere in January 2014 with the launch of Podemos; a new party set
up by its leader Pablo Iglesias Turrión to oppose the austerity agenda following the European sovereign debt crisis.

In addition to its anti-austerity agenda, Podemos proposes the curtailment or even the revoking of the Lisbon Treaty – a cornerstone of the European Union project. Moreover, it has advocated the withdrawal of some of Europe’s free trade agreements. If these policies were ever to rise up the political agenda, investors may begin to question Spain’s future in the Eurozone.

Since its inception, Podemos has grown rapidly in popularity, particularly amongst disenchanted youth – unsurprising given Spain’s extremely high youth unemployment rate of 49.3% is only second to Greece’s within the EU (May 2015). In May 2014, Podemos entered the race for European Parliament elections and won just under 8% of the national vote, finishing in fourth place.

Podemos has gone on to advance to third place in Spain’s regional elections in mMay 2015 by attracting almost 15% of the national vote. It also boasts the second largest political party membership, only behind PP, and is eager to make more gains in the upcoming elections.

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