TalkingEconomics: Eurozone Political risk shifts to Iberia

As the crisis in Greece subsides, we expect investors to shift their attention to two crucial elections in Iberia.

17 August 2015

Azad Zangana

Azad Zangana

Senior European Economist and Strategist

Grexit averted

Overall, we do not expect either Spain or Portugal to go down the Greek route of voting radical, anti-austerity parties into power at the end of the year.

A Greek exit from the eurozone (Grexit) has been averted for now, but at what cost?

With legislative elections approaching across Iberia, has the anti-austerity and anti-establishment movement spread to Spain and Portugal? Is there a risk of another political earthquake later this year?

Spain: Can Rajoy hold on?

In Spain, the anti-austerity Podemos party appears to have split the left-wing vote, giving the ruling centre-right People’s Party and Prime Minister Rajoy a good chance of returning for a second term.

Moreover, the long-standing Citizens Party is gaining support from voters who would like to see an alternative to established parties, but would also like conservative policies and continued euro membership.

The rising popularity of Citizens could limit the influence of Podemos after the election. The risk of a disruptive party winning the election is now low compared to earlier this year.

Portugal: A close race

In Portugal, there is even less risk. Investors would probably prefer either a victory for the current coalition, or an outright victory for the opposing Socialists.

The current lead the Socialists hold over the ruling coalition is well within the margin of error, and could easily swing in either direction between now and the election.

A less ideal scenario would be the Socialists relying on either one of the two main left-wing coalitions to form a government, given their euro-scepticism.

For a more in depth review of the global economy in August 2015 try:

TalkingEconomics: China's equity boom and bust

TalkingEconomics: Global storm clouds lift

TalkingEconomics: Full August 2015 economic infographic

Conclusions: "It’s the economy, stupid!"

In our view, the key to the performance of the incumbents will be how their economies perform in coming months.

Spain and Portugal implemented structural reforms much earlier than other member states (like Italy and France) and as a result, are now reaping the rewards:

  • Spain's GDP is forecast to grow the fastest since 2007 at 2.8%
  • Portugal’s GDP is forecast to grow at the fastest rate since 2010 at 1.6%.

It is also no surprise that Spain’s acceleration in growth which became evident from April coincided with a pick up in support for Rajoy's party.

High unemployment rates remain a major problem across Iberia, but again, in both countries, interest rates are past their peaks, and are falling faster than the eurozone average.

The hard work to reform the Spanish and Portuguese economies has helped to boost growth and put public finances on a stable path.

Financial markets have already rewarded both with lower market interest rates. Voters may not see the benefits straight away, but the evidence suggests that they are unlikely to go down the Greek route.

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