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J.P. Morgan Logo
07 Jan 2015
Europe Economic Research
Some reflections about the outcome of the Greek election
Fears about a Greek exit from the monetary union have resurfaced. Our inclination is to think that the likelihood of this is very low. Moreover, it is possible that the period of uncertainty will be relatively short. Most likely, Greece will be governed by a centrist coalition (New Democracy, PASOK, To Potami, Movement of Democratic Socialists) in the not too distant future, either because New Democracy is the largest party after the January 25 election or because it is the largest party in a second election that takes place shortly afterwards. A second election would occur if Syriza is the largest party in parliament after January 25 but without an overall majority, as recent polls suggest, and is not able to achieve a sustainable coalition.
As the first table below illustrates, the latest opinion polls suggest that Syriza will be the largest party in the new parliament after January 25th, but it will not have an outright majority. It will thus need to form a coalition with another party in order to effectively govern. However, it may be difficult to form a stable coalition. Syriza’s ambitions would have to be tempered to reach a coalition agreement, which would create tension within the party itself. Tsipras has not only over promised what can be delivered relative to the rest of the region, he has also over promised what can be delivered relative to likely coalition partners. In our view, pressure from the Troika and the markets is likely to mean that the coalition would need to take some very difficult decisions relatively quickly. This means that the period of uncertainty could be relatively short lived, although it could still last a few months. If a stable coalition cannot be achieved or sustained, then another election would follow. Our judgment is that New Democracy would be more likely to win a second election if that were to occur.
But, the latest opinion polls may exaggerate the likelihood that Syriza will be the largest party in the new parliament after January 25th, for three reasons.
First, Syriza’s lead looks to have narrowed over recent weeks as New Democracy has sought to frame the election question around EMU membership rather than austerity. In early December, Syriza’s lead in the polls was around 7.4pts, while now it is around 4.6pts. If this trend continues, because most Greek people want to remain in the monetary union and some are convinced by New Democracy’s argument, then polls will be much closer on election day.
Second, it is uncertain how much support Papandreou’s new party—Movement of Democratic Socialists—will receive, and where that support will come from. To the extent that Papandreou draws support away from Syriza, which seems likely to some extent, this would further narrow Syriza’s lead over New Democracy. At the moment, we only have one poll which includes Papandreou’s new party. In order to ensure consistency, this is excluded from the first table below but the impact of this single poll is shown in the second table. Support for Papandreou’s new party is put at 4.8% and support for PASOK and To Potami together is 4.2%-points lower than in the average of the other recent polls. But, relative to other polls, support for Syriza and Golden Dawn is much higher, and support for New Democracy is much lower. At face value, this one poll would point to Syriza having an outright majority in parliament after January 25th. But, there are occasionally polls that show outsized support for Syriza and Golden Dawn, and these tend to be outliers. In our view, we need to wait to see more polls which include Papandreou’s new party in order to see how the situation is evolving.
And third, there are still a significant number of undecided voters (between 7% and 16% depending on the opinion poll). Given that voting in Greece is compulsory, many of these people will vote on the day. Given the tendency of status quo bias, our inclination is to think that the undecideds will lean more towards supporting the prior administration (New Democracy and PASOK). If that is correct, then that would further narrow Syriza’s lead.
Given these factors, it is certainly possible that New Democracy will be the largest party in parliament after January 25th and will be able to form a durable coalition with one of the other parties.
In our view, the period of uncertainty about Greece’s membership of EMU could be shorter than is generally assumed. If uncertainty about a Greek exit from EMU is eliminated in the coming weeks or months, we would view this as very constructive for the Greek economy in particular and for the Euro area in general. The Greek economy has been growing for the last few quarters, and looks well positioned to grow strongly given pent-up demand. Political uncertainty is the greatest impediment to an ongoing recovery, in our view. For the Euro area as a whole, uncertainty about the integrity of the region is unlikely to create the same financial stresses that we saw a few years ago, but some dampening of business and household sentiment is still an issue. Removal of this uncertainty would allow the region to move decisively to an above trend growth pace.
J.P. Morgan Logo
07 Jan 2015
Europe Economic Research
Some reflections about the outcome of the Greek election
Fears about a Greek exit from the monetary union have resurfaced. Our inclination is to think that the likelihood of this is very low. Moreover, it is possible that the period of uncertainty will be relatively short. Most likely, Greece will be governed by a centrist coalition (New Democracy, PASOK, To Potami, Movement of Democratic Socialists) in the not too distant future, either because New Democracy is the largest party after the January 25 election or because it is the largest party in a second election that takes place shortly afterwards. A second election would occur if Syriza is the largest party in parliament after January 25 but without an overall majority, as recent polls suggest, and is not able to achieve a sustainable coalition.
As the first table below illustrates, the latest opinion polls suggest that Syriza will be the largest party in the new parliament after January 25th, but it will not have an outright majority. It will thus need to form a coalition with another party in order to effectively govern. However, it may be difficult to form a stable coalition. Syriza’s ambitions would have to be tempered to reach a coalition agreement, which would create tension within the party itself. Tsipras has not only over promised what can be delivered relative to the rest of the region, he has also over promised what can be delivered relative to likely coalition partners. In our view, pressure from the Troika and the markets is likely to mean that the coalition would need to take some very difficult decisions relatively quickly. This means that the period of uncertainty could be relatively short lived, although it could still last a few months. If a stable coalition cannot be achieved or sustained, then another election would follow. Our judgment is that New Democracy would be more likely to win a second election if that were to occur.
But, the latest opinion polls may exaggerate the likelihood that Syriza will be the largest party in the new parliament after January 25th, for three reasons.
First, Syriza’s lead looks to have narrowed over recent weeks as New Democracy has sought to frame the election question around EMU membership rather than austerity. In early December, Syriza’s lead in the polls was around 7.4pts, while now it is around 4.6pts. If this trend continues, because most Greek people want to remain in the monetary union and some are convinced by New Democracy’s argument, then polls will be much closer on election day.
Second, it is uncertain how much support Papandreou’s new party—Movement of Democratic Socialists—will receive, and where that support will come from. To the extent that Papandreou draws support away from Syriza, which seems likely to some extent, this would further narrow Syriza’s lead over New Democracy. At the moment, we only have one poll which includes Papandreou’s new party. In order to ensure consistency, this is excluded from the first table below but the impact of this single poll is shown in the second table. Support for Papandreou’s new party is put at 4.8% and support for PASOK and To Potami together is 4.2%-points lower than in the average of the other recent polls. But, relative to other polls, support for Syriza and Golden Dawn is much higher, and support for New Democracy is much lower. At face value, this one poll would point to Syriza having an outright majority in parliament after January 25th. But, there are occasionally polls that show outsized support for Syriza and Golden Dawn, and these tend to be outliers. In our view, we need to wait to see more polls which include Papandreou’s new party in order to see how the situation is evolving.
And third, there are still a significant number of undecided voters (between 7% and 16% depending on the opinion poll). Given that voting in Greece is compulsory, many of these people will vote on the day. Given the tendency of status quo bias, our inclination is to think that the undecideds will lean more towards supporting the prior administration (New Democracy and PASOK). If that is correct, then that would further narrow Syriza’s lead.
Given these factors, it is certainly possible that New Democracy will be the largest party in parliament after January 25th and will be able to form a durable coalition with one of the other parties.
In our view, the period of uncertainty about Greece’s membership of EMU could be shorter than is generally assumed. If uncertainty about a Greek exit from EMU is eliminated in the coming weeks or months, we would view this as very constructive for the Greek economy in particular and for the Euro area in general. The Greek economy has been growing for the last few quarters, and looks well positioned to grow strongly given pent-up demand. Political uncertainty is the greatest impediment to an ongoing recovery, in our view. For the Euro area as a whole, uncertainty about the integrity of the region is unlikely to create the same financial stresses that we saw a few years ago, but some dampening of business and household sentiment is still an issue. Removal of this uncertainty would allow the region to move decisively to an above trend growth pace.
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