Some Overlooked Takeaways From Spain and Greece

Editors’ Note: MarketMinder Europe is politically agnostic. We prefer no party nor any politician and assess developments for their potential economic and market impact only.

Amidst chatter in the UK about food price controls and animated discussion amongst America’s Congress regarding the country’s statutory debt limit, political stories have dominated headlines in financial publications we cover. However, we noticed a couple of political developments in Europe we thought were going overlooked. Spaniards will head to the polls early—in July versus December—whilst Greeks will go to voting booths again in a couple weeks despite May’s election returning a clear winner. We see some interesting takeaways for investors in both. Read on!

Nobody Expects Spanish Gridlock

Spanish Prime Minister (PM) Pedro Sánchez’s Socialist Workers’ Party did poorly in May’s local elections, confirming what polls have shown for months: The ruling party has lost ground to the centre-right Popular Party (PP).^[i] In response, Sánchez dissolved parliament, triggering a snap election for 25 July—five months early.

The move may seem counterintuitive given the Socialists’ flagging popularity, but we think Sánchez’s decision seeks to take advantage of the country’s fractured politics. For PP leader Alberto Nunez Feijoo to become PM, his party must win a majority, form a coalition or convince other parties to abstain from rejecting a confidence motion. The PP currently polls at 32%, probably not enough for an outright majority in Spain’s proportional representation system (i.e., parties gain parliamentary seats in proportion to their share of the vote).^[ii] The latest polls suggest the PP and far-right party Vox could win enough seats to form a two-party coalition, though it is close.^[iii] If the PP can’t form a majority with Vox, Feijoo would likely struggle to gain smaller parties’ support since our research has found many regional groups oppose Vox’s nationalist ideology. If the PP fails to form a government, Sánchez would likely get the opportunity to reform his minority government, reset the electoral cycle and remain in power.

Whether or not Sánchez’s gambit pays off, we think it is unlikely any one party will have an outright majority in parliament, which implies a coalition or minority government—the norm for Spain these days. The Socialists and leftist Podemos have run a minority coalition government since 2020, and before that, the PP headed a minority government from 2016 – 2018. Given the aforementioned party divides and lack of majorities, whoever is running the show is unlikely to have a ton of clout, in our view, limiting their ability to pass major legislative change. That doesn’t mean the government accomplishes nothing—rather, our review of gridlocked legislatures in developed nations has found that whatever does pass is typically watered down from initial proposals.

Take the incumbent administration. Though it pushed through some changes, including public pension reforms, Sánchez’s government didn’t completely undo and overhaul past labour reforms passed under his predecessor, Mariano Rajoy.^[iv] Today, many we follow are monitoring the Sanchez government’s new housing law, which includes provisions for national rent control. There is talk in coverage we have seen that a PP-led government may try to reverse the measure, which some commentators we follow cheer and others warn will be a negative development.^[v] A lot of that chatter is sociological, in our view, but our research finds rent control does impact the economy, making it one worth watching for the potential economic effects. But overall, we think gridlock looks likely to dominate Spain’s political backdrop—a bullish feature prevalent throughout the developed world, in our view.

Greece’s Reemergence

Greek Prime Minister Kyriakos Mitsotakis’s centre-right New Democracy did better than expected in May’s general election, winning 40.8% of the vote.^[vi] In response, Mitsotakis … rejected the fresh mandate to form a government, opting instead for a new election on 25 June. Whilst this may seem odd, a new electoral law takes effect at the next ballot: If the winning party takes 40% of the vote, it will receive 50 bonus parliamentary seats.^[vii] If they repeat May’s feat, that would give New Democracy an outright majority—making Greece an outlier in a sea of gridlocked legislatures.

In this case, we think markets see this as more of a benefit than a risk, given the apparent room for pro-market changes. The government has a big to-do list on this front, from reducing red tape to maintaining a budget surplus, in hopes of turning Greece into a European financial centre and returning to Developed Market (DM) status (as designated by index provider MSCI).^[viii] Markets appear to us to be pre-pricing these prospects already: Greek stocks rose 10.2% last month, well ahead of broader Emerging Markets’ (EM) -0.3% dip, and have vastly outpaced EM year to date (32.3% to 0.7%).^[ix] According to our research, stocks move first, and we think investors benefit from keeping in mind the difficulties for the government to meet high expectations once political realities set in.

Whether New Democracy passes reforms considered market friendly or not, we think Greece’s political stability today is a far cry from the country’s debt crisis days over a decade ago—a timely reminder of how quickly a situation can improve. Back in 2010, the government announced its budget deficit was much larger than thought, leading to an austerity programme of tax hikes and public spending cuts—and, eventually, a rescue package from eurozone finance ministers (which included strict reform commitments).^[x] But the country’s troubles didn’t go away. In 2012, Greece received another bailout and defaulted twice, and the evident problems in the country’s finances prompted MSCI to reclassify Greece from DM to EM in June 2013.^[xi]

The drama reached a fever pitch in 2015, when leftist Alexis Tsipras and his upstart Syriza party won big in a snap election on the promise of ending austerity measures imposed by creditors—which stirred fears Greece would leave the eurozone (i.e., cease using the euro as its primary currency).^[xii] That culminated in a July 2015 referendum, in which Greek voters rejected the terms of international bailout … yet the country didn’t exit the euro.^[xiii] Instead, Tsipras moderated and compromised, and Greece received more bailout money and remained in the common currency bloc.^[xiv] The leftist administration made significant reform progress in the next few years, in our view.

A decade after Greece’s demotion to EM, we have seen discussion of Greece going back to DM.^[xv] Reclassifications aren’t market drivers, in our view, but they do reflect well-known developments—and in the case of Greece, its progress since the debt crisis. On the political front, Tsipras settled in as a frontline eurozone politician, staying in office until 2019 and is now serving as opposition leader, rarely making international headlines. The Mitsotakis government has cut corporate taxes, passed pension reform and progressed on privatisation deals.^[xvi] Greece repaid some International Monetary Fund bailout loans two years earlier than estimated, and the Hellenic Republic found healthy demand in debt markets—it sold a 30-year bond in March 2021, the first since the global financial crisis.^[xvii] Another way to see the return of investor confidence: 10-year yields on Greek sovereign debt have fallen from 10.9% in June 2013 to 3.7% today.^[xviii] Not having gridlock in a small EM isn’t likely to be a market hang-up, but we think Greece’s political environment today is another example of longer-term, overlooked improvement against today’s broader pessimistic sentiment backdrop.