Political risk not obvious through polls

 Social discontent and higher uncertainty may hide surprises in the European Parliament election result

By Dimitris Kontogiannis

The markets have placed their money on the Greek economy recovering from the protracted recession, pouring billions of euros into banks, other companies and the state. In so doing so, they have chosen to give limited significance to political risk. In about three weeks, their assumption will be put to the test as millions of Greeks cast their ballot to choose a representative for the European Parliament and indirectly determine the fate of the coalition government. It is difficult to gauge whether the markets are right in downplaying the political risk, but increased uncertainty may lead to surprises.

Public finances have been the economy’s Achilles’ heel for a long time and the main reason Greece was forced to undertake the biggest-ever sovereign debt restructuring in history. Unlike other eurozone countries, the Greek private sector debt has been modest and manageable. Of course, the loss of international competitiveness in the years after joining the euro in 2001 also constituted a problem and this is perhaps more important for the economy’s long-term health. After all, it was the country’s cut-off from market financing in the spring of 2010 on the back of chronic large budget deficits, leading to a huge public debt and an unprecedented crisis mismanagement by the PASOK government at the time which did the damage.

So, the markets are right to look at Greece’s underlying fiscal position, especially the primary budget and the cyclically-adjusted primary balance, and to conclude that it is in relatively good shape and likely to get better. They are not like some academics who draw conclusions about the...