Following the “no” vote in Greece’s national referendum on whether to accept the bailout terms proposed by its European creditors, the two sides continue to struggle to reach an agreement that would keep the country in the euro zone. For investors, the Greek crisis highlights the importance of “political risk,” the idea that the value of your investments can be hurt by political factors in addition to purely economic or financial ones.
In the case of Greece, the political risk for most investors should be fairly small. As we’ve noted in the past, Greece’s economy makes up less than one third of one percent of the global economy, and the size of its stock market is negligible compared to the global market. But the Greek crisis has the potential to exacerbate other political risks in Europe that could have a larger effect.
One is the possibility that—like the Syriza party in Greece—anti-establishment political parties could come to power elsewhere in Europe and cause further political and economic fragmentation of the continent. Such parties have even gained popularity in some of the largest European countries. In France, which makes up over 3% of the global stock market, the National Front party has made gains in recent years. In Spain, which makes up over 1% of the global stock market, the Podemos party is vying to win the national election that will be held later this year.
Another risk is that the United Kingdom (which has its own currency and therefore isn’t a part of the euro zone) will leave the European Union. The country’s prime minister, David Cameron, has pledged to hold a national referendum on whether the country should leave the EU. Leaving a political group such as the EU likely wouldn’t cause as much financial upheaval as a country leaving a currency union such as the euro zone, but it could harm many British companies.
The outcome of Greece’s current crisis will affect these other political risks. The disorderly financial collapse that Greece has suffered in recent weeks has probably made it less likely that other struggling countries will risk leaving the euro zone by trying to extract more favorable terms from their creditors. If Greece leaves the euro zone and its economy recovers, however, other countries may view a euro zone exit as a more enticing possibility. Furthermore, a breakup of the euro zone could make it more likely that the UK votes to leave the EU. The political risk from Europe is far from over.