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The Financial Cost of Global Political Uncertainty

PANews_P-6785c97c-e801-4fb9-8bc9-d5c215a31323_I1As news of Greece’s revised bailout out plan sinks in, questions turn once again around the intersection of government action(s) and global markets.

While on the one hand the New York Times reports that “Eurozone finance ministers on Tuesday approved Greece’s plan meant to ease the hardships created by its international bailout, extending that loan program by four more months,” the paper simultaneously adds: “But though the eurozone ministers were leading the negotiations on behalf of their countries, the response from two of the other creditors — the European Central Bank and the International Monetary Fund — conveyed a certain skepticism of whether Greece could live up to the terms of the new agreement.”

Indeed, there remains great lack of clarity of what the ultimate outcome will be. Said Mujtaba Rahman, a chief European analyst for the Eurasia Group: “‘The Greek electorate wants different things. They want their membership in the euro and they want to end austerity, and at some point these desires will become mutually incompatible.’”

The topic recalls a piece posted in Capital Ideas, published by the University of Chicago Booth School of Business, titled: “The price of policy uncertainty.” As the subhead notes: “What scares investors? Not knowing the government’s next move.”

The piece cites data that tries to put a financial cost on global political uncertainty: “A growing body of research suggests that uncertainty has negative, measurable effects. Huseyin Gulen and Mihai Ion of Purdue University estimate that about two-thirds of the 32% plunge in corporate investments during the 2007–10 crisis period was attributable to policy-related uncertainty. The Peterson Institute for International Economics estimates that heightened fiscal-policy uncertainty saps real US GDP of about one percentage point—a loss of $150 billion each year.”

Indeed, this political uncertainty can affect both consumers and businesses, the piece notes.

“According to Steven J. Davis, William H. Abbott Professor of International Business and Economics at Chicago Booth, government-related policy uncertainty has three aspects (see “What is policy uncertainty?”) that affect the decisions of people who collectively impact the economy. Tomas Hellebrandt, a senior researcher at the Peterson Institute for International Economics, notes that uncertainty may lead industries and firms to wait to invest, hire, or act. Households interpret political brinkmanship (the kind they saw during the US Congress’s 2013 debt-ceiling negotiations) as a threat to their financial well-being, and therefore buy and invest less, slowing the economy as they save their money and wait for better, safer times.”

Interestingly, “the MacArthur Foundation in 2013 awarded a $250,000 grant to the Becker-Friedman Institute for Research in Economics—a collaboration of Chicago Booth, the University of Chicago’s department of economics, its law school, and the Harris School of Public Policy—to bring the academic findings on policy uncertainty to the attention of policymakers. The institute is creating a series of brief videos for lawmakers, nongovernmental organizations, policy institutes, and think tanks. The hope is that policymakers could use the findings to reduce, or at least avoid aggravating, policy uncertainty.”