Prior to the controversial and unprecedented US election of 2020, much of the focus was on sitting President Donald Trump and how his policies had impacted on the American economy.

However, this caused some to overlook the impact of the US election on the economy as a whole, with this observable through several long-term trends and various elections throughout history.

But how exactly do elections affect the economy, and are currencies similarly impacted? We’ll explore these ideas in the article below.

How Do Elections Affect the Economy?

Before we focus on specific elections, let’s consider the generic ways in which elections affect the economy.

One of the most interesting is a potential increase in national or government debt, with this borne out in recent elections in India. Here (and in similar locations), elections are usually marked by the introduction of policies that may be economically catastrophic but politically or culturally advantageous, in order to wow voters or resolve socially important issues.

This may include the rollout of welfare schemes or increased public spending, which is funded by taxation and can trigger a higher debt-to-GDP ratio and hikes in the rate of inflation.

Interestingly, an upcoming election can also lead to the postponement or delay of strategic decisions, particularly those that are potentially controversial or likely to conflict with previous manifesto pledges.

Although this may be beneficial for the financial markets, it can also create uncertainty within the economy and translate into reduced economic growth in some instances.

This is certainly the case if businesses or industries reduce growth spending or look to postpone infrastructure and reinvestment projects, as less money is ultimately sunk back into the national economy and capital is pulled from investment funds and bank accounts.

On a similar note, such a scenario can see the rates of foreign direct investment (FDI) reduce markedly, leading to lower capital inflows and a situation where there’s much less money within a national economy.

How are National Currencies Impacted?

The good news is that the short, medium and long-term economic impact of elections is usually minimal, aside from rare exceptions such as the UK election in 1974 and 1979 (when the region bore the brunt of aggressive monetary policy decisions and spiraling inflation).

But are national currencies affected during elections? The short answer is yes, with general speculation about the outcome causing some investors to seek flight and others to open a forex account and claim a welcome bonus of $30 in a bid to capitalise on currency fluctuations across the board.

If we analyse the recent German elections, for example, there was speculation that the ascension of a centrist, “traffic-light” government would result in choppy trading, amid general uncertainty and a lack of clearly defined policy.

Conversely, a victory for Angela Merkel’s successor was projected to boost the ailing Euro, while it was thought that the election of the hard-left Die Linke party would have the reverse effect.

Ultimately, it was the Social Democrats (SDP) and Merkel’s Christian Democrats who earned the most votes, with the former claiming the largest share of 25.7% overall.

This has resulted in a potential center-left or traffic light coalition as described above, which will, in turn, impact directly on the Euro by driving potential uncertainty and causing the most-risk averse investors to seek flight.

If negotiations continue and FDI levels are also hit following the election, there’s a chance that currency values may plummet further as the single currency continues to weaken.

Update news