Spain: Political instability persists in Spain, but risks to economic outlook are limited
February 29, 2016
The political impasse that has characterized Spanish politics since the 20 December elections could come to an end in early March as the parliament prepares for its first confidence vote. Pedro Sánchez, leader of the Spanish Socialist Workers’ Party (Partido Socialista Obrero Español, PSOE) and runner-up in the general election, will try to form a government in the two-round confidence vote to be held on 2 and 5 March. Prime Minister Mariano Rajoy, who’s People’s Party (Partido Popular, PP) won the December election but fell well short of the number of seats needed for a majority, decided to not run in a confidence vote after failing to find allies in parliament. The PP had its worst result since 1989 in the December election as voters frustrated with the government’s corruption scandals and austerity measures turned to newcomer political parties. To be elected Prime Minister, Sanchez will have to win with a minimum 176 majority on 2 March or a simple majority on 5 March. Despite the cloudy political environment, the risks to Spain’s economy are limited. GDP grew at the fastest pace since 2007 last year on the back of an improving labor market and greater confidence and this momentum is expected to carry over into this year.
Sanchez took the first steps toward securing the job as Prime Minister on 24 February by signing a coalition agreement with the recently-established Citizens (Ciudadanos) party. The agreement with Citizens, who came fourth in the election, seeks to overturn Rajoy’s landmark labor reform and remove some of the austerity measures that were enacted during Spain’s recession. In addition, the deal seeks to reduce the number of elected officials, improve tax collection and fight corruption. However, even with the governing pact, the two parties still fall short of a majority government and would need to be supported—at least through abstentions—by either PP or Podemos (translated in English as “We Can”) and several smaller parties in order to pass the confidence votes. Gathering support from either the PP or Podemos appears to be a challenging task, given that both parties campaigned on promises that are in direct conflict with the governing agreement signed by PSOE and Citizens. Commenting on the recent develops, Ángel Talavera, Eurozone Economist at Oxford Economics adds:
“Following the highly fragmented parliament emerging out of the December vote, our view since day one has been that a repeat of elections is the most likely scenario. Although the recent pact between the Socialist Party and Ciudadanos marks some progress in terms of unlocking the current political impasse, we maintain our view given the extremely complicated alliances required in order to have Pedro Sanchez elected as new prime minister. We think the current strong momentum should be enough to keep the Spanish economy growing at strong rates in the short term. However, downside risks have increased given the current political situation, which may lead investors to start postponing investment decisions. A persistent political gridlock automatically increases the chances of policy inaction, which would slow the recovery and add risks to fiscal sustainability over the long term.”
At this time, the political situation remains uncertain. Even if Sánchez is able to survive a confidence vote and become Prime Minister, the government would be fragile and at risk of early elections. If Sánchez is unsuccessful in the votes, another nominee can run for Prime Minister. If no nominee wins a confidence vote, in a two-month period following the first vote, new elections will be called. However, it is uncertain whether new elections could lead to a clearer outcome. While it is unlikely that the political situation will derail Spain’s robust economic growth, policy inaction in the near term is a likely possibility and could slow reform momentum going forward.