Spain Politics June 2016

Spain

Spain: Political uncertainty lingers threatening Spain's outlook as repeat election fails to resolve deadlock

June 27, 2016

The political stalemate that has characterized Spanish politics since December’s general election appears set to last as a second vote on 26 June failed to yield a clearer result, threatening a continued period of political instability. The election delivered a similarly fragmented Congress with no political party or likely coalition able to control an absolute majority of seats. The result sets the stage for tough coalition negotiations and it is likely that a, probably shaky, minority government will have to be formed, setting the stage for more weeks of government inaction and policy standstill. This is casting a shadow on the country’s economic prospects.

Despite a more fragmented political landscape, the two traditionally dominate political parties—who have ruled Spain for more than 30 years—were able to remain as the largest forces in Congress. The PP, led by Prime Minister Mariano Rajoy, was the only major party to record a better result than in December’s vote and won the most seats securing 137 out of 350, which was an improvement over the 123 seats won in December, but still fell well short of the 176 needed for an absolute majority. The Spanish Socialist Workers’ Party (Partido Socialista Obrero Español, PSOE) performed better than expected, coming in second and winning 85 seats. Unidos Podemos, an alliance between Podemos (translated in English as “Together We Can”) and additional left-wing parties, secured third place, winning a poorer-than-expected 45 seats. The rise of Podemos, along with Citizens (Ciudadanos, Cs), has eroded support from the traditionally dominate parties and this has increased political uncertainty in Spain.

Although the PP performed better than in December’s election, coalition negotiations are likely to be similarly difficult. The PP has few natural allies in Congress and no options that would give the coalition an absolute majority. While a third election has not been taken off the table, at this point, it appears unlikely given voter fatigue and heightened economic risks following the United Kingdom’s Brexit vote. The Brexit vote caused Spanish stocks to plummet and bond yields to rise on 24 June and has shaken confidence across the Eurozone. Edoardo Campanella, Economist at UniCredit, elaborates:

“The financial and political uncertainty triggered by the Brexit referendum likely pushed undecided voters to lean on traditional forces and it might increase the probability of getting a government this time round. […] Our baseline scenario involves a minority government between the PP and Ciudadanos, with external support from the PSOE that should abstain at the confidence vote. A more stable solution, but less likely now, entails a grand coalition between the PP, PSOE and Ciudadanos. In our view, this option would guarantee an acceptable degree of stability and governability, even if the differences to be smoothened out are sizable, especially between the PSOE and the PP. Although Mariano Rajoy has skillfully navigated the PP through the turbulent waters of a highly fragmented political landscape, he might be forced to step aside for this alliance to emerge. For both the PSOE and Ciudadanos, Rajoy embodies the main obstacle on the way leading to a coalition government. Given the strong electoral performance of the PP, Rajoy will negotiate from a position of strength and asking him to quit might make the sealing of a deal extremely complicated. Also Sanchez’s leadership of the PSOE will likely be questioned within his party.”

A quick formation of a new government is key to supporting Spain’s economic prospects. Although the economy’s recovery remained on track in the first quarter of the year—GDP expanded solidly—economic reforms are needed to tackle one of the Eurozone’s largest fiscal deficits and build on the recent growth momentum. Moreover, unemployment remains elevated and risks to the outlook have sharpened since the Brexit vote, which is likely to increase volatility in financial markets going forward. However, even if a government is formed swiftly, minority or coalition governments are relatively unknown territory for Spain and it is uncertain how effective or stable one would be.

Against this backdrop, FocusEconomics Consensus Forecast panelists expect GDP to expand 2.8% in 2016, which is unchanged from last month’s forecast. In 2017, panelists expect the economy to increase 2.2%.


Author: Angela Bouzanis, Senior Economist

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