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Spain: Uncertainty looms after split election result

December 22, 2015

Spain entered into unchartered territory after the general elections on 20 December yielded a fragmented Congress and no clear governing coalition, threatening a period of prolonged political instability. While the ruling People’s Party (Partido Popular, PP) won the most votes, the party had its worst result since 1989 as voters frustrated with the government’s corruption scandals and austerity measures turned to newcomer political parties. The election result confirmed a fundamental shift in Spain’s political landscape, as for the first time Congress will be characterized by four dominant parties. Tough coalition negotiations will need to be held or a shaky minority government will have to be formed with no clear outcome foreseen, setting the stage for potentially weeks of government inaction and reform standstill.

The PP, led by Prime Minister Mariano Rajoy, won the most seats securing 123 out of 350 and 28.7% of the popular vote, but fell well short of the 187 seats won in the last election and the 176 needed for a majority. The Spanish Socialist Workers’ Party (Partido Socialista Obrero Español, PSOE) came in second, winning 90 seats and 22.0% of the vote, which marked the party’s worst result in their modern history. Either PP or PSOE has held a majority government for over 30 years and the election result signals an end to the political duopoly. Newcomer Podemos (translated in English as “We Can”), a leftist party who campaigned on an anti-austerity platform secured third place, winning 69 seats and surpassing expectations. However, the largest surprise was the poorer-than-expected result by Citizens (Ciudadanos, Cs), a relatively-young, center-right party, who came in fourth with 40 seats.

Pre-election polls had predicted that Citizens would capture third place and be in a position to play kingmaker in a coalition government. In terms of ideology, Citizens is the PP’s most natural ally and was expected by many analysts to form a coalition government or support a minority PP government. However, Citizens’ weak performance means that a PP-Citizens alliance is no longer a feasible option, as it would not contain enough seats for a majority, and leaves Rajoy with limited and difficult options to try and form a government. While a PP-PSOE coalition would be the most stable majority, given the number of seats each obtained, the parties are historic rivals and the two parties’ platforms clash on key issues. If Rajoy is unable to form a government, a coalition of losers could arise. A minority government coalition between PSOE, Podemos and the Communists could be formed, however, it would require the support or abstention of some of the smaller parties to succeed and likely be a very fragile alliance. A third possibility for a majority coalition would be a PSOE-Podemos- Citizens alliance, however, given the wide disparity in policies—particularly between Citizens and Podemos—this appears unlikely. If no workable government is able to be formed, an early election would take place in spring 2016. Edoardo Campanella, Economist at UniCredit, adds:

“Our view is that a PP-PSOE coalition would guarantee an acceptable degree of stability and governability, even if the differences to be smoothened out are sizable. All the other options would not last long. If a grand coalition does not materialize, then snap elections would become more likely.”

At this time much remains unknown. Coalition governments are new territory for Spain and the four main parties’ ideologies differ significantly, casting doubt on future economic policies. The increased political risk caused government bonds to tumble on 20 December, pushing the yield on 10-year bonds to a five-week high. In the short-term, the heightened uncertainty may increase pressure on financial markets and government activity will be restricted to coalition negotiations. In the medium term, the effectiveness of a coalition or minority government is unknown and policy inaction or reform standstill is a large possibility. Moreover, a second election is possible and it is uncertain whether new elections could lead to a clearer outcome.


Author: Angela Bouzanis, Senior Economist

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