Spain: Political uncertainty remains under new Spanish government, but economic impact expected to be slim
June 26, 2018
Pedro Sánchez, leader of the center-left Spanish Socialist Workers’ party (Partido Socialista Obrero Español, PSOE), was sworn in as Spain’s new prime minister on 2 June after ousting Mariano Rajoy in a no-confidence vote held the previous day. Sánchez’s vote passed in parliament with the backing of six smaller parties, and he became the first politician in the country’s modern democratic history to win such a vote. He had filed the no-confidence motion on 25 May following the verdict by Spain’s highest criminal court of a massive corruption scheme that operated for years within Rajoy’s right-wing People’s Party (Partido Popular, PP). Although the change of government carries an element of political uncertainty going forward, the overall impact on the economy should be low, given Sánchez’s commitment to budgetary stability and limited room for maneuver to enact major policy changes.
Signaling he would respect the democratic process and aim to ensure political stability, Sánchez declared prior to the vote his commitment to adopting the approved 2018 budget—drafted by the Rajoy government and previously approved by congress—and to continue adhering to the fiscal stability program agreed upon with European authorities. Following the success of the vote, Sánchez reaffirmed his promise. As Raymond Torres, Director for Macroeconomic and International Analysis at FUNCAS, pointed out:
“The new government has expressed an unambiguous commitment vis-à-vis the European integration project in general, and the Euro in particular. This includes in particular fiscal goals, and the importance of exiting the European excessive deficit procedure as soon as possible. This reflects a genuine commitment to the European project, but also the fact that this year’s budget has been decided already.”
To further back his pledge, Sánchez appointed a moderate, technocratic cabinet—which includes the former Director-General for Budget at the European Commission, Nadia Calviño, as Economy Minister. The move was intended to send a message of economic stability and bring confidence that he would abide by EU fiscal rules. Sánchez indeed succeeded, as EU officials in Brussels welcomed his stance on the budget and financial markets reacted positively—after facing pressure from the uncertainty created by the vote—to the change of leadership. In addition, the expected final approval of the 2018 budget by congress on 28 June, after the senate amended it on 18 June, should ensure policy continuity in the near term.
Sánchez’s political capital in parliament is, however, weak. The previous Rajoy minority government had only 134 seats out of 350, and passing legislation was difficult. Sánchez is at a further disadvantage, with his party holding just 84 seats. This, along with a highly fragmented parliament with wide disparate political views, will constrain his ability to pass major reforms. Nevertheless, he has some room for maneuver on key economic and political issues, which he has prioritized going forward. For instance, Sánchez has hinted at the need to introduce new taxes to finance the growing Social Security deficit—a proposal that most political parties are inclined to consider and debate. On the labor market, it remains to be seen whether he will roll back reforms implemented by the Rajoy government in 2012, but he has signaled his intentions to address issues such as unemployment coverage, active employment policies and the gender pay gap. As for the Catalonian crisis, Sánchez has ruled out any debate on self-determination, but he has talked of “building bridges” with the new pro-independence regional government, which raises hopes of finding a negotiated solution to the conflict.
All in all, given that the 2018 budget has virtually been approved and Sánchez has committed to adhere to budget stability, it is expected that no major changes in economic policy will be implemented. Hence, the economic impact from the change of government should be limited. The new prime minister’s weak political leverage in parliament, however, raises the odds that elections will be called before the end of his term in 2020.
Author: Javier Colato, Economist