RaboResearch - Economic Research

Spanish elections: Día de la Marmota

Economic Comment

  • Yesterday’s elections in Spain failed to break the deadlock in parliament
  • Scraping a majority is not entirely impossible, but far from straightforward to say the least
  • The stalemate will not sent the economy into crisis, but it prevents the economy and public finances will be prepared for one   

Groundhog day

Yesterday’s elections in Spain have again resulted in a parliament with no clear majority for either party or coalition. In fact, as expected, the outcome seems to make it even more difficult to form a government than after April’s elections. The centre-left PSOE headed by Sánchez again won and the outgoing PM holds the best cards for heading the next government. But the PSOE lost 3 seats and national left-wing parties together lost 8, due to which they now come 18 seats shorts of an absolute majority in the Spanish parliament. At the same time, a coalition more through the centre including the socialist PSOE and the liberal-right[1] Ciudadanos is no longer numerically feasible due to large losses by the latter. Together they lack 35 seats. Right-wing parties together have won 3 seats, but still come 26 seats short of a workable majority. So back to ballot box then?

Figure 1: Elections have failed to put an end to the stalemate in parliament
Figure 1: Elections have failed to put an end to the stalemate in parliamentSource: Interior Ministry Spain, Rabobank calculations

Not necessarily immediately as there are still some challenging options for Sánchez to explore. One is to get the centre-right PP and Ciudadanos to abstain in an investiture vote for a centre-left minority government, while left-wing Más País and/ or some non-separatist regional left-wing parties vote in favour. The main challenge will be to convince the PP. It won’t be a bed of roses, but it is not completely out of option. Another path Sánchez might choose to take is the one over the left. In that scenario he would have to either offer the ultra-left Podemos ministerial posts or convince them to back a PSOE minority government. An agreement between the two appeared to be impossible during the last negotiation period. On top of reaching an agreement with Podemos, Sánchez would also have to get multiple regional left-wing parties including the Catalan separatist ERC on board. Especially the latter will be difficult in light of the recently intensified anxieties between Catalonia and the rest of Spain.

Economic challenges are building

The bottom line is that Spain is set to remain deadlocked for some time to come. While the stalemate in parliament is unlikely to bring the economy down in the short run, it does have negative implications for the longer-term outlook. More specifically, Spain risks large hysteresis, pro-cyclical fiscal policy during the next downturn and unaffordable public finances in the longer term in light of the rapidly ageing population. The fact that the Spanish government still uses the 2018 budget is exemplifying the difficulties subsequent parliaments have had in agreeing over policy in the past years. Back in October, the outgoing government again presented a no-policy change budget draft to the European Commission. As a result, Spain will insufficiently address its still weak public finances, which will likely move back to the centre of attention when the economy turns sour amid slowing domestic demand dynamics and weakened global demand.

The economic impact of the surge of Vox

The major winner of the elections is the radical-right Vox. It ran on an anti-immigrant, unionist and very conservative platform, advocating traditional Catholic Spanish values. It has likely gained traction on the back of nationwide growing anger against the Catalan separatists and dissatisfaction with current politics. Even though Vox will likely not be part of the next government, it will likely have an influence on policy indirectly. So far, we know relatively little about its economic agenda other than that it wants to substantially lower taxes and alter the pension system. Probably more important for Spain’s socioeconomic outlook is that the strong presence of Vox on the national stage risks further polarizing the society, making it ever more complicated to find a solution for the Catalan crisis, amongst other things. 

Figure 2: Still many people side lined, despite strong labour market recovery
Figure 2: Still many people side lined, despite strong labour market recoverySource: Macrobond, Rabobank
Figure 3: The Spanish and French government run the largest budget deficit in the Eurozone
Figure 3: The Spanish and French government run the largest budget deficit in the EurozoneSource: Macrobond, Rabobank

[1] Ciudadanos can be placed just right of centre when looking at its economic policy plans, yet very right in the Catalan independence discussion.


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