RaboResearch - Economic Research

Spanish elections: take four!

Economic Report

  • On Sunday, Spaniards will head to the ballot box for the second time this year
  • The elections are unlikely to break the deadlock in Spanish parliament
  • PSOE is set to win the elections again, but forming a majority seems impossible
  • The radical right party Vox is set to gain substantially, while the liberal Ciudadanos will lose
  • Spain’s economy is likely to continue to grow relatively fast in the short term, although growth is slowing
  • It is highly unlikely that the next parliament will deal with economic and fiscal challenges that hamper economic growth and public debt sustainability in the longer run

Moving on to take five?

On Sunday, Spaniards will head to the ballot box. Or at least that is what they are asked to do for the second time this year and the fourth time in four years. Election fatigue is expected to keep more voters at home compared to the previous inconclusive elections dating back to April this year. Polls provide little comfort that the upcoming elections are going to be a main turning point in Spain’s recent history of political instability. Indeed, if the polls are correct, we cannot expect much alleviation of the parliamentary gridlock after Sunday.

Figure 1: Ever more fragmented parliament
Figure 1: Ever more fragmented parliamentSource: Macrobond, average of multiple polls 6 November 2019, Rabobank calculations

It should be noted, though, that it is quite difficult to make an adequate prediction based on the current polls. For one, election fatigue could undermine both the left and Ciudadanos in particular even more, while benefitting the radical right. Right-wing voters seem more determined to show up to support ‘their’ party, not the least due to the renewed intensification of the Catalan crisis. That said, before the April elections, polls overestimated the support the new radical-right party Vox would obtain. Second, as much as 30 percent of the respondents in surveys have not yet decided what to vote. Third, Spain’s regional proportional electoral system makes it very difficult to translate the percentage of votes in the polls into the number of seats in parliament. Especially since the number of (new) parties competing at the national stage has never been higher. Based on the current available information we expect that renewed elections in 2020 are a real possibility. The stalemate can only be solved if Spanish politicians accept the new political reality they are in, i.e. the need for coalition building.

What options are there?

Sánchez will get another try

Sánchez’ centre-left PSOE is best placed to win the elections on Sunday. And barring any last-minute surprises, the next government cannot be formed without the PSOE. But the PSOE is set to lose seats due to which obtaining a majority will also be problematic for any government including the socialists. In any case, a centre-government with PSOE and centre-right liberal Ciudadanos seems no longer numerically feasible. Ciudadanos is also likely to lose substantially. And a left-wing government including PSOE and Podemos would need the explicit backing of the (moderate) separatist party ERC. This seems to be a stretch in light of recent flared-up tensions between Catalonia and Madrid after separatist leaders were sent to jail over the 2017 independence referendum.

Casado to the rescue?  

Also a stretch would be to expect the centre-right PP to enter in a coalition with PSOE or to explicitly vote in favour for a PSOE minority government. Sánchez ousted the previous PP leader Rajoy out of the PMs office a year ago without elections and more importantly he has been relatively soft on Catalonia. So helping Sánchez into office would mean political suicide for the PP. It would likely drive more rightist voters towards Vox. Especially since only 18 percent of PP voters prefers backing a PSOE government. Not surprisingly, PP’s leader Casado has already ruled it out.

Back in the old days…

Like some of you might recall, before the 2015 elections Spain was used to a two-party system, with one of the fastest government formations across Europe. Generally, if neither the PP nor the PSOE had obtained an absolute majority, the main opposition party abstained in the investiture vote to ‘let’ the biggest party head a minority government. Yet after Sunday’s elections, abstention by the PP would not even deliver PSOE a simple majority. It would only work if Ciudadanos would also abstain in the investiture vote and if Podemos would explicitly vote in favour. Indeed, a lot of ifs!

The impact of Vox

According to the polls, the radical-right Vox is up for large gains. To be fair, it underperformed the polls in April’s elections, but it is clear that the radical-right has nested in Spanish politics now as well. Vox has a strong anti-separatist and anti-immigrant rhetoric, and advocates conservative traditional Spanish Christian values. The rise of Vox shows increasing polarisation of Spain’s society 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. Moreover, if the other main parties continue to be unable to strongly respond to Vox’ rhetoric, society will likely polarise further.

Politicians risking future economic prosperity

19Q3 figures showed that Spain’s economy continues to grow faster than many of its peers. Yet economic and employment growth are losing speed. This is not that surprising as the overall economy has largely recovered from the crisis, but it is unsatisfying that it happens whit the unemployment rate still at 14.2 percent and public debt still close to 100 percent of GDP. Moreover, the structural budget deficit is close to 3 percent, i.e. larger than in Italy, implying that the government will have little headroom to support the economy during the next downturn. In fact, it will likely aggravate a future downturn due to the need to cut back on spending to keep government finances in check. Limited progress in economic and fiscal reforms in the past years is very much the result of fragmentation in parliament, the many elections and the Catalan crisis.    

Looking forward there is little reason to believe things will change for the better any time soon. Furthermore, both fragmentation, the risk of early elections and the Catalan crisis are not going anywhere. So it is highly unlikely that the next parliament will swiftly deal with the abovementioned issues and others such as weak labor market efficiency, abundant bureaucracy, the impact of the rapidly ageing population, which are all necessary to safeguard satisfactory economic growth and public debt sustainability in the longer term.

Figure 2: The young continue to bear the brunt
Figure 2: The young continue to bear the brunt Source: Macrobond
Figure 3: Ageing hampers GDP growth[1]
Figure 3: Ageing hampers GDP growthSource: Macrobond, United Nations, Rabobank calculations

Short term will be fine, long term requires attention

Spain’s economy is expected to continue to grow faster than the Eurozone average, but to slow from 2.4 percent last year to 2 percent this year and to just below 1.5 percent next year. As a reference, the Eurozone economy will likely grow with rates around 1 percent this and next year. Regarding public finances we expect the debt ratio to continue its downward trajectory in the short term, both helped by low interest rates and by still good growth rates. But government finances are likely to deteriorate quickly during a next downturn and are not prepared for the long-term impact of ageing.

Figure 4: Public debt has barely come down during the boom years
Figure 4: Public debt has barely come down during the boom yearsSource: Macrobond, Rabobank
Figure 5: Government spending has been pro-cyclical
Figure 5: Government spending has been pro-cyclical Source: Macrobond, Rabobank


[1] The impact of ageing illustrated in figure 3 is a very simple calculation based on the reduction in the working age population, holding the effective retirement age and the participation rate constant. And neglecting the impact of ageing on government expenditure choices. 


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