Spain heads to the polls on Sunday in a historic election that may well spell the end of two-party dominance in a country racked by high unemployment and beset with corruption scandals.
The election is a four-way race between the Socialists, Podemos, Ciudadanos, and PM Mariano Rajoy’s Popular Party. “With no party expecting a majority of parliament’s 350 seats, Spain appears headed for a minority or coalition government,” WSJ notes, adding that “wheeling and dealing among political leaders in search of a winning alliance will likely start almost as soon as the polls close and could last for days or weeks.”
Like October’s elections in Portugal, the vote will serve as a kind of referendum of Spain’s adoption of austerity and a slavish adherence to Berlin-style fiscal rectitude. Brussels has held up Spain and Portugal as examples of how bailouts, when paired with harsh fiscal adjustments, can work to right the proverbial ship, but the numbers tell a different story. Austerity looks more like “fauxterity” when one looks at the trajectory of the periphery’s debt-to-GDP ratios (see below) and as we’ve noted on any number of occasions (see here for instance), Spain’s economic “recovery” is anything but.
Clearly, Brussels does not want to see another outcome like that which unfolded in Portugal where the Socialists aligned with the Communists and the Left Bloc to overthrow the Passos Coelho government early last month. New PM Antonio Costa has pledged to honor Lisbon’s obligations but as we explained, the new government in Portugal will almost certainly be less amenable to further fiscal retrenchment than its predecessor and that’s bad news for Brussels.
As for Spain, the rise of Podemos shows that like their Portuguese counterparts, Spanish voters have become fed up with austerity policies that many everyday Spaniards believe have done more harm than good. “Spain emerged from a biting recession in mid-2013 and is growing at around 3% this year, the fastest rate among major eurozone economies, but the country is still coping with an unemployment rate of more than 20%, only slightly below the level when Mr. Rajoy took office four years ago,” WSJ writes.
"The outcome is the most uncertain in the 40 years since the end of the Franco dictatorship and the return of democracy," Reuters adds, before noting that "about one in three of the 36.5 million eligible voters were still undecided going into Sunday.
"Podemos’s ponytailed 37-year old leader, Pablo Iglesias, is considered too radical to serve as prime minister by most of the Spanish establishment," Lluis Orriols, a political scientist at Madrid’s Carlos III University told The Journal. The media has long equated Iglesias with Alexis Tsipras.
Podemos is the most vocal critic of the austerity policies that WSJ correctly notes "have made Mr. Rajoy’s government a favorite of European leaders in Brussels and Berlin."
Guess when #Syriza came to power #SpainElection v @guardian pic.twitter.com/aIFZZm55V2
— Yiannis Mouzakis (@YiannisMouzakis) December 20, 2015
All of this is complicated by the situation in Catalonia where a fifth of Spanish GDP voted to secede last month.
"Political risk in Spain could materialise from three directions," Deutsche Bank says, in the bank's comprehensive election preview. Here are the bullet points:
- First, a government heavily influenced by Podemos could lead to a reversal of recent structural reforms. Based on opinion polls, Podemos’ chances of driving the policies of the next government have fallen sharply.
- Second, a fragmented parliament could lead to an unstable government if not to an outright impasse in building a majority. However, this risk has also decreased materially. With the recent surge in the vote intentions for pro-business Citizens, a centre-right coalition could have an absolute majority without the additional help from small regional parties. That said, we think that Citizens will not enter into a formal government coalition with the centre-right PP but rather provide only external support.
- Third, the situation in Catalonia remains unresolved. We continue to see a compromise centred on an overhaul of regional financing as the most reasonable outcome. But PP and Citizens are strongly pro national unity, hence reaching a compromise with the pro-independence parties will not be easy and a negative outcome cannot be excluded.
Deutsche goes on to note that political risk has caused Spanish financial assets to underperform their Italian counterparts.
"The rise of radical-left Podemos in 2014 was the first element pointing to weakening of the PP-PSOE 'duopoly'", Deutsche goes on to note, adding that "one of the costs of Spain’s economic rebalancing was a dramatic increase in unemployment – especially among the young – which fuelled support for Podemos [and] a series of corruption allegations which affected the traditional parties played an equal if not greater role in [their] rise."
More from Deutsche on Ciudadanos:
The second element was the even more recent, but no less remarkable: the rise of Citizens (Ciudadanos in Spanish). Citizens provides a more pro-business alternative to Podemos for those who are disillusioned with traditional parties but do not share Podemos’ radical views. Citizens was a party mainly based in Catalonia. It is against Catalonia’s independence and its young leader, Albert Rivera, is one of the most popular political leaders based on polls.
And here's Deutsche's take on possible coalition governments:
- A PP and PSOE grand coalition: numerically strong, politically highly unlikely. A grand coalition would have a large majority (c200 seats). However, such a grand coalition would be unprecedented. Indeed, we think it would be feasible only under a national emergency scenario.
- A centre-right PP-Citizens “alliance”: our central case scenario. Mainly thanks to the recent surge in the vote intentions for Citizens, a PP- Citizens alliance could have an absolute majority with about 185 seats (Figure 7). Politically we also think that the PP and Citizens could reach an agreement on the economic programme. Although this is our base case, Citizens will also consider alternatives.
- A centre-left PSOE and Citizens coalition: our alternative scenario. Citizens could also form an alliance with the PSOE, above all if it manages to be close enough in terms of seats to the Socialist party. In this case, Citizens would have more leverage than with the PP and it could put forward more convincingly its case of representing an alternative to a PP-government. However, based on current polls PSOE and Citizens would fall 24 seats short of a majority (Figure 7).
In simpler terms, Rajoy's PP will probably win but won't end up with an absolute majority. "The Socialists are expected to come second with Podemos and liberal Ciudadanos vying for the third place which would make them kingmakers in post-election talks," Reuters explains before boiling it all down to this: "...any of three outcomes are possible - either a right-wing or left-wing coalition government or a minority administration."
Polls close at 9 p.m. local time.
And so, Brussels and Berlin are holding their breath as an "undesirable" outcome could push the periphery even further away from an austerity regime that, even if it hasn't produced any tangible results when it comes to bringing down debt, has unquestionably created quite a bit of misery for the citizens of Spain on the way to exacerbating the ideological gap between the periphery and the core.
We close with the following quote from El País:
“The new system, is not a revolution but, indeed, a change of great magnitude in response to the wishes of Spaniards who, fed up with sterile confrontations in a highly polarized system, are asking for negotiation and consensus.”