Spain: Yes, we have no Podemos

29 June 2016


If investors were hoping for an end to political uncertainty in Spain, Sunday’s electoral outcome has failed to deliver. Six months after an indeterminate electoral result, Spain went back to the polls only to produce another one. Ahead of the ballot, there was a near consensus view among pollsters that Rajoy’s centre-right Popular Party (PP) was likely to lose at least a handful of seats compared to the general election in December. Falling approval ratings and mounting corruption scandals in his party were tempered only by strong growth in the economy.

In the event, Prime Minister Mariano Rajoy’s PP was the clear winner, gaining a total of 137 seats but falling short of the overall majority of 176 seats in the 350 seat Congress. Mr Rajoy now looks set to remain Prime Minister but at the head of a coalition. How strong a government is formed will depend on the political negotiations that follow in coming days.

The four major political parties vying for power are the PP, the PSOE socialists, the newcomers Podemos (now called Unidos Podemos after merging with Izquierda Unida, a ragtag of old communists) and the new centrist Ciudadanos.

Rajoy may struggle to form a government but he seems better placed to do so than the left. If he can strike a deal with Ciudadanos (32 seats) and with moderate nationalists and regional parties in the Basque Country and the Canary Islands he will be just one seat short of a majority. But Ciudadanos is playing hard to get. While it may see itself as kingmaker, the party lost a fifth of its deputies and it is now close to irrelevance, locked into an electoral system that severely penalises minority parties. There is also the fact that in the aftermath of the December election, Ciudadanos switched sides and supported the PSOE despite earlier promises to back the PP.

Rajoy would prefer the PSOE (85 seats) to join him in a German-style “grand coalition”. However, Mr Sánchez, the PSOE leader, has rejected the idea: the left-right divide has been deep and unbridgeable throughout modern Spain’s political history. Moreover, Sánchez has ruled out a deal with the PP as long as Rajoy is in charge.

By far the biggest surprise in Sunday’s election was the failure by Unidos Podemos to displace the PSOE as the leading force of the left. While Unidos Podemos emerged with the same number of seats in Parliament as it did back in December, discontent among its ranks has grown. The future of Podemos now hangs in the balance.
It would take a near miracle to form a leftwing government given the animosity that exists between Podemos and the PSOE. Back in March, Sánchez’s attempt to unseat Mr Rajoy and usher a coalition government made up of PSOE and the Centrist Ciudadanos was voted down by Podemos. Given that past experience, the PSOE leader may be less than welcoming to suggestions by the Podemos leader that the left and hard left could form a pact to oust Rajoy. The major sticking point remains Podemos’ insistence on letting Catalonia stage an independence referendum, a possibility that the PSOE and the other main parties have rejected outright.

A third election to break the deadlock is hardly in the interests of PSOE or Ciudadanos or indeed Spain. The country needs change if it is to consolidate economic recovery (although it hasn’t proved a drag so far), deter Catalan separatism and shore up public confidence in the political system. A grand coalition would be best placed to deliver it.
Let the horse trading begin.https://www.economicperspectives.co.uk/downloads/spain_chart.bmp

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