Spain: A Vote for Stability

Published on May 25, 2016

Key Takeaways:

•    A small shift in voting preferences in Spain’s June 26 Presidential elections is likely to strengthen the two center-right parties, the Partido Popular (PP) and Ciudadanos, and give them a chance to form a coalition government supported by an absolute majority in the Congress.

•    A leftist alliance between the center-left PSOE and far-left Podemos has been adamantly ruled out by sources within the Socialist Party.

•    All party leaders are dismissing prospects for of a “three-peat” election. We fully expect the elections to break Spain’s six month political impasse and lead to a successful new coalition of the center right parties.

May 25, 2016

Six months after the inconclusive December 21 elections that were followed by two unsuccessful bids to form a government, Spanish voters will be called yet again to the polls on June 26 to elect a new Parliament.

Even though the timing of the vote is not ideal – just three days after the British referendum on EU membership – we expect this time around the elections will finally lead to political stability in Madrid.

*** Sources in the center-right Popular Party (PP) are confident acting Prime Minister Mariano Rajoy will be able to form a coalition with centrist party Ciudadanos after the elections. Their predictions are supported by a recent surge in polls by both parties and by shrinking support for the Socialist Party (the PSOE). ***

*** Socialist sources for their part have ruled out reaching out to the far-left Podemos party after the election, virtually eliminating chances of a leftist government resulting from these elections. ***

Welcome News for Rajoy

The unusual – for Spain – political instability that resulted from last December’s elections should end after the June 26 vote, even though polls are currently signaling only minor changes in voter preferences.

Indeed, Spanish voters’ intentions are pointing to a surge in support for both the Popular Party and Ciudadanos, while they also show the Socialist Party is on course to finish in third place, behind a newly formed far left alliance between Podemos and United Left.

And given that the PP and Ciudadanos currently hold a combined 160 MPs, 16 shy of the 176 absolute majority threshold in the Congreso de los Diputados, even a modest increase in the next election compared to December could help them clinch the goal, albeit with the negotiated abstention of some of the smaller parties.

The Socialist leadership is skeptical, of course, and points to the fact that its leader Pedro Sanchez is also on good terms with Ciudadanos’ leader Albert Rivera. Together, they agreed on a joint program last March during Sanchez’s unsuccessful bid to form a government, and that deal is still valid, they claim.

The PSOE strategy to form a government would therefore rely on the chance of obtaining Podemos’ abstention to form a minority government with Ciudadanos.

That outcome, while possible in theory, is highly unlikely.

Indeed, the same PSOE sources are quick to dismiss any speculation that they will reach out to the extreme left to form a coalition this time around, pointing to two factors: the bad blood dating back to March, when Podemos leader Pablo Iglesias refused to play ball with Sanchez, which if anything has only gotten worse – and related to that a newly forged alliance between Podemos and United Left that is being seen a fundamental challenge by PSOE to its historic role as Spain’s primary party of the left.

In the current climate, even in the unlikely chance he will be called again to try to form a government, Sanchez would have an extremely difficult time negotiating Podemos’ abstention.

Beyond that, further reassurance for investors should come from the fact that, behind the scenes, none of the three mainstream leaders has signaled any intention to go to a third election, though we would caution that forging alliances and agreeing on programs will take a while, and a new cabinet will not be able to pass Parliament scrutiny before the end of the summer.

Brussels Weighing In

A further push for a swift conclusion of this six-month long political stalemate in Madrid is coming from Brussels, where the Commission once again, last week, refrained from hitting Spain with a proposal to “step-up” budget scrutiny over its repeated violations of the Stability and Growth Pact. That restraint is seen as a clear “assist” to the “mainstream” parties before the elections, mainly to the incumbent PP party of Mariano Rajoy.

The Commission agreed to give Spain more time and revisit the budget issue in the fall, but it has also made it clear it needs and expects some level of political cooperation and a fully functioning government to negotiate with in Madrid. Reform efforts and future plans to further rein in the deficit have all but stopped under the current care-taker cabinet.

Brussels sees that as crucial not so much to protect current economic growth – Spain is the fastest growing Eurozone economy after Ireland, even without a government – but to avoid the politically controversial decision down the road to sanction Madrid for ultimately not reaching its deficit target.

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