Spain will hold a general election on 20 November, with the focus on the incumbent Spanish Socialist Workers’ Party (PSOE) and the opposition conservative Popular Party (PP). A PP victory seems to be a foregone conclusion, but the new government will face a difficult period as it will have to press ahead with harsh austerity measures.
IHS Global Insight Perspective
Significance
Spaniards go to the polls on Sunday (20 November) to elect a new leader and a new national government.
Implications
The state of the economy and the high level of unemployment are taking precedence over other issues and will shape voters’ decisions. The opposition Popular Party (PP) is set to win, while the left-leaning incumbent Spanish Socialist Workers’ Party (PSOE) will be punished for its slow reaction to the economic crisis and pushed into opposition after seven years in power.
Outlook
Although the PP could secure an overwhelming parliamentary majority, it will not have an easy ride. Expectations are high and the party will need to move quickly to convince the markets that Spain is committed to lowering its fiscal deficit and reviving economic growth. Inevitable austerity measures could trigger a negative public reaction, which would make their implementation, and the PP’s job, even more difficult.
Right Turn
Spanish voters will go to the polls on Sunday (20 November) to elect a new prime minister and government. Although more than 20 regional and national parties are competing for 350 parliamentary seats, the contest will be a two-horse race between the leftist Spanish Socialist Workers’ Party (PSOE), led in the election by former interior minister Alfredo Pérez Rubalcaba, and the opposition conservative Popular Party (PP) of Mariano Rajoy. The current PSOE leader and prime minister José Luis Rodríguez Zapatero is not running for the premiership, having seen his popularity plunge, and his party has opted for the charismatic Rubalcaba to lead it in the election instead. Rubalcaba is more popular with the public than the PP’s Rajoy, but the circumstances are dire and the election result is almost a foregone conclusion, with the public set to punish the PSOE for the rocketing levels of unemployment and stalled economic growth, caused above all by the bursting of the property bubble. As a result, the PSOE is set to be pushed into opposition after seven years in power.
With the majority of public opinion surveys predicting a PP victory, the main question is whether the party will manage to garner enough votes to create a stable majority government on its own. Following the 2008 general election, the PSOE was seven seats short of an absolute majority and was thus forced to form coalitions of convenience with the United Left (IU) and smaller nationalist parties from Catalonia and the Basque country. The support of smaller regional parties generally comes with a price of higher subsidies, which tend to irk other parties not included in the deal. This may not be the case after the upcoming poll, however, as Rajoy’s PP is on track to win an absolute majority, with pollster Sigma even predicting an historic 198 seats to the conservatives. Such an outcome would be positive as it would give Rajoy enough leeway to proceed with heavy budget cuts without being forced to offer concessions to smaller regional parties in return for their support.
Mind the Economy
As is the case in other European countries troubled by economic woes, Spain’s pre-election campaign has been dominated by the economic and fiscal situation, with other issues—such as the problem of domestic terrorism, which has played a significant role in previous polls—being pushed to the sidelines. The rate of unemployment in Spain surpassed 21.5% in the third quarter of this year, the country has wide national and regional fiscal deficits, and the economy appears to be heading for another recession in the first quarter of 2012 after exiting the last one in early 2010. Having relied too heavily on a decade-long property boom and credit explosion to underpin a prolonged period of robust economic growth, Spain is now struggling to find another dynamic sector of the economy to bring about a more sustainable recovery. Despite recent labour market and collective wage-bargaining reforms, the economy requires more substantial productivity and competitiveness gains through the further dismantling of still too rigid labour laws, namely wage awards tied to past inflation, still excessive severance pay for redundancies, and high costs for regulatory compliance. Despite an intense period of consolidation and recapitalisation, the Spanish banking sector continues to face brisk headwinds, notably rising non-performing loans in line with deteriorating economic conditions and higher write-offs of substantial property-related loans as the real-estate downturn continues. Banks could be forced to acquire more real-estate assets with dwindling value from developers unable to service their debt. The rise in the banks’ problematic assets could entail significant credit losses, which could restrict the supply of credit to parts of the economy. Finally, uncertainties caused by the current political and fiscal situation in Greece, compounded by Italy being sucked into the eye of the Eurozone sovereign debt storm, continue to raise the pressure on Spain’s financial stability.
ETA Put to One Side
The issue of domestic terrorism stemming from the Basque separatist group Basque Homeland and Freedom (ETA) has dominated previous elections, but the current concerns over Spain’s economy have pushed this issue to the sidelines. In fact, as reported by the Huffington Post, the issue of terrorism is currently only the 13th biggest concern for Spaniards. Indeed, ETA has not carried out a terrorist act on Spanish soil since August 2009, and in January 2011 the group announced an internationally verifiable ceasefire, followed by a surrender of violence in October. The Spanish government has welcomed the move but demanded the group’s unconditional surrender of arms and permanent dissolution. Still, ETA’s recent announcement could boost the popularity of pro-Basque independence parties, which could win seats in Spain’s national parliament for the first time in 15 years. In particular, the Amaiur coalition could secure up to five parliamentary seats, which would be seen as a breakthrough for the Basque independence movement. The Amaiur group was created only in September this year and consists of the Abertzale Left, Eusko Alkartasuna, and Alternatiba—the latter two were previously part of the banned party Bildu—as well as Aralar, other abertzale (patriot) groups, and independents. The previous pro-Basque independence party, which won representation in the national parliament in 1996, controlled a few seats, but its MPs boycotted the assembly, arguing that “it was a Spanish state institution that they did not recognise”. Still, Amaiur’s parliamentary ride will not be smooth, as the PP is strongly opposed to granting more powers to the regional Basque government.
Main Cast in Spanish Drama
Although the PP’s election manifesto has been criticised in some quarters for being vague and for failing to spell out specific ways in which the party aims to cure the country’s ills, the conservatives seem to be better equipped to tackle the crisis than their socialist counterparts. Zapatero’s PSOE government has carried out sweeping reforms in recent months, but the party was initially criticised for its slow response to the crisis. Once they were introduced, the austerity measures provoked a strongly negative reaction from the public, and some critics deemed them “too little too late”. The PSOE now claims that austerity measures will not solve the country’s fiscal and unemployment problems; rather, the party has promised that if it is returned to power, it will call together communities, labour unions, businesses, and political parties to come up with a pact designed to create jobs. To raise the funds for job creation, the PSOE would keep the wealth tax intact and also introduce a special levy for banks and other financial institutions. The wealth tax was reintroduced in September but is due to remain in place only until the end of 2012. Among other proposals, the PSOE wants to introduce a 10-percentage-point tax increase on alcohol and tobacco products, with the exception of wine and beer. The revenues from this tax would be used to finance public healthcare. The PSOE has also pledged to protect public services, including the health and education sectors.
Perceived as being more business-friendly than its left-leaning counterpart, the PP has pledged to support small and medium-sized enterprises (SMEs) and self-employed individuals, calling them the backbone of the Spanish economy. The party will be more likely to introduce further cost-cutting measures; although, similar to the PSOE, it has stated that any such measures would exclude the healthcare, education, and pension systems. Instead, the conservatives want to concentrate on a “revolution in human resources and structural reforms”. The PP plans to offer tax breaks for job creation and reinvest profits for innovation and reduce bureaucratic red tape. Furthermore, the PP also plans to free up the labour market by simplifying employment contracts and giving preference to wage deals at a company level, rather than broader collective agreements. The party also plans to introduce tough sanctions for public authorities that spend unbudgeted funds, and to close down public bodies “whose work can be done by the administration”. PP’s Rajoy has also proposed temporarily decreasing the value-added tax (VAT) rate on house-buying to boost the property market.
Although the PSOE and PP are perceived as the major players on Spain’s national political scene, other smaller and regional parties will also be competing for national seats and could boost their parliamentary representation by luring undecided voters disillusioned with PSOE and PP policies. The Catalan nationalist party Convergence and Unity (CiU) won 10 seats in the 2008 poll and could see its representation increase to 14 this time around. The CiU is considered a moderate party with a centrist ideology but separatist Catalan policy. The United Left (IU) could also see its national representation increase. The IU is mainly made up of left-leaning socialists and greens, and the party is believed to have benefited from the so-called “indignant” protest movement, which originated in May in the capital, Madrid, and whose ideology that ordinary people suffer the most from the influence of big corporations and the banking sector and corrupt political practices has since inspired other movements worldwide.
Outlook and Implications
Sunday’s poll will see the PSOE punished. The party is aware of this and hence its pre-election campaign has concentrated on limiting the damage rather than winning the contest. In opposition, the party will present itself as a staunch defender of the country’s public services, which—despite the PP’s pledges—are likely to be affected by the austerity measures. This could help the PSOE restore its popularity somewhat in the medium term, especially if the PP’s measures fail to bring the necessary results. As for the PP, the party will have to work hard to convince the markets of the country’s commitment to economic revival, but it will have to tread carefully as an angry public burdened by too much austerity will be less inclined to support the measures, making their implementation difficult. Although Rajoy’s popularity is currently high, the threat of strikes and street protests cannot be ruled out, especially as the “indignant” protesters are determined to continue their movement and the public’s patience in the face of rising joblessness is wearing thin.
A Rajoy victory would calm the markets down for a short time as the PP leader is perceived to be more inclined to carry out the needed austerity measures than his PSOE counterpart. However, Rajoy’s victory in the election would mark only the beginning of a very difficult period. Indeed, with recent events in Italy providing the main point of focus for international investors, Spain has slipped under the radar of late. However, it could be heading for another jolt, with missed fiscal goals for 2011 alongside accelerated falls in employment and house prices condemning the economy to a dire and austerity-riddled 2012. With unemployment likely to hover around a confidence-sapping 21% for most of next year, the immediate outlook remains gloomy.
By Blanka Kolenikova and Raj Badiani
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Foto by Mercedes de Luis
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