In Spain, Elections Won't Shield Madrid from Economic and Political Headwinds

7 MINS READMar 27, 2019 | 09:00 GMT
Deputies meet on June 14, 2017, in Madrid's Congress of Deputies.

Deputies meet on June 14, 2017, in Madrid's Congress of Deputies. The country's government lost a vote of no-confidence.

  • The Spanish general election on April 28 could lead to a divided parliament and long coalition talks, highlighting the uncertainty about the country's policy direction and questions over whether its former economic resilience will persist.
  • The next administration in Madrid will also have to deal with unresolved disputes with Catalonia and an uneven economic recovery.
  • The lengthy negotiations to form a government and domestic issues could reduce Spain's influence in EU affairs in a year when the leaders of some of the most important Continental institutions will be appointed.

Spain will hold an early general election on April 28. Prime Minister Pedro Sanchez called the vote after the Spanish parliament rejected his budget proposals for 2019, forcing his minority Socialist government to resign. The elections come at a time of increasing fragmentation and polarization in Spanish politics, creating uncertainty regarding the future of the country's domestic and foreign policy. But no matter who ultimately takes charge, the next administration in Madrid will be forced to cope with political, economic and foreign policy challenges ranging from separatism in Catalonia to an uneven economic recovery.

The Big Picture

Spain has the fourth-largest economy in the eurozone and was among the EU countries most profoundly affected by the international economic crisis of the past decade. Although the Spanish economy is growing again, its political system is more fragmented, governments more fragile and labor market more precarious than before. Moreover, long-simmering separatist sentiment has heated up. No matter who wins the upcoming national election, the next administration in Madrid will have to find a way to deal with these issues.

From Two-Party System to Coalition Governments

For decades, two main forces dominated Spanish politics: the center-left Socialists and the center-right Popular Party. These parties used to govern alone or with some support in parliament from smaller regional political parties; coalitions were rare. This system collapsed within the last decade as Spanish politics fragmented — April's general election will be the third in three and a half years — and new political groups have emerged with significant appeal to voters disenchanted with the two main parties. The newcomers include the centrist Ciudadanos and left-wing Podemos, which probably will be joined in the 2019 general election by the right-wing Vox — which is poised to gain seats in parliament for the first time.

A fragmented parliament means that the election will probably be followed by a long series of negotiations to form a coalition government. Depending on the distribution of seats, Spain might even need to hold another general election before a government can be seated. It took a general election in December 2015 followed by another in June 2016 before former Prime Minister Mariano Rajoy could form a government. Rajoy's minority government was ousted by a no-confidence motion in mid-2018, after which Sanchez became prime minister.

Two coalitions could emerge out of the April vote: a progressive group including the Socialists and Podemos, and a conservative one including the Popular Party, Ciudadanos and Vox. Less likely, but still possible combinations include minority governments that require support from the smaller parties to pass legislation.

Economic Headwinds

The impending elections come amid a general economic slowdown in the eurozone, with Italy already in a recession and Germany facing lower-than-expected economic growth. This is connected to many factors, ranging from trade disputes at the global level to Brexit-related uncertainty. While Spain is currently one of the fastest-growing economies in the eurozone and has proved resilient to political uncertainty, it could pay a higher economic price than before for political deadlock if decisions on crucial reforms are postponed and households and businesses delay investment or spending decisions until a new government is in place.

Slower growth could well mean a rising Spanish deficit. Over the last decade, Spain's deficit dropped dramatically from 10 percent in 2012 to 2.7 percent in 2018. But lower growth this year would probably lead to less government revenue and so less forgiveness for increased government spending. The European Union and financial markets are also likely to force Madrid to keep the deficit under control, something that would prove more difficult for a center-left coalition. Lower economic growth and a rising deficit would also make it harder for Spain to reduce its public debt, which stands at around 100 percent of its gross domestic product.

Unemployment has fallen significantly from its high of 26 percent of those actively seeking employment in 2013, but many of the new jobs are part-time or temporary or come with low pay.

The next Spanish government will also face a labor market with declining unemployment, but frequently at the cost of increasingly unstable forms of employment. Unemployment has fallen significantly from its high of 26 percent of those actively seeking employment in 2013, but many of the new jobs are part-time or temporary or come with low pay. This reduces many households' ability to spend, consume or qualify for credit, which in turn limits Spanish economic growth. And while the percentage of people living on the brink of poverty has fallen since peaking at 29 percent of the population in 2014, it still stands at around 26 percent. By contrast, before the crisis began in 2007, it stood at 23 percent.

The Separatist Challenge

The Spanish government will also face the issue of Catalan separatism. In 2017, the separatist government in Catalonia held an illegal independence referendum and unilaterally declared independence. The Spanish government responded by taking direct control over the Catalan government and some pro-independence leaders were jailed while others fled the country. Catalonia's separatist forces have since been divided, and while the regional government in Barcelona still challenges Madrid every now and then, it has not made any significant moves toward independence.

The ideological composition of the next Spanish government will directly affect relations with Catalonia. Neither a center-left nor a center-right coalition would approve a legally binding independence referendum in Catalonia, which means that the issue will continue to linger. Still, progressive forces assert the need for dialogue with Catalonia, while conservative parties advocate a tougher line. The Popular Party and Ciudadanos have proposed once again taking direct control of the Catalan government. Vox has gone even further, saying that Spain's political system, which is based on autonomous regions, should be scrapped and replaced with a more centralized system. (This would require constitutional reform that would be unlikely to pass, given Spain's political divisions.)

Unrest in Catalonia will contribute to political uncertainty in Spain, which in turn could harm the economy, especially in Catalonia. During the peak of the Catalan crisis in late 2017, hundreds of companies based in the region moved their headquarters to other parts of the country for legal purposes — though this was not necessarily a net economic negative for Spain as a whole. But the tourism sector (a vital part of the Catalan economy) suffered, and companies delayed investment decisions. While the intensity of the conflict between Madrid and Barcelona will differ depending on who controls the national government, Catalonia in no case is likely to become independent.

Diminished Influence at the European Union

Even though Spain is the fourth-largest economy in the eurozone, a decade of economic crisis has somewhat reduced Madrid's influence in European affairs. The general election in April will be followed by elections for the European Parliament in May. After that, new presidents will be appointed for the European Commission, the European Central Bank and the European Council. At this point, no Spanish nationals are thought to be in the running to head any of these influential institutions. Madrid may try to present candidates, but it will probably settle for more modest roles, somewhat reducing its ability to shape the direction of the bloc.

At the same time, Spain's traditional allies in Europe are dealing with issues of their own, further diminishing its influence. France and Italy, which should be Spain's natural partners on EU-related issues, are at odds with each other, lowering the odds of a common front among the three representing the interests of Mediterranean Europe.

Spain has long supported European integration, and this is not likely to change after the election no matter who wins. But long coalition talks and a potentially fragile government could reduce Madrid's clout in the European Union. A coalition government that includes Vox could even lead to tensions between Madrid and Brussels. While Vox does not propose leaving the European Union or the eurozone, it is critical of the bloc's supranational aspects and promotes the idea of the European Union as a club of sovereign nations that cooperate on areas of common interest instead of as a federal superstate. So while the April 28 election will help determine the amount of Spanish influence in the European Union, it will not change the political and economic headwinds the eventual government will face.

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