Spain has re-emerged from dire economic circumstances and is expected to grow by more than 3 percent this year — but that will not be enough to stop the country's political fragmentation. Support for the two main parties (the conservative Popular Party and the Socialist Party) has declined as new parties have surfaced, causing Spain's traditional two-party system to evolve into a multiparty system in which political alliances are needed to form governments.
Spain will hold general elections before the end of the year, and the result will be a coalition government including one of the two mainstream parties and at least one of the main anti-establishment contenders.
In May, regional and municipal elections offered a preview of what could happen in the general elections. Left-wing Podemos helped the Socialist Party form governments in several regions and municipalities, and the centrist Ciudadanos sided with the conservative Popular Party in some districts and with the Socialists in others. The most likely outcome of the general elections will be either a center-right alliance between the Popular Party and Ciudadanos, or a center-left alliance between the Socialist Party and Podemos.
Regardless of what government is formed, the new administration in Madrid will be forced to lower taxes and increase spending. After May's elections, center-left forces ruled most Spanish autonomous communities. They will advocate for softer deficit targets for the regions. At the national level, the incumbent conservative government announced a reduction of the income tax, promised more tax cuts if re-elected and increased financing for the autonomous regions. A progressive government would probably go further because both the Socialist Party and Podemos criticize the austerity measures introduced by the administration of Prime Minister Mariano Rajoy.
Spain's initial economic growth will give the central government some room to relax the pace of spending cuts, but since Spain's recovery is still fragile, markets could react negatively if Madrid is seen to be abandoning the path of reform. With high levels of public debt and dangerously high levels of private debt, Spain is not completely out of the woods.
