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Friday, July 29, 2011

And they're off! What will the Spanish elections mean for the eurozone and the UK?

News in earlier today, Spanish Prime Minister José Luis Rodríguez Zapatero has finally set a date for national elections - 20 November. Parliament will be dissolved on 26 September. As expected, Zapatero will step down and make way for a new socialist party leader, Alfredo Perez Rubalcaba (pictured on the right), who was selected by his party earlier this year.

Elections were originally planned for early 2012, with an ultimate deadline of March 2012, but in view of the economic crisis and increasing pressure from the public, the press, the opposition, and some members of his own party, Zapatero finally caved in today. Spain’s main opposition party, the Partido Popular (PP) are now tipped for a big win, according to opinion polls and the PP’s recent successes in regional elections. However, Spain’s economic problems indicate that stormy times are ahead.

“I have chosen the date to project economic and political certainty”, Zapatero said. Conveniently for Zapatero, October’s budget will now be delayed until next year, after the elections. The election campaign will now certainly be dominated by the impending budget, and the need for deeper austerity cuts. This debate could be tricky for the PP, who will have to strike a balance in the election campaign between identifying in detail the cuts it envisions, and not scaring the electorates back into the arms of the Socialists. And with an eye on the Conservatives' record in last year's election campaign in the UK, the PP will want to avoid leaving any sort of impression that it's flip-flopping over cuts. What's clear is that whichever party ends up at the helm will have to make tough decisions to navigate Spain through the eurozone crisis’ Bermuda triangle.

El Pais also notes cynically that the date of the election happens to fall on the anniversary of the death of Spain’s notorious right-wing dictator Franco. The left-wing government was quick to dismiss the ‘coincidence’ saying it’s a date “like any other”.

A few questions:

What will this mean for the eurozone crisis? Well, the timing of the elections may not buy Spain any favours with financial markets. The uncertainty that comes with any election is far from ideal given the already rising borrowing costs. In addition, the election will put a complete pause on the economic reform and austerity programmes. It's also unclear whether the expanded EFSF will get ratified by the Spanish Parliament before the election - something which the French and German governments, not to mention investors, are keen to see done asap. If Spain misses any important targets over the next few months due to the elections, be sure that the markets will push borrowing costs even higher.

How will a PP-led government differ from a Socialist one? At a recent event of ours, the PP's Secretary of Economy and Employment Álvaro Nadal set out his priorities for the coming years noting that the PP will go much further on labour market reforms than its predecessor, particularly with changes to the collective bargaining system, in addition to more privatisations and stricter budget conditions for regions. In terms of restructuring the Cajas (the regional saving banks), it looks as if PP will continue where Zapatero left off, since the reforms were very much based on a cross-party deal in the first place. Nadal suggested that the mandate given to the PP in the recent regional elections and polls shows that the people are ready and willing to accept these reforms. Once past the uncertainty of the elections, a Spanish reform-minded government, with a strong mandate from the electorate, can only be good news for the eurozone.

Interestingly, Nadal said that a PP run government would probably not support Eurobonds - which is becoming increasingly fashionable as a "solution" to the eurozone crisis. Nadal said,"For [Spain] it would be suicidal. The current eurobonds are very ill-designed. We need a method to encourage fiscal discipline but they are not it". Nadal concluded by reiterating a stance taken by Mervyn King, Governor of the Bank of England, saying, “We have been treating this as a liquidity problem when actually it is a solvency one”.

How will social discontent in Spain impact on the elections? Intertwined with its economic problems, Spain is also suffering from serious social discontent at the moment. The so-called ‘indignados’ (indignant protesters) will pose a serious challenge to both parties during the election campaign, but probably hurt the incumbent government the most. Support for the indignados is high and growing, not really a surprise in a country with unemployment rates of 21% (climbing to 45% youth unemployment). Last weekend saw crowds of 35,000 march through Madrid, more are on the way.

What will this mean for the UK? In fact, a PP victory is Spain could provide the Coalition with a potential centre-right ally in Europe at a time when both Germany and France could see centre-left governments take over within the next two years. And there's scope for deals to be struck between the Coalition and a PP-led Spanish government, including on some crucial economic issues such as services liberalisation, the EU better regulation agenda, bank recapitalisation, and potentially also on external trade. (However, other areas will be trickier, including the EU budget where any Spanish government and any UK government are poles apart).

What's clear is that a successful Spanish economy is absolutely vital for the health of the eurzone and the European economy. A vibrant Spain would do a lot to get the eurozone back on track.


Anonymous said...

Sooner or later Greece will default and either have to leave the Euro as is, or continue under a new set of rules. Square pegs never will fit in round holes and relative to Germany and France, Greece is surely a square peg.

Rollo said...

It is going to be a nasty operation, cutting out the Euro from Spain. Like removing an otherwise lethal tumour, it's going to hurt. But like the same tumour, the sooner it's removed, the better the chances of recovery. Quick ! before it's too late.