The Road Ahead For Don Mariano

Yesterday's general elections in Spain saw the centre-right Partido Popular win a landslide victory and secure an absolute majority in both houses of the Spanish parliament (with 186 out of 350 MPs and 130 out of 208 Senators). The win was widely expected, although not even the most recent opinion polls had foreseen such a bad performance by the outgoing Socialist Party, which, in the lower house, fell at least 5-10 seats short of expectations.

Despite the wave of protests against Spain's political establishment staged by the indignados movement, the turnout remained fairly high (71.69%, down from 75.32% in 2008), although the number of spoiled ballots doubled, from 0.64% to 1.29%.

Unfortunately for Spain, which is facing record borrowing costs at near unsustainable levels, the government will not take office until just before Christmas due to a specific timeline laid out in the Spanish constitution. Nonetheless, speculation has already kicked off about the names of the people who will feature in the cabinet led by the inscrutable Partido Popular leader, 56-year-old Mariano Rajoy (see picture). In particular, two names are floating around in the Spanish press for the key post of Economy Minister: Cristóbal Montoro (a politician, who already served under José Maria Aznar) and José Manuel González Páramo (more of a bureaucrat, who currently holds a seat on the ECB's Executive Board).

As with Italy's new government, the markets' response to the outcome of yesterday's elections in Spain has been lukewarm, to say the least. This is presumably because, at the moment, it's frankly quite difficult to see major differences between what the Socialist government did during its last few months in office and what Partido Popular pledged to do during the electoral campaign. After all, Spain's two major parties looked to be playing a similar tune on austerity when they agreed to introduce a debt brake in the Spanish constitution earlier this year.

However, it may well be that Spaniards will start to hear the word recortes (cuts) more frequently. Rajoy put it quite bluntly in a long interview with El País last week, when he said,

"My first priority is to safeguard the purchasing power of pensions. Starting from this premise, there are many other [budget] items. In our electoral manifesto we envisage a review of all budget items. Starting from there, we will have to make cuts in all of them...We will have to cut wherever we can."

In the same interview, Rajoy also insisted that, unlike his Socialist rival, Alfredo Pérez Rubalcaba, he was not planning to ask the EU to push back the deadlines to meet Spain's deficit reduction targets, as such a request "would convey the wrong message in the current circumstances."

Quite controversially, Rajoy has also hinted at cuts in unemployment benefits, adding,

"I think that unemployment benefits will decrease, not because people will stop getting them, but because there will be less people entitled to get them."

But this heavily austerity-oriented programme leaves at least three big (if not unrelated) questions unanswered. First: how will Rajoy return Spain to higher levels of economic growth? Second: what will the new Rajoy-led government do to make Spain regain competitiveness within the eurozone? And third: what is Rajoy exactly planning to do to tackle Spain's mind-boggling unemployment levels? For the moment, the ideas outlined on Partido Popular's website all sound a bit too vague, something we expect the markets have also picked up on.

As regards Spain's role in Europe, Rajoy yesterday repeated to the cheering crowd in the Calle de Génova (Partido Popular's headquarters in Madrid) that he wanted Spain "to be at the front of Europe, which is where it has to be." An editorial in today's Le Figaro was already foretasting a new Franco-Spanish axis, noting,

"Madrid's support will be precious in the dialogue, sometimes vigorous, with Berlin...If [French President] Nicolas Sarkozy listens to Mariano Rajoy's expectations not to be marginalised in the new Europe under construction, he can find a precious new ally in him, both in Europe and in the Mediterranean."

However, it looks like Rajoy doesn't really share Sarkozy's vision of a multi-speed Europe. In the same interview we mentioned before, Rajoy said,

“I’m radically against the existence of two or three speeds [in Europe], because this would mean that certain countries would finance themselves very well and be much more competitive, while certain others would lag far behind. It would be bad for everyone."

The truth is that Rajoy has always felt greater sympathy for David Cameron and his economic policies. And in fact, a Downing Street spokesman has today confirmed that, when Cameron called Rajoy for the ritual congratulations, the Spanish Prime Minister in pectore told him that he was "willing to establish a close partnership" with his British counterpart. As we already argued here, this is definitely good news, not least because Rajoy would be a new ally for the UK on the centre-right in Europe, at a time when it looks increasingly likely that both France and Germany could be run by centre-left leaders after the next elections in those two countries, scheduled for 2012 and 2013 respectively. Spain's support could be particularly helpful for pushing through a more liberal services directive, for example.

Rajoy will very quickly also face some tough questions on the eurozone crisis, not least: Is he in favour or against Eurobonds? What does he think of the ECB acting as the eurozone's lender of last resort?

What seems most certain, for the time being, is that Rajoy will face significant external pressure over the next few weeks/months with France, Germany, the ECB and the Commission pushing for clearer answers on what his government is planning to do to drag Spain out of the crisis. No doubt that it's now time for Rajoy & co. to put some flesh on the bones of the broad declarations of intents which sufficed during a pretty uneventful electoral campaign.

The moment is approaching when Don Mariano will have to drop his peculiar Galician ambiguity and show his hand to his European counterparts.