Podemos gears up for next year's Spanish elections with revamped economic plan

Pablo Iglesias with economists Navarro (right) and Torres López (left)  

With the next general election only one year away, Spain's anti-establishment party Podemos last week unveiled a revamped package of economic proposals written for them by Spanish economists Vicenç Navarro and Juan Torres López (in the picture with Podemos leader Pablo Iglesias), and called, 'An economic project for the people'. We went through the 68-page document and pulled out the most interesting bits.

WHAT'S IN THE PLAN?

The euro: a "mouse trap" in need of an overhaul

The document describes the euro in its current form as "a real mouse trap", arguing that "it is materially impossible to pursue policies that satisfy the national interest" within the existing framework. However, as we previously noted on this blog, Podemos stops short of calling for Spain to leave the single currency. Instead, the document says,

"It is fundamental that the Spanish government promotes and achieves as soon as possible strategic agreements with [the governments] of other European countries to change the current conditions of governance of the euro."

So what are the changes Podemos is looking for? The document lists a few:

• "Flexibilisation" of the EU's Stability and Growth Pact (EU fiscal rules) - although no further details are provided as to what this would involve in practice.

• "Change the rules that prevent the ECB from financing governments", while establishing a number of conditions under which this can be done. 

• Amend the ECB's statute to include "full employment" among its policy targets.

• Make the ECB accountable to the European Parliament, which should also be in charge of appointing ECB members.

• "Create mechanisms that guarantee the pooling of debt and the effective supervision of the financial system at the European level".

• Scrap the balanced budget rule from the Spanish Constitution - which is basically tantamount to rejecting the EU's 'fiscal compact' on budgetary discipline.

• Achieve real coordination of economic policies in the Eurozone.

Debt restructuring: a matter of when, not if

The document presents an "orderly restructuring" of Spanish debt as the only real way to revive the country's economy. It reads,

"In Spain as in [the rest of] Europe, there is no way to achieve sufficient [economic] recovery unless debt decreases, and debt cannot decrease unless the recovery materialises. The only way out of this vicious circle is an as orderly as possible restructuring of European and Spanish debt. Therefore, the question is not whether one wishes to implement it or not, but rather in what conditions it will happen, because it is materially inevitable that it is implemented sooner or later." 

Other economic measures 

The document contains a number of other economic measures to be adopted at the national level, some of which could have a significant impact:

• Raise the statutory minimum wage.

• Scrap the labour market reform passed by Mariano Rajoy's centre-right government.

• Legally enshrine a 35-hour working week.

• Bring the legal retirement age back to 65 years - although with some flexibility depending on the nature of the job.

• Increase public spending and challenge "the false idea that in Spain there is an excess of public resources, too many civil servants or public sector employees in the administration, and excessive spending on public goods and services". 

On the revenue side of public finances, Podemos seems to primarily focus its attention on stepping up the fight against tax evasion and increasing wealth taxation - although the document does mention the need to avoid "any type of unnecessary [public] spending", thereby making budget savings.

WHAT'S NOT IN THE PLAN?

Compared to the European election manifesto of Podemos, which we analysed here, there are at least two big changes:

• The idea of a 'basic universal income' for every citizen has been dropped. According to the party's own estimates, the measure would have cost the Spanish government some €145 billion - roughly 14.5% of Spanish GDP. Instead, the new document proposes "emergency plans" to help people at risk of social exclusion.

• The proposal to hold a 'citizens' audit' of Spanish public debt, potentially leading to a selective default, is also no longer there - and has been replaced by the call for debt restructuring.

HOW HAVE THE TWO MAIN TRADITIONAL PARTIES REACTED TO THE PLAN?

The day after Podemos unveiled its new economic plan, Spanish Economy Minister Luis de Guindos was asked about it at a press conference. All he said was, "I don't think anyone wants to go back to the [economic] situation we were in three years ago". 

As regards the Socialist Party, the new leader Pedro Sánchez said, "I'd like [Podemos] to be consistent and not to fall into ideological opportunism", and stressed that Podemos was already "reneging" on some of the proposals included in its European election manifesto (as we noted above). Sánchez also said he's against the 35-hour working week.

OPEN EUROPE'S TAKE

It is very interesting how Podemos has ditched at least two of its most radical economic proposals. With a view to next year's general election, the move is most certainly aimed at winning over undecided/disappointed voters from the centre of the political spectrum, while also preempting criticism from the two mainstream parties - the ruling centre-right Partido Popular and the Socialist Party - that Podemos is telling fairy-tales to the Spanish electorate because it is pursuing unrealistic policies.

For the rest, this revamped economic plan seems to fit perfectly with our description of Podemos as a 'shadow eurosceptic' party: it doesn't openly call for Spain to leave the euro, but many of its proposals are incompatible with Eurozone membership under current terms.

Interestingly, many of the proposals actually involve transferring more power and sovereignty to Europe, even over sensitive fiscal issues. The scrutiny this is put under in Spain will be important. It is also not clear exactly how power would be pooled and managed at the Eurozone level under the proposals of Podemos.

In the meantime, it is undeniable that the extraordinary rise of the party led by Pablo Iglesias has already made an impact on the Spanish political debate. To mention but two examples:

• The Socialist Party has toughened up its anti-austerity rhetoric. The party's new leader, Pedro Sánchez, has himself proposed scrapping the balanced budget rule from the Spanish Constitution - despite voting for it back in 2011.

• Yesterday, for the first time, the deputy leader of Partido Popular María Dolores de Cospedal admitted in a TV interview that her party would "consider" forming an unprecedented grand coalition with the Socialist Party if it failed to win an absolute majority in next year's elections. This may well be a sign of concern that a left-wing coalition between Podemos and the Socialist Party could force Partido Popular out of power.

Everything seems to suggest Spain will be one of the Eurozone countries to watch next year. 

Catalonia's symbolic independence referendum: What it means and why it would be wrong to ignore it

UPDATE (1:00pm) - As promised, here's an update on the results of Catalonia's symbolic independence referendum now that all votes have been counted.

Turnout: 2,305,290 people (around 37% of those eligible to vote)
Votes in favour of independence: 1,861,753 (80.76%)

 *****

ORIGINAL BLOG POST (9:55am)

Catalonia's symbolic independence referendum eventually went ahead yesterday. With 88.4% of votes counted, the Catalan government puts turnout at over two million people. Nearly 1.7 million of them (80.7%) voted in favour of Catalonia's independence from Spain. We will update the blog with the final results as soon as they come in.

This infographic from El País compares yesterday's turnout (far right column) with the 2012 Catalan regional elections and the 2006 (binding) referendum on the amended Statute of Autonomy of Catalonia:

In other words, less than a third (32.8%) of those eligible to vote cast their ballot yesterday. However, this is still quite impressive considering that Catalan voters knew yesterday's vote was purely symbolic. Furthermore, the percentage is calculated on a broader electoral base - since young Catalans aged 16 were allowed to vote in yesterday's referendum, unlike in regional elections where the voting age is 18.

On the other hand, the outcome of yesterday's vote is probably not a great indication of where the majority of Catalans stand on independence. Due to the non-binding nature of the referendum, there is likely to be a significant amount of self-selection bias. Many Catalans who felt strongly about independence thought it was worth queuing at polling stations to cast a non-binding vote and show defiance of the Spanish government, while many of those who would vote against independence in a real referendum, or were undecided, stayed home since they knew the result would have no legal validity. 

This certainly helped push up the pro-independence vote to nearly 81%. As a reference, the four pro-independence parties currently holding seats in the Catalan parliament won a total 2,093,709 votes in the 2012 regional elections. 

Recent opinion polls clearly show that the split is much more even than that. For example, a Metroscopia poll published by El País two weeks ago found that 44% of Catalans would vote for independence in a referendum and 42% would vote against. Interestingly, when offered a third option involving "new and bulletproof exclusive competences" for Catalonia, 46% of respondents said they would choose this option, while 29% would vote for independence and 17% would opt for the status quo.

So where does yesterday's vote leave the debate on Catalan independence?  

Pep Guardiola was one of over 2m Catalans who cast their vote

As we argued in our previous blog posts (see here, here and here), the situation in Catalonia has got to a point where the status quo is looking increasingly untenable. The issue has so far been handled quite poorly by both the Spanish and the Catalan governments, who have failed to engage in any meaningful negotiations.

Unsurprisingly, Spanish Prime Minister Mariano Rajoy has talked down the significance of yesterday's vote and stressed that, if anything, it makes future talks between him and Catalan President Artur Mas more difficult. However, Rajoy's unwillingness to engage in any real discussions with Mas so far makes this position look somewhat strange.

Furthermore, this approach sort of misses the point. The Spanish government continues to use a legal argument (the Spanish Constitution forbids regions from organising binding referenda without the authorisation of Madrid) to address a political problem. In this regard, the fact that the next Spanish general election is due next year is clearly an incentive for Rajoy to show even more inflexibility vis-à-vis Catalan demands.

That said, Madrid and Barcelona can't just keep talking past each other indefinitely. Constitutional reform giving Catalonia (and, why not, other Spanish regions) more powers to set and collect taxes, for instance, would probably go a long way to address Catalan voters' concerns that the wealthy region is paying too much towards the national coffers and getting too little out of it - although it would be simplistic to boil the Catalan question down to money only.

Incidentally, constitutional reform is being openly backed by the new Spanish Socialist leader Pedro Sánchez, the Matteo Renzi of Spain. Going forward, as we already argued no less than two years ago, a reform of the Spanish Constitution envisaging further devolution of powers may well impose itself as the most sensible solution for everyone.

The Podemos Express: What lies behind the extraordinary rise of Spain's new protest party?

The extraordinary rise of Podemos, Spain's eight-month-old protest party, continues. A new Metroscopia poll for El País, released on Sunday, showed that the party would win a Spanish general election, if held today, with 27.7% of votes. The Socialist Party would finish second on 26.2%, followed by Spanish Prime Minister Mariano Rajoy's Partido Popular on 20.2% – less than half the 44.6% the party won in the November 2011 general election.

This is unbelievable stuff, but what lies behind the instant success of Podemos? 

As with all protest parties, there are a number of inter-related, mutually re-reinforcing causes: 

New media: Can establish and multiply protest movements in a heart beat. Italy's Five Star Movement is a well-know example. Podemos, too, has fed off this.

Corruption scandals: There have been a series of pretty big ones in Spain over the past two years (see this blog post we wrote last year, for instance). That said, though, Spanish politics have struggled with flaky politicians for some time, so this in itself doesn't answer the 'Why now?' question. 

Loss of trust in mainstream parties: This is the same story as virtually everywhere in Europe. In the Metroscopia poll we mentioned above, 42% of respondents said they were inclined to vote for Podemos because of "a feeling of disappointment and disillusionment with the other parties". 

"They're all the same": Related to the above, and especially during the post-crisis years, many Spanish voters don't see much difference between Partido Popular and the Socialist Party. Again, though, Spain has been a two-party, 'centripetal' system for quite some time, so why is it that voters turn against mainstream politicians now? 

EU-mandated austerity: This is a big part of the story, which reinforces the above point. Partido Popular and the Socialist Party are broadly seen by the Spanish electorate as implementing the same set of austerity policies. Remember, the first substantial austerity package during the Eurozone crisis in Spain was passed by the Socialist government of José Luis Rodríguez Zapatero in May 2010. 

Podemos: a 'shadow eurosceptic' party

Podemos certainly doesn't describe itself as 'eurosceptic', and it's not 'eurosceptic' in the northern European sense. Both the party and the Spanish public as a whole remain committed to the Euro. According to the European Commission's latest Eurobarometer survey, 56% of Spaniards think the Euro is "a good thing" for their country – up from 53% last year – compared to 34% who think it is "a bad thing".   

But just as with SYRIZA in Greece, a big part of the Podemos package is predicated on opposition to policies which are, in one way or another, driven by Spain's Eurozone membership – most importantly fiscal consolidation and internal devaluation.

In other words, Podemos could be described as a 'shadow eurosceptic' party.

Podemos leader Pablo Iglesias did say in a recent interview:

"The [Spanish] Socialists should acknowledge that they got it wrong with [the] Maastricht [Treaty]. They got it wrong by letting Spain be turned into a colony of northern European countries."  

Per implication, this means envisaging a Euro without the Maastricht criteria. Similarly, some of the main policy proposals of Podemos seem to be outright incompatible with Eurozone membership. For example, the party's flagship proposal is a "basic income for each and every citizen, for the mere fact of being citizens". According to the party's own estimates, the measure would cost the Spanish government €145 billion – roughly 14.5% of Spanish GDP. That would bust every EU budget rule on the books. 

Other proposals, such as more "democratic and parliamentary control" over the ECB, won't happen as long as Germany is around. 

Therefore, to a certain extent, Podemos offers voters a 'false choice': Euro membership with far-left spending policies. Interestingly, the firebrand anti-austerity talk of Podemos is already having a knock-on effect. Under the leadership of Pedro Sánchez, the Socialist Party has also stepped up its anti-austerity rhetoric. We will see if this will have an impact on upcoming opinion polls.

In our 2012 report looking at internal devaluation in the Eurozone periphery, we noted: 

"The history of the Baltic states – and to some extent Ireland – shows that large scale internal devaluation is fully possible in certain circumstances. But, against a backdrop of plummeting real GDP, internal devaluation also produces a politically explosive combination of falling wages and rising unemployment – all leading to a reversal in living standards. This is the Eurozone's great curse: do what's economically necessary but risk massive political and social fallout."

The rise of Podemos shows just how real that risk still is.

No Podemos parar: Spain's six-month-old protest party comes second in new opinion poll

On this blog, we have been tracking Podemos, Spain's six-month-old anti-establishment party, since its very first success in the European Parliament elections in May - when the party came from nowhere to secure five MEPs (see here and here).

The rise of Podemos has continued since. According to a new poll released by Tele Cinco yesterday, the party led by Pablo Iglesias would finish second in a general election with 24.1% of votes - behind Prime Minister Mariano Rajoy's Partido Popular (on 28.3%) but ahead of the Socialist Party (on 23.7%).

Podemos was only officially registered as a political party in March and is already polling as Spain's second most popular party. This is absolutely extraordinary in itself, but this second graph is even more interesting:

Essentially, this poll suggests we may be looking at the following two post-election scenarios:

• A strongly anti-austerity left-wing coalition including the Socialist Party, Podemos and the United Left (53% of votes in total in this specific poll).

• An unusual 'grand coalition' between the centre-right Partido Popular and the Socialist Party, an option which we discussed here.

The new Socialist leader Pedro Sánchez has so far ruled out joining forces with either Partido Popular or Podemos, but the next Spanish general election is still a year away - so things may well change. Opinion polls can certainly be wrong, but as we noted in our previous blog posts, the steady rise of Podemos should not necessarily come as a surprise. There was a gap in the market, so to say. Spain, the country that had given birth to the indignados movement, had no real anti-establishment party.

Now that Podemos has entered stage and is consistently polling well, traditional parties may be forced to engage with its arguments. At the same time, we would expect Podemos to come under greater scrutiny and pressure as Spaniards begin to contemplate its role as an opposition party or even as a member of a governing coalition.

One thing Spain's mainstream political forces should keep in mind is that, as Italy's Five Star Movement showed last year, simply ignoring a protest party and hoping it will go away can often backfire.

Catalan government calls off independence referendum, but it's not the end of the story

UPDATE (10:55am): 

Catalan President Artur Mas has just been speaking to the press. His remarks were broadly in line with the blog analysis we published earlier (see below).

Two key points from the presser:

• The planned independence referendum will not take place on 9 November. However, somewhat confusingly, Mas said "there will be polling stations and ballot papers" available to hold a "preliminary" vote on the same day. In other words, a purely symbolic, informal referendum (as opposed to the formal, non-binding one previously planned). It remains to be seen how this offer will go down with Catalan voters.

• As we expected, the Catalan leader said he is "at the disposal of the other [Catalan] parties" to call early regional elections. However, he suggested that these elections could only be credible as a proxy for a "definitive" referendum if all the pro-independence parties were to run "as a joint list and on a single programme". Therefore, Mas is clearly using the prospect of early elections to put pressure on the Spanish government, while at the same time trying to hedge his CiU party against the risk of being outflanked by the strongly pro-independence ERC (as we explained below) and taking a beating. 

Meanwhile, Spanish Prime Minister Mariano Rajoy has hailed the cancellation of the Catalan referendum as "excellent news" and reiterated that he's open to dialogue with the Catalan government.

ORIGINAL POST (9:15am):  

The Catalan government has called off the non-binding independence referendum planned for 9 November. It was really just a matter of time. Catalan President Artur Mas had repeatedly stressed that he wanted the consulta to be legal, so that the outcome of the independence vote could be recognised as valid in Spain and beyond. However, the Catalan law used by Mas to call the independence referendum has been temporarily suspended by the Spanish Constitutional Court after the Spanish government lodged a legal challenge against it. Hence, going ahead with the referendum would have meant breaching the law - something the Catalan leader wants to avoid.

Clearly, though, this is not the end of the story. Mas will reportedly set out an alternative 'participative process' (proceso participativo) in a press conference this morning - but his new proposal is unlikely to be welcomed by the other pro-independence parties.

As we noted in previous blog posts, the 'Catalan question' seems to have got to a point where the option of going back to business as usual is not on the table anymore. The decision to call off the 9 November referendum may have opened a window of opportunity for the Spanish and the Catalan governments to engage in real talks.

Spanish Prime Minister Mariano Rajoy may be tempted to shut the door and just ignore Catalan demands, especially after Mas has backed down. However, the Catalan leader still has an ace up his sleeve: he can put further pressure on Madrid by threatening to step down and call early regional elections. A snap vote in Catalonia would very likely see a victory for the hardcore pro-independence Catalan Republican Left (ERC).

The party leader, Oriol Junqueras, said of the decision to cancel the independence referendum yesterday:

"We will have to build up a parliamentary majority to issue a declaration of independence and begin the constituent process of the Catalan Republic".

With a Spanish general election due in November 2015, Rajoy would probably want to avoid having to deal with an ERC-led Catalan government and would therefore be more willing to listen. On the other hand, Mas would be taking a huge gamble himself by threatening to call early elections. The Catalan leader fought the 2012 electoral campaign on the pledge of an independence referendum that he has failed to deliver. Hence, his moderate nationalist Convergence and Union (CiU) party would face the risk of harsh punishment by disappointed pro-independence voters.

One thing is certain: the time of political posturing on either side is coming to an end. The sooner the Spanish and the Catalan government agree to sit at the negotiating table, the better.

Scotland votes, Catalonia waits: Will there soon be another independence referendum in Europe?

FC Barcelona supporters waving Scottish flags at Camp Nou

The world is watching Scotland today, and the Catalans will watch closer than most.

Spanish news sites are featuring pictures of FC Barcelona supporters waving Scottish flags during their team's Champions League game yesterday, and it is widely reported that delegations from the Catalan (and Basque) nationalist parties have travelled to Scotland to follow the latest developments on the ground.

This is because the debate around Catalonia's independence referendum is approaching its own moment of truth:

• Catalonia's ruling parties agreed long ago that the independence referendum (carefully described as la consulta, the consultation) would take place on 9 November. However, the Catalan government has yet to officially call such a referendum. 

• The Spanish government maintains the referendum is unconstitutional (and as we explained here, the Spanish Constitution is actually on Prime Minister Mariano Rajoy's side).

• The Catalan government will tomorrow try to get around the legal obstacles by asking the Catalan parliament to adopt a new law on 'non-referendum consultations' (consultas no referendarias). Catalan President Artur Mas is then expected to convene one of these consultations for 9 November. However, the legal status of the result of such a consultation is unclear at the moment.     

• Reports in the Spanish press suggest the Spanish government has everything ready to launch a legal challenge against la consulta at the Spanish Constitutional Court, as soon as it is officially announced.

• If the Spanish Constitutional Court were to strike down the referendum (which is what Rajoy expects), the 'Plan B' of Artur Mas would be to resign and call early regional elections - and then present the election results as a referendum on Catalonia's future. Recent polls suggest the strongly pro-independence Catalan Republican Left (Esquerra Republicana de Catalunya, ERC) would come out as the largest party, albeit short of an absolute majority. For Rajoy, having to deal with ERC instead of Mas would be like jumping out of the frying pan and into the fire.

Are the Scottish and the Catalan cases similar?

There are similarities between Catalonia and Scotland. Both are proud regions with long histories of independence movements, and both have also been embedded in decentralised systems. Also with respect to the consequences of leaving there are similarities, not least the prospect of joining the EU and the difficulties that could potentially arise.

However, there are at least two fundamental differences:

• The Spanish government has never considered accepting the outcome of an independence referendum in Catalonia. On the contrary, it is determined to use all the legal instruments at its disposal to stop the referendum taking place. Spanish Foreign Minister José Manuel García-Margallo has not even ruled out making use of Article 155 of the Spanish Constitution - which gives the central government the power to "adopt the necessary measures" to force a regional government to comply with its constitutional obligations. In practice, despite the planned date for the referendum being less than two months away, the Catalans still don't know whether - and in what form - it will actually happen.

• Constitutional reform and greater devolution of powers to Spanish regions as an alternative to independence has so far not been discussed properly, mainly because the Spanish and Catalan governments have never really engaged in negotiations. 

Will there be a 'contagion effect'?

Pro-independence Catalans would no doubt get a boost in case of a 'Yes' victory in the Scottish referendum, whilst, naturally, Madrid would love to see the 'No' camp win. Irrespective of the outcome in Scotland, the status quo doesn't seem to be an option anymore for Catalonia. Just think of the 500,000 to 1.8 million people, depending on the estimates, who took to the streets last week to celebrate La Diada, Catalonia's National Day.

Sooner rather than later, the Spanish and Catalan governments will need to give up posturing and start talking to each other. At that point, reforming the Spanish Constitution to give regions greater power to set and collect taxes may well appear as a valid alternative. The Scottish episode, whichever way the referendum goes, may ultimately serve to accelerate further devolution in Spain.

Headlines are all for AfD and UKIP, but the biggest shocker for traditional parties may come from Spain...

The surge of anti-EU, anti-euro and protest parties across Europe continues. Germany's anti-euro Alternative für Deutschland (AfD) is making headlines after winning 9.7% of votes in yesterday's regional elections in Saxony and securing its first ever seats in one of the country's regional parliaments.

In the UK, a Survation poll for the Mail on Sunday found that, following the defection of Douglas Carswell from the Conservatives to UKIP last week, UKIP is set to win the ensuing Clacton by-election with 64% of the vote - which would grant Nigel Farage's party its first elected MP.

However, the biggest shocker for mainstream parties seems to be coming from Spain. According to a new Sigma Dos poll for El Mundo, the anti-establishment (but not anti-EU) party Podemos would finish third in a general election with 21.2% of votes - only 1.1% less than the opposition Socialist Party. Being neck-and-neck with one of Spain's two traditional parties is an absolutely extraordinary result for Podemos, given that it was founded in March. The poll puts Spanish Prime Minister Mariano Rajoy's centre-right Partido Popular in the lead on 30.1% - a 14.5% fall from the 44.6% the party scored at the November 2011 general election (click on the picture to enlarge).

 
If you didn't read it at the time, here is a portrait of Podemos and its leader, Pablo Iglesias, that we published in the aftermath of the European Parliament elections in May - when Podemos came from nowhere to win five seats in Strasbourg. We noted:

Call it left-wing, anti-establishment, anti-austerity (but clearly not anti-EU), the rise of Podemos is significant because - similar to what the Five-Star Movement has done in Italy - it can give Spaniards a channel through which they can voice their dissatisfaction with the political establishment (and the current eurozone economic policies), something which has been lacking at the peak of the eurozone crisis.

Indeed, looking at the latest polls, Podemos seems to be following exactly the same trajectory as Beppe Grillo's Five-Star Movement in terms of rocketing (potential) electoral support. And exactly as in Italy, the rise of a strong anti-establishment party may well force the centre-right Partido Popular and the Socialists to consider an unusual (and uncomfortable) 'grand coalition' if none of the two big traditional parties wins a majority in the next general election - due in November 2015.

While the speed of the rise of Podemos is certainly surprising, there has undoubtedly been a huge gap in the market for a protest party in Spain over the past few years - as we noted on this blog at the end of May. Despite sky-high unemployment, a struggling economy, a few political scandals and regional discontent, no party or movement had so far managed to shake the solid support for the two mainstream parties. But since Podemos entered stage, things seems to have changed. With a Catalan independence referendum potentially coming up in November and thoughts turning towards next year's general election, these are certainly interesting times in Spanish politics.

France comes under fire in latest European Commission economic assessment

The European Commission has just released its latest round of country-specific recommendations (the Commission’s advice on how the country can boost economic growth and maintain stable public finances).

As with the broader economic state of the eurozone, the recommendations are a bit of a mixed bag. There are some positive assessments of the peripheral countries, but also warning over continuing problems with high debt levels and high unemployment.

We would argue that there is also still too much complacency on the former and not enough urgency on the latter points. Below, we've picked out some of the more interesting points for the big four countries.

FRANCE
The European Commission’s assessment of the French economy is quite damning, given the context of a supposed economic recovery. The Commission says that the “level of detail of the fiscal consolidation measures is insufficient” to ensure France meets its targets and that the economic forecasts used for 2015 are “slightly optimistic” and the planned savings are “very ambitious”.

The Commission also takes aim at areas of the economy which the Socialist government will not be too pleased with, specifically arguing that “sizeable short-term savings cannot be achieved without” curbing health and pension costs through reforms of both sectors. The report also hits out at French labour costs, warning that they reduce “firms’ profitability”, and its ranking in surveys of business environment which has “deteriorated” not least due to regulation which hampers growth of small business in France, the significant number of protected professions and the high overall tax burden.

Therefore, the European Commission calls for action on all these areas. Ultimately, the report does a decent job of highlighting the on-going flaws in the French economy and the lack of strategy displayed by the French government. While it has taken tentative steps towards reform in some areas others fly under the radar while the government does not yet seem to have fully bought into the reforms it has laid out for the coming years.

GERMANY
The recommendations for Germany feel very familiar with early comments regarding its current account surplus. Specifically the report calls on Germany to:

“Improve conditions that further support domestic demand, inter alia by reducing high taxes and social security contributions, especially for low-wage earners.”

However, there is not an extensive discussion and the report focuses on other areas which include some interesting recommendations such as “more ambitious measures to further stimulate competition in the services sector” (something we have long advocated) and “more efficient public investment in infrastructure, education and research”.

ITALY
The European Commission seems to have doubts over Italy’s latest budget forecasts labelling them "slightly optimistic.” “The achievement of the budgetary targets is not fully supported by sufficiently detailed measures, in particular as of 2015”, the Commission continues. This will certainly revive the domestic debate between Italian Prime Minister Matteo Renzi and his critics, who argue that there is not enough money to cover for the tax cuts for workers and businesses recently announced by the Italian government.

On labour market reform it notes, “Globally, the Italian labour market continues to be marked by segmentation and low participation…Therefore, the limited steps taken so far need to be extended.” Here, the recommendation is to “assess the need for additional action” by the end of the year. Another long-running issue in Italy is services liberalisation. According to the Commission, “There are still a number of bottlenecks to competition (reserved areas of activity, concession/authorisation schemes, etc.) in professional services, insurance, fuel distribution, retail and postal services” – and these need to be removed.

Interestingly, the European Commission also notes that “one of the key levers to improve the implementation performance [of Italy]…lies in enhanced coordination and a more efficient allocation of competences among the various levels of government”. This reform is already on Renzi’s radar. Still, we’re not sure how well this specific ‘suggestion’ will go down in Italy, given that it touches on a politically sensitive issue – the distribution of powers between the central government and the regions, which is laid out in the Italian constitution

SPAIN
The European Commission finds Spain’s budgetary forecasts “broadly plausible for 2014 and subject to downside risks in 2015”. However, “for 2016-2017, the GDP growth rate in the [Spanish government’s] programme seem somewhat optimistic.” Similar to Italy, the European Commission’s recommendation to Spain is to “reinforce the budgetary strategy as of 2014, in particular by fully specifying the underlying measures for the year 2015 and beyond.” 

Although the European Commission acknowledges that Spain’s labour market reforms have gone some way in ensuring greater flexibility, limiting job losses and reducing the number of dismissals challenged in court, “Segmentation remains an important challenge for the Spanish labour market, the number of contract types remain high and the gap between severance costs for fixed-term and indefinite contracts remains among the highest in the EU even after the reform.” Furthermore, “the inadequate labour-market relevance of education and training and the high proportion of unemployed without formal qualifications contribute to the high youth unemployment rate, as well as to long term unemployment.” Therefore, the European Commission recommends that the Spanish government “enhance the effectiveness and targeting of active labour market policies, including hiring subsidies” and “reinforce the coordination between labour market and education and training policies.”

Some variance from country to county but a couple of clear themes can be found here. Much more work needs to be done on labour market reform and improving the business climate. On top of this the forecasts continue to be optimistic. Plenty of work to be done on many fronts then. 

Meet Podemos, the great newcomer of the European elections

The European Parliament elections have dealt a blow to Spain's traditional two-party system. Together, Prime Minister Mariano Rajoy's Partido Popular (PP) and the opposition Socialist Party (PSOE) won 49% of votes. In 2009, their combined score was 80.9%. No wonder Socialist leader Alfredo Pérez Rubalcaba has decided to step down following his party's poor showing.

But the big story coming out of Spanish ballot boxes is the success of Podemos (We Can), a new left-wing, anti-austerity movement that came from nowhere to become Spain's fourth largest party and win five seats in the new European Parliament.

And 'nowhere' really means 'nowhere' in this case. Podemos was officially registered as a political party in March 2014 - which makes its performance extraordinary. Its leader, 35-year-old Pablo Iglesias (see picture), is a Political Science professor but also a bit of a TV star in Spain. Interestingly, his parents called him Pablo so their son could bear the same name as Pablo Iglesias, the founder of the Spanish Socialist Party.

Factoids apart, we have been flicking through Podemos's European elections manifesto. The following bits give a good feel for what Podemos stands for in a number of policy areas:

• "Citizens' audit of public and private debt to find out what parts of it can be considered as illegitimate...and declare that those won't be paid back."

• "Creation of democratic and parliamentary control mechanisms for the European Central Bank...Creation of a European public credit rating agency."

• "Regain public control over strategic sectors of the economy: telecommunications, energy, food, transport, health, pharmaceutical and education."

• "Budgetary support for and increased development of public R&D centres, in order to favour the return of Spanish researchers and scientists from abroad."

• "Right to a basic income for each and every citizen, for the mere fact of being citizens" - which sounds a lot like the 'citizenship wage' advocated by the Five-Star Movement in Italy.

• "A moratorium on mortgage arrears for the first houses of families with difficulties in paying their loans back."

• "Increase the EU's social budget, and establish a levy on capital movements within its boundaries" - which basically means saying adiós to free movement of capital. Podemos also calls for a "bigger levy" on movements of capital from the EU to third countries.

• "Establishment of trade agreements among small producers in Southern European countries. Development of specific cooperation mechanisms among Southern European countries." On the other hand, Podemos wants to "abandon" negotiations over the EU-US free trade agreement (TTIP), and calls for a "substantial revision" of the existing EU-Latin America free trade deals.

• "A derogation from the Lisbon Treaty so that public services are exempted from the competition principle." 

• "Stop the use of Memoranda of Understanding" - which set out the conditions attached to EU-IMF bailout loans to struggling eurozone countries.

Call it left-wing, anti-establishment, anti-austerity (but clearly not anti-EU), the rise of Podemos is significant because - similar to what the Five-Star Movement has done in Italy - it can give Spaniards a channel through which they can voice their dissatisfaction with the political establishment (and the current eurozone economic policies), something which has been lacking at the peak of the eurozone crisis.

In an interview with today's El Mundo, Pablo Iglesias has refused to reveal whether he and his movement will stand in next year's Spanish general election. For now, though, it seems Beppe Grillo may just have found someone to work with in the new European Parliament.

What's the best place to publish an ECB letter setting out your country's economic policies?

Former Spanish Socialist Prime Minister José Luis Rodríguez Zapatero has upset quite a few people after he included the letter he received from the ECB and the Bank of Spain in August 2011 in his recently published memoirs. Though bits and pieces of the letter had already been disclosed, the full content was never really made public. In a radio interview today, Zapatero has justified his decision to keep the content of the message secret at the time because at least part of it "would have put stability at risk".

Courtesy of El País, we have had a look at the letter – and we thought it was worth translating a few key points:

• The first priority identified by the ECB and the Bank of Spain is labour market reform. The letter reads, “We deem it necessary to adopt additional measures that improve the functioning of the labour market […] We are enormously concerned about the fact that the [Spanish] government has not adopted any measure to abolish inflation-indexing clauses. Such clauses are not an appropriate element for the labour markets in a monetary union, as they represent a structural obstacle to the adjustment of labour costs.” 

• The letter goes on, “The government should also adopt exceptional measures to promote wage moderation in the private sector [...] We suggest revising other labour market regulations shortly, with a view at speeding up the re-integration of unemployed people in the labour market [...] We see important advantages in the adoption of a new exceptional work contract that is applied for a limited period of time, and where compensation for dismissal is very low.” 

• The second priority is the adoption of “bold measures to ensure the sustainability of public finances. The government should prove in a clear manner, by action, its unconditional commitment to the achievement of its fiscal policy targets, irrespective of the economic situation. To this end, we urge the government to announce, by the end of this month, additional measures of structural fiscal consolidation for the remainder of 2011 worth at least more than 0.5% of GDP.” “Simultaneously”, continues the text, “the application of national fiscal norms must be continued in order to ensure [central] control over regional and local budgets (including the authorisation for debt emissions by regional governments).” 

• The third priority is product market reform. According to the letter, the Spanish government should “increase the competitiveness of the energy sector in order for prices to better reflect the cost of energy” and “increase the competitiveness of the services sector, in particular by addressing the regulation of professional services.” 

Therefore, as in the case of Italy (see our blog post from September 2011), the letter was a lot more than just a push to shape up. It was a detailed and quite prescriptive to-do list in return for ECB bond-buying - even boiling down to specific policy measures and the size of fiscal cuts. Furthermore, it did not shy away from touching on politically sensitive issues for Spain – just think of the demand for more central control over regional spending or the abolition of wage indexation.

All this put the ECB squarely in the realm of domestic fiscal policy, somewhere many would agree it should not be. In any case, any country considering applying for an OMT bond-buying programme should consider these points when wondering how prescriptive the conditionality might be.

The closing paragraph of the letter sounds a lot like a warning. It reads, “We are confident that the [Spanish] government is aware of its highest responsibility in the good functioning of the eurozone in the current [economic] conjunction, and that it will adopt in a decisive manner the necessary measures to regain the confidence of the markets in the sustainability of its policies. Such measures […] should greatly benefit not only the Spanish economy, but also the eurozone as a whole.”

Therefore, it is no surprise that many of the letter’s ‘suggestions’ have become government policy – though under the centre-right cabinet led by Mariano Rajoy, who took office at the end of 2011.

Spanish unemployment: A temporary turnaround?

New data on Spanish unemployment are out today. The headline figures look, once again, rather encouraging. The overall unemployment rate has fallen below 26% in the third quarter of the year, and there are 39,500 employed people more than in the previous quarter.

The number of unemployed people has gone down by 72,800 - which is the largest decrease in a third quarter since 2005.

However, a few points are worth making:

• The rise in the number of employed people is due to an increase in self-employed and temporary workers. The number of employees on permanent contracts has actually fallen by 146,300. One can see the glass half-full or half-empty here. This finding can mean that the Spanish labour market is becoming more flexible, or just that the increase in the number of employed people is driven by seasonal workers - especially in the tourism sector.

• Employment is growing in the services sector, but is decreasing in agriculture, industry and construction. Another sign that the improvement in Q3 figures could be tourism-driven. This is not, in itself, a bad thing - given tourism is definitely one of Spain's key resources and it is obvious that the Spanish economy needs to rebalance (away from construction). But it can't quite be seen as a permanent source of growth, since the flow of tourists is per definition dependent on which season of the year you're in.

• As we noted on this blog when the figures for Q2 came out, the number of active Spaniards (those working or actively searching for work) continues to go down - marking a further 33,300 decrease.

• Seasonally adjusted data show that the unemployment rate has actually increased by 0.21% from the previous quarter, and that the level of employment has not stopped going down since Q2 2008. 

Slush fund scandal reignites in Spain, but risk of early elections remains small

UPDATE (16:00): Another interesting fact from the Rajoy-Tusk presser. When a foreign leader comes to Spain on an official visit, the protocol establishes that, at the joint press conference, Spanish journalists and their counterparts from the visitor's country are only allowed two questions each.

Today, it had been agreed that the two questions from the Spanish side would come from El Mundo and the news agency EFE. However, Rajoy unexpectedly gave the floor to a journalist from ABC.

Asked by his colleagues at the end of the presser, the ABC journalist explained that he had received a phone call from his editor dictating him the exact wording of the question he had to put to Rajoy - who then replied by reading a short written statement he had prepared.

UPDATE (15:00): At the joint press conference with his Polish counterpart Donald Tusk, Spanish Prime Minister Mariano Rajoy said, "I'm going to fulfill the mandate I was given by the Spaniards" - a clear indication that he's not planning to resign.

Meanwhile, the first details from Mr Bárcenas's court hearing are emerging. For the first time, he admitted that he was indeed the author of the 'parallel' accounting books published by El País earlier this year (see our blog from last January for further details). Mr Bárcenas reportedly also declared that he made cash payments to Rajoy himself and María Dolores de Cospedal, the Secretary General of Partido Popular, in 2008, 2009 and as recently as March 2010. 

OUR ORIGINAL BLOG POST (11:30)

Remember the slush fund scandal that broke out earlier this year in Spain? Prime Minister Mariano Rajoy and other senior members of the ruling Partido Popular allegedly received illegal cash payments from the party's former treasurer, Luis Bárcenas (in the picture). All these payments were registered in 'parallel' accounting books that were leaked to the Spanish press (see our blog from last January for further details).

After a couple of months of relative calm, the scandal is now reigniting. El Mundo yesterday published several screenshots from Mr Bárcenas's mobile, allegedly showing that Rajoy sent him supportive text messages after the scandal was exposed - the most recent one in March - and asked him to keep calm and deny the existence of the secret accounting books.

Unsurprisingly, the opposition Socialist Party has called for Rajoy to resign "immediately" in light of the latest revelations. Equally unsurprisingly, Rajoy's office denies any wrongdoing and accuses Mr Bárcenas of trying to "deviate attention" from his own judicial problems.

So what happens next? The following points are worth keeping in mind:

• Partido Popular holds an absolute majority in the Spanish parliament, so it looks quite hard for the opposition to force Rajoy out. Indeed, the Spanish Prime Minister could still choose to step down voluntarily or be forced to do so by his own party - but neither option seems to be on the table at the moment;

• Even if Rajoy resigned, he would have the right to indicate his successor - and the King of Spain would have to appoint this person as the new Prime Minister until the end of the current parliamentary term;

• Crucially, the Socialist Party itself has made no mention of early elections so far. They simply want Rajoy to quit and be replaced by someone else from his party. An understandable position, given how badly the Socialist Party is doing in the latest opinion polls.

Therefore, the risk of snap elections remains small for now - although the scandal will inevitably cast a shadow over Rajoy's government, at least until things become clearer.

Today, all eyes in Spain will be on two key events: Mr Bárcenas is due to appear in court, and is expected to provide some more details about the latest events. To add a further twist to the story, his lawyer yesterday said Mr Bárcenas didn't know anything about the publication of his exchange of text messages with Rajoy by El Mundo.

The Spanish Prime Minister is also due to speak in public, in a joint press conference with his Polish counterpart Donald Tusk - which is also going to be interesting. We will keep a close eye on anything coming from Spain throughout the day, so keep following us on Twitter @OpenEurope and @LondonerVince.

Services liberalisation: David Cameron has one more reason to love Spain

We reported in today's press summary that Spain's Prime Minister Mariano Rajoy and opposition leader Alfredo Pérez Rubalcaba have agreed to adopt a common position ahead of the 27-28 June EU summit. The full document - a draft resolution due to be voted on by the Spanish parliament a couple of days before the summit - is now available online.

We found the following paragraph very interesting (the emphasis is ours). The Spanish parliament urges the government to,

"Favour progress on the completion of the internal market through the swift adoption of the pending legislative proposals under the Single Market Act I and II. Particular attention shall also be paid to the full and effective implementation of the Services Directive."

We couldn't agree more. As we stressed in a recent report, the services sector represents a huge untapped source of growth for the EU. A quick reminder of the figures we're talking about:

• Further liberalisation of services by fully implementing the existing Services Directive and implementing a new 'country of origin' principle would result in a permanent boost to EU-wide GDP of up to an extra €294 billion a year;

• If Spain, the UK and the other ten EU countries that signed a 'pro-growth letter' in February 2012 decided to press ahead among themselves and open up their services markets under the so-called 'enhanced cooperation' procedure, this would still drive EU-wide GDP up by some €148 billion a year.

¿Por qué no?

Spain's credibility suffers another blow as Eurostat spots some creative accounting

Two weeks ago, we noted on our blog that the Spanish Tax Agency had delayed around €5bn of tax refunds (due in December 2012) deferring payments to January 2013 instead. This contributed to Spain missing its EU-mandated 2012 deficit target (6.74% of GDP, instead of 6.3% of GDP).

We wondered whether the sudden increase in tax refunds (up by 82.8% in January 2013 compared to previous year) would not lead the European Commission to start asking some question. Sure enough.

The EU's statistics office Eurostat has asked Spain to raise its 2012 deficit to 6.98% arguing that Spain was not correctly accounting for tax refunds. Basically, Eurostat rules say tax refunds have to be counted towards the deficit when they are claimed by taxpayers. Spain only includes them when they are paid out.

This means Spain will have to retroactively revise its deficit figures, going all the way back all to 1995. The difference for 2012 in itself is not huge. And Spain remains unlikely to face sanctions, as the European Commission has now shifted its focus to 'structural' deficit, but not inspiring confidence.

In an official note published yesterday, the Spanish Budget Ministry tried to blame Eurostat for the revision of the deficit figure, saying it was due to a methodological change "demanded by Eurostat over the past few days".

But according to a spokeswoman for EU Tax Commissioner Algirdas Semeta quoted by Expansión,

"Eurostat hasn’t changed its methodology or its rules. It has simply found out that the methodology used by Spain was incorrect."

Eurostat has realised this only now because,

"The [spending] pattern suddenly changed…when Spain moved to January 2013 certain payments due in December 2012." 

Eurostat will publish its final deficit figures on 22 April. Spanish Budget Minister Cristóbal Montoro said this month that, if anything, the 2012 deficit figure of 6.74% of GDP would have been revised downwards. He's been proved wrong once. He can only hope it doesn't happen again.  

Is Spain using accounting tricks?

This is interesting from today's El País. The paper suggests that the Spanish government could have decided to delay various tax refunds due in December 2012 and pay them in January 2013 instead, in order to close the year with a lower deficit figure.

These refunds (around €5 billion in total) would have affected revenue from VAT and income tax, both individual and corporate. Had they been paid out in December, Spain's public deficit at the end of last year would have been around 7.2% of GDP. The target agreed with the European Commission was set at 6.3% of GDP.

El País notes that data from Spain's Agencia Tributaria (tax agency) show that tax refunds in January 2013 were 82.8% higher than in January 2012 (see the table on page 15). This seems to indicate that the Spanish government may have deliberately pushed back the refunds to send a lower 2012 deficit figure to Brussels.

The Spanish Treasury Ministry has denied the reports and given its own version. Basically, due to recent legislative changes, tax refund applications need to be looked through "with greater attention" - and stricter controls take longer. No accounting tricks are being used.

Both versions sound plausible. We would note, though, that even if the Spanish government did dodge including the refunds in last year's deficit, it will certainly have to factor them into this year's deficit. Not exactly a permanent fix, although we have seen very similar one-off measures used in Portugal to meet deficit targets (see, for instance, this post we wrote in November 2011).

With that in mind, we can't help but wonder whether the European Commission will want to know more details about this story, although Olli Rehn & co. seem to be more focused on structural deficit for now.  

Spain's slush fund scandal: This is not going away soon

New interesting details have emerged on the slush fund allegations involving Spanish Prime Minister Mariano Rajoy and his Partido Popular (PP). The party has said that it will take El País to court, because the 'secret' accounting books allegedly held by PP's former treasurer Luis Bárcenas are fake. However, the paper today reports that a couple of senior members of Rajoy's party have admitted that they did receive the payments registered in the books under their names.

A spokesperson for Pío García Escudero, the speaker of the Spanish Senate, said that Escudero actually asked the party for a 5 million pesetas (some €30,000) loan in 2000. He needed the money to repair his house in Madrid, which had been destroyed by an attack from Basque terrorist group ETA. Escudero says he paid the loan back in instalments of 1 million pesetas each, and stresses that he never dealt with Bárcenas personally.

Similarly, people close to Jaume Matas - a former Environment Minister and President of the Balearic Islands region - have confirmed that the party agreed to pay him some sort of 'transition allowance' between when he quit the cabinet and when he became PP's candidate for President of the Balearic Islands. Now, El País notes that Matas stepped down as Environment Minister in March 2003 and was elected as President of the Balearic Islands in May 2003. Perhaps just a coincidence, but the €8,400 payment to Matas is dated 2 April 2003 in the books.

Interestingly, during her press conference yesterday, the Secretary General of PP María Dolores de Cospedal (pictured) was asked about Escudero's admission. She said that specific payment "may be true", but this does not automatically validate the documents, because "some people ask for money in advance, this happens in all companies. It's no extra pay." Not an entirely convincing answer.

One last aspect is worth flagging up. El País stresses that, according to the Spanish law on the financing of political parties in force from 1987 to 2007, donations larger than 10 million pesetas (around €60,000) were forbidden. Therefore, 70% of the donations disclosed by the paper would have been illegal at the time when they were made - potentially quite a strong incentive to try and hide them in 'parallel' accounting books. 

Rajoy has convened a meeting of top members of his party, scheduled for tomorrow - but has yet to announce when (and if) he will speak to the press on this issue. Meanwhile, hundreds of Spaniards protested outside his party's headquarters in Madrid yesterday and called for him and his cabinet to resign immediately. This story is getting increasingly interesting, and is not going away anytime soon.  

An untimely scandal in the making for Rajoy?

Spain's largest daily El País this morning splashed this and other pictures on its webpage (click to enlarge):

The paper claims it has seen hand-written accounting books held by Álvaro Lapuerta and Luis Bárcenas, who served as treasurers of Spanish Prime Minister Mariano Rajoy's Partido Popular (PP) between 1990 and 2009.

These books register donations made to the party by Spanish businesspeople. But most importantly, they seem to show that Rajoy himself and other senior members of PP were handed out sobresueldos (extra pay, bonuses) which were allegedly distributed in envelopes with cash - and therefore completely tax-free. According to the paper, Rajoy received sobresueldos regularly between 1997 and 2008.
 
Such allegations had already emerged earlier this year, and an internal investigation is currently under way. However, the documents published today could be the first concrete evidence of what may, if confirmed, trigger a big scandal in Spanish politics. The names in the books include not just Rajoy, but also, for example, Rodrigo Rato (former Finance Minister, who recently also appeared in court for the Bankia case).

The Secretary General of PP, María Dolores de Cospedal (whose name is also in the secret books) has just held a press conference from the party's headquarters in Madrid's Calle de Génova - perhaps to convey the message that this is a party, not a government issue. The gist of her declarations was: the documents are false, and we will take the necessary legal action to prove it.

Rajoy is not planning to speak to journalists for now. His first public appearance will therefore be on Monday, when a joint presser with Angela Merkel is scheduled. For the moment, a bit of background info could be useful for those who do not follow Spanish politics on a daily basis:

• Luis Bárcenas served as PP treasurer until July 2009.

• It emerged recently that he had up to €22 million deposited in various Swiss accounts. Reports in the Spanish press suggest that the money was moved from those accounts in 2009 (although to where exactly is still unclear), when Bárcenas was involved in another corruption scandal, the so-called Gürtel case.

• Bárcenas himself has now told Spanish prosecutors that he brought almost €11 million of that money back to Spain, through the 'tax amnesty' introduced by Rajoy's government. The opposition Socialist Party has obviously suggested that the amnesty was made precisely to cover Bárcenas and others. 

• When the fact that Bárcenas held bank accounts in Switzerland came in the public domain, sources close to him suggested that he knew enough to put several leading figures of PP into trouble. Interestingly, though, he has moved swiftly to make clear that he does not recognise the secret books published by El País and is considering taking the paper to court.

Very sensitive stuff. And rather untimely, given that Rajoy is about to meet his EU counterparts for key negotiations on the next long-term EU budget. The quicker the investigation, the better for the Spanish government and Spain as a whole.  

Spain back under the spotlight soon?

We haven't blogged on Spain for a bit, but a couple of interesting developments have caught our attention today. Spain will presumably disclose its final deficit figure for 2012 shortly, and everything seems to suggest that Madrid will let its eurozone partners down once again.

Spanish Industry Minister José Manuel Soria (pictured) told a conference this morning that Spain's public deficit for 2012 will be somewhere around 7% of GDP - higher than the target of 6.3% of GDP agreed with the European Commission.

It is also probably not just a coincidence that Soria's words came just before the European Commission put out its latest update on Spain's compliance with the conditions attached to its bank bailout. The content of the report was not entirely new to us (and the readers of our daily press summary), given that a draft was leaked to El País last week. The document reads,  

Fiscal consolidation advanced in the third quarter, but the 2012 deficit target will likely be missed.

Most importantly, it adds,

The 2012 deficit target for the regions of 1.5% of GDP can...still be within reach for the regional level as a whole, but risks are substantial and a number of regions will most likely exceed their target.

You won't hear us say this very often, but well done to the European Commission for making the right prediction. Of course, we (and others) warned of the risk of several Comunidades Autónomas overshooting their deficit target as early as last July.

Anyway, Catalonia (Spain's wealthiest region) has just announced that its deficit at the end of 2012 stood at 2.3% of GDP - with the overall target for Spanish regions fixed at 1.5% of GDP. With the wealthiest region missing its targets, and few others likely to undershoot theirs to pick up the slack, it seems unlikely that the overall target will be met.

A day of bad news for Spanish Prime Minister Mariano Rajoy and his government - not least because Spain had already obtained a relaxation of its deficit target for this year. The risk is that, once the official deficit figures come out, Spain could face fresh pressure from the markets. Before complaining about being "underrepresented" in the EU institutions (see Spanish Economy Minister Luis de Guindos remarks from this morning), the Spanish government should probably do more to regain its credibility vis-à-vis its eurozone partners. Top EU/eurozone jobs would surely follow.

The Catalans have voted: for what exactly?

It does not happen very often, but the final result of yesterday's Catalan elections was almost completely unpredicted by polling. Artur Mas (in the picture) and his centre-right Convergència i Unió (CiU) party were always going to win - and they did so. However, according to most opinion polls, Mas was, at worst, going to consolidate the 62 seats that his party currently holds in the Catalan parliament - but he failed to do so, and by a wide margin.

CiU only secured 50 seats - 18 short of the 68 needed to command an absolute majority. Needless to say, Spanish Prime Minister Mariano Rajoy's party has immediately described the result as a bofetada (a "slap in the face") to Artur Mas - claiming he has failed in his attempt to lead Catalonia towards independence.

So have the Catalans suddenly given up on independence? Not quite. The exploit of the left-wing independentist, anti-austerity and anti-monarchic Esquerra Republicana de Catalunya (ERC, Catalan Republican Left) won them 21 seats - eleven more than in the previous elections. Therefore, Mas could certainly try to push ahead with his plans for a referendum on Catalonia's independence with the support of ERC. 71 votes from a total of 135 seats in the Catalan parliament (without counting the smaller pro-independence parties) is not the "exceptional sovereignist majority" Mas hoped for - but is a majority nonetheless.

This is exactly what the Catalan President noted in his first remarks after the election results were made official yesterday night. He said,

Those who want to abort the [sovereignist] process should take into account that…the sum of political forces in favour of the [Catalans’] right to decide is very much a majority in the parliament.

However, CiU and ERC are hardly natural allies or the makings of a stable and durable coalition. In particular, the two parties clearly do not see eye-to-eye on the need for Catalonia to continue with fiscal consolidation. At this stage, it is difficult to predict how things will evolve within the next few weeks or months. But the following should be kept in mind:

• Under the Spanish Constitution (see here, Article 149.1), any referendum needs to be authorised by the central government. During the electoral campaign, Artur Mas has repeatedly suggested that he would get around the problem by holding such a referendum within an 'alternative' legal framework - i.e. a new Catalan law which would provide for the necessary legal base. However, this would be unlikely to stop the Spanish central government from taking the referendum to the Constitutional Court to invalidate it.

• Great uncertainty remains over how Catalonia would declare its independence in practice - not least because an amicable divorce seems to be out of the question for Rajoy and his cabinet. In any case, it would be wrong to see Catalan independence as a short-term prospect.

• Finally, and most importantly, an independent Catalonia would find itself out of the EU. Many have argued that the EU would have a strong interest in letting Spain's economic powerhouse back in as quickly as possible. A fair point, but under the current EU Treaties, Catalonia's accession would need to be endorsed by all member states - including Spain. This is arguably the biggest stumbling block for Artur Mas's hope of making Catalonia "a normal nation in Europe". Crucially, previous opinion polls have showed that the prospect of continued EU membership would be a big factor in a hypothetical referendum on independence.

Everything else, at this stage, is far from clear - especially given that the new Catalan government is not yet in place, and forming one may not be the easiest of tasks.