Why Spain Endures Political Paralysis as Its Economy Powers Ahead

Mariano Rajoy
Spain's acting prime minister, Mariano Rajoy, in Madrid, April 29. Juan Medina/Reuters

Acting Spanish Prime Minister Mariano Rajoy lost Friday a key political confidence vote, a necessary step to try to form a new government after almost eight months of political paralysis in Madrid. This failure may now mean Spain faces a third straight general election in December, potentially on Christmas Day, after inconclusive ballots in June and December 2015.

The fact that Rajoy is still trying to form a coalition government following June's general election reflects the fact that the People's Party (PP) emerged as the largest party, but once again short of an overall majority. The key challenge he faces in building a coalition is that the last two elections have seen the fragmentation of the long-running post-Franco political duopoly of PP and the Spanish Socialist Workers' Party (PSOE) that has dominated the country since the late 1970s. The two 'new' parties that have emerged—the anti-austerity Podemos in coalition with Izquierda Unida (a remnant of the former Spanish Communist Party), and the centrist, business friendly Ciudadanos—may now have broken this two-party system for good.

The combined vote of PP and PSOE, which was around 85 percent of the ballot in the 2008 general election, fell to around 55 percent in June in a low turnout election. Filling this political vacuum—Podemos and Izquierda Unida (collectively known as Unidos Podemos), seen as the sister grouping of the ruling Syriza in Greece, and Ciudadanos—benefited from popular anger over political scandals, and the fall-out from the deepest economic recession in the country for over a generation since 2008, and also the growing political clamor for independence in Catalonia.

Ciudanos (the fourth largest party) is the PP's closest rival, ideologically speaking, and the two parties announced a deal last month. However, they cannot govern alone as the two parties are, collectively, seven seats short of the 176 seats necessary in the lower house for a majority by themselves.

This puts the ball into the second-placed PSOE's court. The party may yet choose to abstain in a future confidence vote that would be enough to enable a PP-led minority government, but so far the PSOE has rejected this possibility, not least as it will be deeply unpopular with many of its supporters, even though it could assert that it is acting responsibly by allowing the largest single party to govern. A deadline to pass a budget for 2017 and present it to Brussels in October will intensify pressure on PSOE to shift position.

The major problem for PSOE's leadership is that Unidos Podemos (which finished third in June) is breathing down its political neck. Pre-election polls in June had even indicated that Unidos Podemos could finish second behind PP, a result that would have spooked financial markets.

Yet, despite the political gridlock gripping the country since last December, the Spanish economy (the fourth largest in the Eurozone behind Germany, France and Italy) is currently proving one of the most dynamic in the continent. The latest GDP data showed that the country grew 3.2 percent over the last year, with the economy now having expanded for 12 consecutive quarters.

As well as strong GDP growth, unemployment has fallen to 20 percent, its lowest level in almost six years, though still the second highest in the Eurozone after Greece, and more than double the Spanish pre-2008 recession rate of around 8.5 percent. The government forecasts that unemployment could fall to 16.6 percent in 2017, a full ten percentage points less than the peak of 27 percent a few years ago. Part of the reason for the better economic news is that Spain has been a beneficiary of ECB policies, with the bank's stimulus-driven purchases of private and public debt keeping interest rates low for Spanish private and public sector.

However, from the vantage point of financial markets, none of the currently conceivable governance options in the present parliament will, going forward, be as attractive as the 2011 election result when the PP won an outright majority of 186 seats. And in the longer-term, continued political uncertainty has the potential to undermine the economic recovery that has been revealed by the latest economic data.

Yesterday's failed ballot will trigger a two-month window to try and form a government that would require Rajoy to win a separate confidence vote. If a government is not formed in that time, parliament will be dissolved again and a third straight election automatically triggered, in December.

Exacerbating the problems Rajoy faces in forming a government and promoting greater political stability in Spain is the growing tension between Madrid and separatists in Catalonia over issues such as linguistic rights and fiscal autonomy. Support for Catalan independence has increased since 2010 when a reform to extend the regional government's powers was struck down by the Spanish Constitutional Court.

In September 2015, pro-independence parties won regional elections with just under 50 percent of the vote. With the wind on their backs, separatists in Catalonia are looking to begin the process of independence from Spain, including the drafting of a new regional constitution.

Whereas the PP has taken a hard-line stance to the separatists since its election victory in 2011, the other parties have talked about the need for reform of the Spanish constitution to try to quell the regional demands for independence. Podemos has previously gone furthest by calling for a referendum on independence, and a new Spanish federation of semi-independent nations.

Taken overall, the Spanish economy is powering ahead, despite Spain's political paralysis. However, in the longer-term, continued political uncertainty has the potential to undermine the economic recovery and a third straight election in coming months is more likely now that Rajoy lost Friday's confidence vote.

Andrew Hammond is an Associate at LSE IDEAS (the Centre for International Affairs, Diplomacy and Strategy) at the London School of Economics.