Spanish election call adds to Eurozone unease

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Spanish election call adds to Eurozone unease

Spanish Prime Minister Pedro Sánchez on Friday called an early general election, the third such ballot in the nation in as many years. However, far from being an exception, the latest governmental uncertainty in the Eurozone’s fourth largest economy comes as there are mounting signs of political stress and stagnating growth in other core EU countries including Germany, France and Italy. 

With the Eurozone celebrating its 20th anniversary this year, the single currency area stands on the brink of yet another downturn. And this even before the possibility next month of a no-deal Brexit that could send economic shockwaves across the continent.     

The Spanish election, to be held on April 28, comes only seven months after Sánchez was sworn in as the nation’s prime minister. And that political instability is mirrored in France, where President Emmanuel Macron remains under severe pressure from the so-called “yellow vest” protests; in Germany, where Chancellor Angela Merkel’s long period in power is now in its twilight; and in Italy, where Prime Minister Giuseppe Conte was forced on Friday to dismiss speculation that reported tension between coalition partners the Five Star Movement and the League could cause it to collapse.  

Moreover, this political angst, alongside the continuing drama of Brexit, appears to be contributing toward flagging European economic growth. On Wednesday, for instance, it was announced that Eurozone factories saw a production slump in December for the second month in a row.

Industrial production was 0.9 percent lower in December than November, the fourth fall in six months, according to the Eurostat statistics agency. And overall, the Eurozone grew by only 0.2 percent in the last three months of 2018.

During that period, Italy fell into recession, in a blow to its populist right-wing government that has promised to rejuvenate growth. And it was announced Thursday that Germany only very narrowly avoided a recession after the nation’s GDP was flat in the October-December quarter, following a contraction from July to September. 

It is amidst these economic woes that the latest Spanish political setback comes, causing deep uncertainty over the nation’s future governance. The ruling Socialist Party (PSOE), which currently leads polls with around 30 percent of support, is nonetheless still widely blamed for the fact that it was also in government around a decade ago when the Spanish economy went into deep recession, and currently has only 84 MPs in the 350-seat legislature. This tally follows the Socialists’ worst national election showing — in 2016 — since Spain transitioned to democracy after the death of dictator Francisco Franco in 1975.

The fragile legislative position of the PSOE, which has headed a minority government since the middle of last year, should be seen in the context of an even bigger story in Spanish politics following the June 2016 election, in which no party emerged with an overall majority.

A dominant narrative of that ballot, the second in the space of six months, was the shattering of the long-running post-Franco political duopoly of the right-of-center People’s Party (PP) and the PSOE that has dominated the country since the late 1970s. Indeed, the combined vote of the PP and PSOE, which comprised around 85 percent of the ballot in the 2008 general election, fell to around 55 percent in 2016. 

Several “new” parties have helped fill the political vacuum, including the far-right nationalist party, Vox, which could secure parliamentary seats for the first time this spring.

 

If political problems were to increase significantly in coming weeks, as pre-election polling begins, this would have the potential to undermine the Spanish economic recovery from the worst recession in decades

Andrew Hammond

Other recently arrived parties include the left-wing, anti-austerity Podemos and Izquierda Unida (collectively known as Unidos Podemos) — seen as the sister grouping of the ruling Syriza in Greece — and the centrist, business-friendly Ciudadano.

The rise of these groups has been fueled by popular anger over political scandals, the fallout from the deepest economic recession in the country for over a generation, and the growing political clamor for independence in Catalonia.

As well as the economic pain and political scandals of recent years, a key backdrop to this spring’s election is the tension between Madrid and separatists in Catalonia over the enduring territorial and political crisis. Separatist tensions reached a spike in 2017 when Catalonia sought to break away from Spain in a referendum. While this dramatically escalated the issue, the backdrop for the event was rising support for Catalan independence since 2010, when a reform to extend the regional government’s powers was struck down by the Spanish Constitutional Court.

With the potential for significant continuing political uncertainty in Spain, financial markets may become increasingly jittery, as the election outcome may not provide even short-term — let alone medium- or long-term — stability. 

If political problems were to increase significantly in coming weeks, as pre-election polling begins, this would have the potential to undermine the Spanish economic recovery from the worst recession in decades, which saw a property crash and unemployment peaking at 27 percent (almost 60 percent for young adults under 24). 

Taken overall, the new Spanish governmental uncertainty is a microcosm of wider political angst within the Eurozone. This instability in its core nations may yet help drive the single currency area into a significant new slump, especially if the shock of a no-deal Brexit adds to the continent's current woes.

  • Andrew Hammond is an associate at LSE IDEAS at the London School of Economics.
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