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The new Italy? Spain's political crisis has no clear end in sight

Key Points
  • Differing views in the Spanish parliament regarding the independence of certain regions has overshadowed Sanchez's tenure and he called a snap election earlier this year.
  • However, the outcome did not provide him with enough votes for a majority government.
MADRID, SPAIN - JULY 22: Spanish acting Prime Minister Pedro Sanchez speaks during the investiture debate at the Spanish Parliament on July 22, 2019.
Pablo Blazquez Dominguez | Getty Images News | Getty Images

Political infighting in Spain could soon lead to another election, which would be its third in three years, raising questions on whether instability has become the new normal for the southern European nation.

Prime Minister Pedro Sanchez won a snap election in April, but has since struggled to find a working majority that will allow him to govern. Negotiations between Sanchez, leader of the Socialist party, and the leftist Podemos party broke down last week. This was after Sanchez refused to give the Podemos leader Pablo Iglesias a place in his next cabinet. If Sanchez now fails to win enough support in some upcoming confidence votes, fresh elections could take place in the fall.

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Why is Spain so unstable?

"Chronic political instability in Spain is indeed becoming the new normal: frequent elections, lengthy and sometimes unsuccessful negotiations to form viable majorities, and unstable minority governments supported by a diverse array of parties," Federico Santi, senior analyst at the think-tank Eurasia Group, told CNBC via email.

"This is in sharp contrast to the earlier part of the decade, when Spain has a stable, one-party government during the crucial years of the euro zone crisis. In a sense, Spain is becoming more like Italy in this respect," Santi said. Italy has seen more than 60 new governments since 1946, lasting for little more than 12 months on average — the normal political cycle is meant to last five years.

What's causing political uncertainty?

Sanchez first came to power in 2018 after a vote of no confidence in the previous center-right government. Differing views in the Spanish parliament regarding the independence of certain regions has overshadowed his tenure and he called a snap election earlier this year. However, the outcome did not provide him with enough votes for a majority government.

Sanchez faces a confidence vote on Tuesday, but without an agreement with Podemos, analysts are expecting that he will not win that vote.

While this would undoubtedly prolong the political uncertainty, pushing the appointment of a functioning government well into 2020...there is little to suggest that this should meaningfully undermine Spain's economic outlook.
Federico Santi
Senior analyst at Eurasia Group

"Sanchez is unlikely to win the vote (on) Tuesday in which he needs an absolute majority (176 votes) in order to be accepted as the new prime minister. If he loses this vote, another vote will be held on Thursday, in which Sanchez needs a simple majority (more yes than no votes). However, he will need Podemos to vote in favor and Catalan independence parties to abstain, which looks unlikely at this point," Michiel van der Veen, an economist at RaboResearch, told CNBC via email.

"In case Sanchez loses both votes, a countdown period of two months will begin in which there is still time to form a coalition. Failure to do so will trigger new elections," he added.

Could new elections overcome the current impasse?

But most analysts expect that elections will be avoided, mostly because a new vote could dent support for Podemos as well as the Socialist party.

"I still think he will manage to form a minority government, I assume Sanchez and Iglesias will eventually reach a compromise as both won't benefit from new elections, in particular not Iglesias," Anna Rosenberg, head of Europe and the U.K. at advisory firm Signum Global, told CNBC via email.

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Snap elections could change the balance in the Spanish parliament and alter possible coalitions. "It is likely the outcome of new elections would be broadly in line with the April vote. This said, in the very fragmented Spanish parliament, even small shifts in the relative share of each party could have an outsized impact on coalition scenarios, potentially amplified by the effects of Spain's complex electoral system," Santi from Eurasia Group explained.

"While this would undoubtedly prolong the political uncertainty, pushing the appointment of a functioning government well into 2020, based on recent precedents (2015/16) there is little to suggest that this should meaningfully undermine Spain's economic outlook, which remains broadly positive despite the broader slowdown in the euro area," Santi told CNBC.

According to Spain's statistics office, the fourth largest euro area economy grew an annualized 2.4% in the first quarter of the year, above the region's average.