Politics

Spain faces uncertain future as a historic coalition is set to take power

Key Points
  • Pedro Sanchez's agreement with Unidas-Podemos received 166 out of 350 votes in the Spanish Parliament on Sunday.
  • The result did not deliver the absolute majority that they needed, but a new vote is scheduled for Tuesday, where a relative majority will be enough to install the new government.
  • According to forecasts from the European Commission, the economy is set to have expanded 1.9% in 2019.
MADRID, SPAIN - JANUARY 04: Spain's interim Prime Minister Pedro Sánchez gestures during his speech during the investiture debate at the Spanish Parliament on January 04, 2020 in Madrid, Spain.
Pablo Blazquez Dominguez

Spain is on track to get a new government Tuesday, but its economic and political future remains uncertain.

Socialist leader Pedro Sanchez is set to receive enough support at a parliamentary vote Tuesday that will put an end to almost one year of political uncertainty. Sanchez won a snap election in April of 2019 but struggled to form a government led by his Spanish Socialist Workers' Party (PSOE). As a result, another snap vote took place in November, which is now culminating with the first coalition government that Spain has seen in modern times.

"A progressive coalition" – is how Pedro Sanchez described his deal with Unidas Podemos, a group of left-leaning parties, whose leader Pablo Iglesias became known in the aftermath of the sovereign debt crisis for his opposition to austerity policies. However, Pedro Sanchez will also be relying on other smaller parties to govern the southern European country.

"The new PSOE-Unidas Podemos government will not probably have a stable parliamentary majority to rely on, which means it will have to negotiate most policy measures on a case-by-case basis with other parties," Antonio Barroso, deputy director at the research firm Teneo, said in a note Friday.

Pedro Sanchez's agreement with Unidas-Podemos received 166 out of 350 votes in the Spanish Parliament on Sunday. The result did not deliver the absolute majority that they needed, but a new vote is scheduled for Tuesday, where a relative majority will be enough to install the new government.

Nonetheless, Florian Hense, economist at Berenberg bank, told CNBC Monday that it is "not very likely" the new government will last until the end of the mandate.

"It is a coalition government, which is not very common in Spain, it lacks an outright majority, and whose likely simple majority relies on the abstention, of among many other regional parties, the big separatist ERC (a Catalan separatist party)," Hense told CNBC via email.

Fiscal consolidation will slow or slightly reverse, only modestly supporting domestic demand.
Federico Santi
senior analyst at Eurasia Group

In exchange of for the ERC's support, Sanchez promised to agree on a roadmap to discuss the future of Catalonia. The region, which has a strong separatist movement, has been a contentious point in Spanish politics for many years, but it has escalated with the imprisonment and sentencing of Catalan separatist politicians to between nine and 13 years in 2019.

"Negotiations between the central and Catalan regional government are unlikely to produce a lasting compromise, but will probably extend for much of 2020 or beyond, giving ERC a reason to remain engaged," Federico Santi, senior analyst at the research firm Eurasia Group said Friday.

Florian Hense at Berenberg added that "the Catalonian conflict can easily flare up at any point, and therefore the possibility for the ERC to torpedo the PSOE-Podemos coalition in Madrid."

Fiscal consolation to slow down

Under their government plans, the Socialist party and Unidas-Podemos intend to increase income tax for high earners, reduce corporate tax for small and medium businesses, raise the minimum wage and to repeal some of the labor market reforms implemented by the pro-business party Partido Popular in 2012.

"Fiscal consolidation will slow or slightly reverse, only modestly supporting domestic demand," Santi from Eurasia Group also said, adding that "economic reforms will be limited and some crisis-era reforms will be partially rolled back."

Spain grew at a rate of 0.4% in the third quarter of 2019 from the previous three-month period. According to forecasts from the European Commission, the economy is set to have expanded 1.9% in 2019.

"For the time being, Spain could cope with a weak left-left coalition and continue to outshine the Eurozone average. But if the coalition were to push through measures of the sort of the 22%+ minimum wage rise, the toll on the economy would become gradually more visible," Hense added.

Pedro Sanchez updated Spain's minimum wage by 22% from 2018 to 2019.

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