On June 1st, as Mariano Rajoy entered the Congress of Deputies later than his political opponents, he was greeted by a standing ovation from his fellow colleagues. It was a sign of loyalty, support and no doubt solidarity from the members of the party towards their soon-to-be former Prime Minister and leader. Rajoy looked calm as he walked into the room, but with the confidence of someone that knows he is part of a historic moment.
PSOE Takes Control
He became the first Spanish PM to be ousted due to a vote of no confidence. His party and most of his tenure as head of the government have been plagued by corruption scandals concerning high-ranking party members. Two weeks ago, a court found these members guilty and fined the party €246,000. However, Mr Rajoy has not been found guilty of anything and the party has said it will appeal the verdict. Nevertheless, this is nothing new for the Spanish political arena that has seen countless baseless accusations and court verdicts alike for both the Socialist Workers Party (PSOE) and the Partido Popular, historically the two most powerful parties in the country.
Mr Rajoy has never been the most liked of leaders. He does not have the charisma of his opponents, nor their charms. However, what he lacks in showmanship, he more than makes up with his calmness, patience and reassurance. In all effects, he is a Man of State and he showed this during this turbulent time for him and his government. Many advised him to resign, while some urged him to call for snap elections and prevent the leader of PSOE, Pedro Sanchez, from taking his seat at the Palacio de la Moncloa. Others suggested he make some backroom deals to solve the situation. He chose none of the above. The Spanish people had elected him, and thus only they had the power and the right to remove him from office. That is exactly what a statesman does; hold strong against the undemocratic winds that may threaten his duty to serve the People. Mariano Rajoy may be disliked for a myriad of reasons, yet this action is enough to respect him.
Surely, it was not the people’s direct will to remove him as Prime Miniter. However, the citizens’ representatives exercised their right to make decisions and they will answer to their constituents as soon as elections are held. As for the former PM, he will probably continue to remain at the helm of the Partido Popular. There will be a rivalry between Ciudadanos, the centrist party, which leans more to the right with every passing month, and Rajoy’s party. So, a leadership change for the conservative party will be highly damaging, especially since many of its base are already going to Ciudadanos and elections may be called in a few months.
Rajoy Can Still Count on Support
Rajoy will argue that it was not the vote of the people that sent him into opposition. As democratic as the whole process was, it was the political manoeuvring of the PSOE leader and his ability to gather the votes necessary that ousted the conservative Prime Minister. Partido Popular remains the largest party in the Congress of Deputies and holds
an absolute majority in the Senate. Resigning now, as many have suggested, would cause more harm than good.
Economic factors also work in his favour. In May, the number of unemployed people fell to the lowest levels since 2008, at 3.25 million. The economy grew 0.7% in the first quarter of 2017 and 3% at an annualised rate, remaining one of the fastest growing of the Eurozone economies. Nevertheless, Spain’s youth unemployment remains high, at 34%. The manufacturing index PMI has been above 50, the threshold between contraction and expansion, since November of 2013, even though it declined from 54.4 in April to 53.4 in May.
During the government of Mariano Rajoy, the recovery from the crisis was remarkable. The unemployment rate has decreased from near 28% in 2014 to 16.7% in the first three months of 2018. The government deficit was reduced substantially, from a record of 9.6% of GDP when Rajoy came to power in 2011, to 3.1% at the end of 2017. Government spending to GDP has seen a decline from a peak of 48.1% in 2012 to 41% in 2017.
However, as an absolute figure, government spending has been increasing steadily since 2015. This has been due to a higher pressure from populist forces. The reforms undertaken by the centre-right government were tough and caused them to lose the majority they had in Parliament. So, the newly formed minority government in 2016 under Rajoy was forced to increase the government spending and scale back the reforms.
Therefore, these three reasons will be enough for Mr Rajoy to lead a strong opposition against the socialist government and to make a competitive campaign whenever elections are called. Nevertheless, the former PM should have a successor in mind and a Plan B in reserve, in case his party loses the next elections. That would certainly warrant a change in leadership.
Events in the Iberian country are important. Political instability is felt in the economy of a country. Yet, Spain is an open economy; therefore, the waves of this unsteadiness reach other countries. Financial markets, as well, are troubled by the uncertainty that this instability produces, as has been the case recently.
While the whole process that transpired in Spain may have been within democratic boundaries, a shake-up of this type is enough to cause anxiety in the markets. The quantitative easing (QE) program of the European Central Bank that has been the main force behind the recovery of many countries, including Spain, is in its twilight. It will soon end and borrowing costs will increase. Spain will need to refinance a huge amount of debt each year for the next few years. In 2018, €41.2bn of debt will mature. In 2019, the figure is €82.4bn, while in 2020 it is €83.9bn. In the short term, Spain has to finance €300bn euros of debt in total. A minority government, such as the socialist one to be sworn in soon, will likely cave to the demands of the small parties asking for more spending, which will lead to higher deficits.
The new Prime Minister, Pedro Sanchez, has already said he intends to raise taxes, such as the personal income, called the IRPF, to 52%. In addition, he plans to raise the average tax burden for companies by 17.3%, by introducing a minimum rate of 15% on the accounting result of multinationals and a tax on profits diverted to other countries. PSOE wants to add an extra 8% charge to the taxable base for banks to finance part of the social security deficit. Moreover, the left-wing program includes taxes on diesel, which according to Expansion, would make a litre of diesel cost 9.55c more. Lastly, Mr. Sanchez has pledged a minimum complementary income between €600 and €1800 per year for families that earn less than €17,238 yearly.
Markets Getting Jittery as PSOE Propose Reforms
Thus, reading this program, it is clear why markets and investors may not be as welcoming of the new government as Mr Sanchez would like. Raising taxes and at the same time increasing government spending risks derailing all the work that has been done in Spain thus far. It will most likely hurt job creation, while the much-needed labour reform will be put on hold. If the conservative government did not change rigid labour law, it is unlikely that the socialists will. The higher spending is said to be financed by the higher taxes, but as history has proven time and again that never happens. Higher taxes discourage investors, decrease employment and depress consumer spending, and is more likely to lead to a decrease in GDP. However, if there is a lower increase in GDP, dealing with the maturing debt would be more difficult, leading to investors losing faith in Spain.
In the days leading up to the no-confidence vote, the spread between Spanish and German 10 year bond yields increased each day reaching 1.46%, the highest level in almost a year.
The socialist, communist and secessionist forces that back the new government threaten the economic stability of Spain. With Spain being the fourth largest economy of the Eurozone, the latter would most certainly feel the effects of a slowdown in the Iberian country.
Geopolitical instabilities, low inflation and trade worries already threaten the Eurozone from all sides. Therefore, this
uncertainty in Spain caused by a vendetta against a single person, the Prime Minister, is unnecessary and dangerous. The only solution is new elections as soon as possible and a stable conservative government that resumes the reforms that were put on hold in 2016.
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