Spanish Election Looming As Key Eurozone Risk

With the situation in Greece stabilising, we highlight one of the next big eurozone risks this year, the Spanish general election. We have already been discussing this for some time in our online service, and we believe that the risks associated with the election are not being sufficiently priced in by investors. Our view is as follows:

  1. The move to a four-party political system will present significant uncertainty in the run-up to the election, which must be held by December. Two protest parties, Podemos and Citizens, have come from relative obscurity to becoming major political forces. Both parties are polling at between 15% and 20%, taking crucial votes away from the ruling centre-right People's Party and opposition centre-left Socialists (Spain's two establishment parties). As the election nears, investors will become increasingly concerned that no party will win a majority in the vote.
  2. Spain looks likely to have its first coalition government since its transition to democracy in the late 1970s. Recent opinions polls imply that no party will win a majority, meaning a coalition government will be formed. Potentially destabilising coalition talks could take weeks, and will be difficult. Statements from each party suggest that producing a workable coalition will prove tricky, as many of the parties have ruled out working with each other.
  3. If coalition talks fail, Spain may have minority government. This would be very fragile and unstable, as the ruling party would require support from opposition parties to pass legislation.
  4. Whatever the composition of the next government, it will be more opposed to austerity than the current administration. Fiscal targets will be missed over the coming years. A sharp move to the left amongst Spanish voters, who reject austerity, will not give the next government a mandate to continue with aggressive fiscal consolidation. Any outcome other than a PP (People's Party, the ruling group) majority (which looks unlikely) would lead to greater influence on fiscal policy by centre-left or far-left parties.

Overall, even if the election does produce a stable outcome (e.g. as in the UK, where months of uncertainty was followed by a comfortable Conservative majority in the end), the pre-election uncertainty alone will be sufficient to dent investment and business confidence.