Spain Election May Mean More Austerity
Spanish Opposition Popular Party Leader Mariano Rajoy
Denis Doyle/Bloomberg
Mariano Rajoy, leader of Spain's opposition Popular Party.
Mariano Rajoy, leader of Spain's opposition Popular Party. Photographer: Denis Doyle/Bloomberg
Spain’s opposition People’s Party pledged to restore investor trust in the euro area’s fourth- biggest economy by imposing more spending cuts if it wins early elections in November.
With Europe’s debt crisis lapping at Spanish shores, the People’s Party led by Mariano Rajoy, 56, is set to campaign on the extra steps it says are needed to kick-start growth and slash unemployment of more than 20 percent. The PP is holding out the prospect of more austerity after the Nov. 20 election as it bids to repeat the trouncing it gave Prime Minister Jose Luis Rodriguez Zapatero’s Socialist Party at local polls in May.
“Achieving Spain’s fiscal consolidation will require a huge effort of coordination between Spain’s regions and profound economic reforms which have hardly yet been started,” Alvaro Nadal, a spokesman on the economy for the PP group in congress in Madrid, said by phone. “Post-electoral periods are a good time to implement deep changes.”
Spain’s Socialists have lost support after seven years in power as Zapatero’s minority government pursues the most drastic budget cuts in three decades. Faced with soaring costs to service debt as investors pushed up bond yields, Zapatero bowed to public pressure last week and brought forward the election from March. He has already said he won’t seek a third term.
Latest Polls
Rajoy’s People’s Party would take 44.8 percent of the vote compared with 30.8 percent for the Socialists, El Pais reported yesterday, citing a poll of 1,203 people carried out from July 27 to July 28. The margin of error was 2.9 percent
“I think the PP can win and that it’ll have a positive impact on markets and the economy because it is better prepared,” said Jaime Alvarez, finance professor at Madrid’s Complutense University. “It would be the best for Spain’s image.”
Spanish 10-year bonds rose today for the first time in four days, sending yields down 10 basis points to 5.98 percent. The additional yield investors demand to hold the securities instead of similar-maturity German bunds fell 15 basis points to 339 basis points.
Bonds fell on July 29 for a third day after Moody’s Investors Service said it may downgrade Spain’s credit rating. Zapatero announced the election hours later in a bid “to project political and economic certainty for the next few months.” The International Monetary Fund said the same day that Spain remains in “the danger zone.”
Three-Year Slump
As the country’s borrowing costs have surged, Zapatero, 50, ditched pledges for more social spending and replaced them with public-sector wage cuts and a pensions freeze. Investors questioned his ability to rein in the budget deficit, the euro area’s third-largest after Ireland and Greece, and steer the country out of a three-year slump that has sent youth unemployment soaring to 44 percent.
Spain’s biggest companies were instrumental in Zapatero’s decision to call early elections, El Mundo reported yesterday, citing people at the country’s main business group it didn’t identify.
Francisco Gonzalez, chairman of Banco Bilbao Vizcaya Argentaria SA, Spain’s second-biggest bank, said in a July 29 statement that Zapatero had taken the “right decision” in calling early elections. The Nov. 20 date for the elections coincides with the anniversary of the death of the Spanish dictator Francisco Franco in 1975.
‘Massive Overspending’
The current government shied away from sorting out decision sharing between regions and the central government, Nadal said. “This has led to massive overspending,” as each level conducts its own policies, he said. “There is a lot left to do for the new government.” He cited reform of the labor market and energy sector as well as an overhaul of the regional administrations.
Spain’s regions are crucial to its efforts to rein in the deficit. They have accumulated debt of 121 billion euros ($174 billion) and control more than a third of the nation’s spending, including health, education and half of public employment.
The new government will face the challenge of reinvigorating growth in Spain, where unemployment has been stuck above 20 percent for the last three quarters, the highest in Europe. The economy faces tough times before the election, Alfredo Perez Rubalcaba, 60, who will lead the Socialists into the vote, told Radio Nacional de Espana yesterday.
‘Difficult’ Times
“Elections don’t change the economic situation,” he said. “There are still difficult times ahead, but we’re seeing some light at the end of the tunnel.”
The PP’s campaign will focus on unemployment, Esteban Gonzalez Pons, the party’s vice-secretary for communication, said in a televised news conference today. “In an election, you choose between change and continuity and with 5 million unemployed it’s impossible that the Spanish will bet on continuity,” said Pons.
While polls suggest a victory for the PP, the party’s margin of maneuver will depend on whether it can get a majority in parliament, said Luis Garicano, a professor at the London School of Economics. Rubalcaba may prove a tough opponent because of his success against Spain’s regional terrorist group ETA and his high personal approval ratings, he said.
Rubalcaba has sought to woo voters hit by the country’s economic woes, proposing to tax the wealthiest and make banks hire young Spaniards.
‘Fair and Achievable’
It’s “reasonable, fair and achievable” to set up a new tax for banks in order to create jobs for young people, Rubalcaba told RNE.
Whatever the election outcome, any new government may struggle to drive through economic reforms and Rajoy’s PP might find it harder to do so than the Socialists under Rubalcaba, said Antonio Fatas, an economics professor at the Paris-based INSEAD business school.
“I don’t expect any big changes in November,” he said. “Reforms are difficult to decide for any party, whether left wing or right wing. It might actually be more difficult for a conservative party to implement reforms, for example of the labor market, because it is less close to the unions.”
To contact the reporter on this story: Angeline Benoit in Madrid at erossthomas@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net
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