Rajoy Seeks Free Hand on Cuts in Regional Vote as Crisis Deepens

Spain’s most populous region votes in an election that may give Prime Minister Mariano Rajoy free rein to enact his deficit-cutting policies and tackle a surge in the nation’s borrowing costs.

Andalusia, the last region under one-party Socialist control, votes today as surveys show Rajoy’s People’s Party is the favorite to win the southern state for the first time in three decades. Results are due shortly after polls close at 8 p.m. Asturias, the fourth-smallest region, also votes.

Victory in Andalusia would leave the PP in control of regions that account for about 70 percent of the Spanish economy, while bolstering Rajoy’s mandate to reorder public finances. Rajoy, who faces his first general strike on March 29, is struggling to convince investors he can reduce the deficit amid a recession, prompting a surge in Spanish borrowing costs last week to the highest in two months.

“Andalusia is a region that has been in the Socialists’ power forever and winning there will be a strong sign the whole country now supports the government of the People’s Party,” said Antonio Fatas, an economics professor at the Paris-based INSEAD business school.

Opinion polls by El Pais and ABC newspapers predicted an outright majority on March 18, while a survey by El Mundo indicated it will be the most-voted party while falling short of a majority. Andalusia, with the highest unemployment rate in the country and the second-lowest output per capita, has been controlled by the Socialists since Spain’s return to democracy in 1978.

General Strike Scheduled

If he does win today’s vote, Rajoy won’t have long to savor his success. The government faces its first general strike on March 29 as unions protest changes to labor laws that make it cheaper to fire workers and cut wages. Three months after coming to power, he is due to present the 2012 budget on March 30, which is designed to cut the deficit to 5.3 percent of gross domestic product this year from 8.5 percent in 2011.

The PP, in power since December, is trying to rein in debt while the economy suffers its second recession since 2009 and unemployment exceeds 23 percent. Doubts about the government’s ability to do so pushed Spain’s 10-year benchmark bond yield to as high as 5.54 percent on March 23, the most in two months, as Spain became the focus of Europe’s debt crisis.

“Going forward, the picture will remain bleak,” Ricardo Santos, an economist at BNP Paribas SA in London, said in a note. “Only Greece and Portugal will post more negative economic performances” this year.

Regional Spending

Andalusia, which has an economy about the size of Ireland’s, has obstructed efforts to curb the nation’s debt load. It voted against the 1.5 percent budget goal for the states this year in a meeting of regional finance chiefs and its deficit last year was more than twice the target of 1.3 percent. In all, the states had a deficit of 2.94 percent, compared with 3.22 percent in Andalusia.

Regions control about 36 percent of public spending, including schools and hospitals, and accounted for most of Spain’s deficit slippage last year. They spend more than a third of their budget on health, which Moody’s Investors Service says will probably need to be trimmed for Spain to meet its budget commitments to the European Union.

Winning Andalusia would make it easier to bring party discipline to bear on regions’ budget decisions, said Antonio Barroso, an analyst at the Eurasia Group in London and a former Spanish government pollster.

“This political alignment at the different levels of government gives regional politicians a powerful motivation to stick to the rules as the party’s structure is highly centralized and the party elite retains considerable power over regional leaders,” he said.

If the Socialists, routed in national elections on Nov. 20, lose Andalusia, they will be left with just one state, the Basque Country, which they run in a coalition with the PP. Two small regions, Navarre and the Canary Islands are led by regional parties. Catalonia, which accounts for 20 percent of Spain’s economy, is governed by Convergencia i Unio, a pro- business group that received PP backing for its regional budget this year and often votes with the PP on economic issues.

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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