March 26 (Bloomberg) -- Spain’s ruling People’s Party failed to dislodge the Socialists in Andalusian elections, undermining Prime Minister Mariano Rajoy as he seeks to cut the deficit and tackle a new surge in borrowing costs.
The PP won 50 seats in the 109-strong regional assembly while the Socialists, who have ruled the southern state since 1978, secured 47 seats. The Socialists signaled they aimed to remain in power through a coalition and would likely pair up with the United Left, a traditional ally that won 12 seats.
The unexpected result may weaken Rajoy just as he faces rising pressure from European colleagues to reorder public finances and regain investor confidence. With the election behind him, Rajoy now has to focus on facing down a general strike and presenting the 2012 budget this week, three months after coming to power.
Delaying the spending plan until after the vote in Spain’s most populous region was a gamble that didn’t pay off, Antonio Garcia Pascual, chief southern European economist at Barclays Capital, said by telephone from London today.
“They paid a high price,” Garcia Pascual said. “They got on the wrong side of European partners and the market, so now they have to swallow the pain, deliver a big budget and follow through,” he said.
Doubts about the government’s ability to rein in spending pushed Spain’s 10-year benchmark bond yield as high as 5.54 percent last week, the most in two months. The yield fell to 5.33 percent at 5:30 p.m. in Madrid, compared with 5.37 percent on March 23.
Citing the increase in yields, Italian Prime Minister Mario Monti said during the weekend that Spain risks reigniting the debt crisis. While praising Rajoy’s labor overhaul, he urged the Spanish administration to focus on public finances. Rajoy pledged today to present a “very austere” budget.
Even as the nation continues to operate on last year’s budget, the PP has started to implement 15 billion euros ($20 billion) of spending cuts and tax hikes. Rajoy has made it easier for companies to cut wages and fire staff, prompting unions to call a general strike for March 29.
“There’s probably a link between the Andalusian election and the general strike -- it could encourage people who wouldn’t otherwise have taken part to do so,” Alejandro Quiroga, a political scientist at Newcastle University in England, said by telephone today.
A day after the first walkout against the PP, Rajoy will present the 2012 budget, designed to cut the deficit to 5.3 percent of gross domestic product this year from 8.5 percent, even with the economy in a recession and unemployment exceeding 23 percent.
Losing Andalusia, which has Spain’s third-largest regional economy and highest jobless rate, may make it more difficult to meet the deficit goal. The Socialist administration in Andalusia, which could prolong its 34 years in power through a coalition with the United Left, has opposed the central government’s deficit proposals, voting against them in a meeting of regional finance chiefs this month.
“Andalusia is important in terms of financing and it is going to raise its voice clearly in meetings between regions,” Ismael Crespo, a political scientist at the Fundacion Ortega-Maranon research institute in Madrid and former head of the state polling unit, said in an interview by telephone. “It’s going to be a resounding voice and that’s important.”
Regions control about 36 percent of public spending, including health and education, and accounted for most of Spain’s fiscal slippage last year. The PP still controls 11 of the 17 regions and Rajoy has the largest majority in the national Parliament of any Spanish leader in three decades.
The Andalusian vote marked a victory for United Left, a group that includes communists, as it doubled its representation to 12 seats.
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