- Spain just two years into its growth phase as ECB extends QE
- The last two expansionary cycles lasted more than a decade
The race has never been more open. The prize may never be greater.
Whoever manages to emerge as prime minister after Spain’s watershed election on Dec. 20 will inherit an economy growing at more than 3 percent, a European Central Bank committed to another 15 months of quantitative easing, and a range of potential policy options to beef up domestic activity. Such a mix could help keep the next leader in power for years.
“It’s a good election to win,” Angel Talavera, an analyst at Oxford Economics in London, said by phone. “The other side of such a long crisis in Spain is that there is much more room for a longer recovery because the fall was so great.”
After four years of bailouts, economic crisis and corruption, oil prices at a six-year low are compounding the ECB effect to fan the flames of recovery. The tailwinds are strong enough to power Spanish growth at rates of 2.5 percent or 3 percent for at least the next three years, said Fernando Gutierrez, an economist at Solchaga Recio & Asociados, a Madrid-based consultancy advising large Spanish companies.
Beyond the horizon of most forecasters, history suggests that when Spain picks up steam its economy tends to keep motoring. The country is two years into its current expansionary cycle, just the third since it re-established democracy in 1978. The last two ran for more than a decade.
It’s a far cry from the hand that the incumbent Mariano Rajoy was dealt when he finally claimed power in 2011 after two successive defeats. Rajoy took office in the teeth of the worst financial crisis in living memory, a storm that forced him to ditch most of his election program and, combined with a wave of corruption allegations, made him the most unpopular prime minister in the modern era.
Now he’s limping toward polling day, ducking debates with his political rivals and promoting his deputy, Soraya Saenz de Santamaria, as an alternative figurehead for his party as potential allies signal they’ll block a second Rajoy government given the chance.
Rajoy’s People’s Party has led in all recent polls. But all have shown him losing more than a third of the votes that gave him a record majority last time as two new parties, pro-market Ciudadanos and anti-austerity Podemos, challenge the traditional duopoly of the PP and the Socialists. A DYM poll for ElConfidencial.com released Dec. 11 showed the Socialists pushed down into fourth place for the first time since the end of the dictatorship.
Rajoy is set to tackle Socialist leader Pedro Sanchez in a televised head-to-head on Monday night.
With state pollster the CIS showing 42 percent of voters have still to make up their minds who to support, the final shape of the new parliament is far from clear. In 2011, just 32 percent were still to decide at this stage in the campaign.
Even so, the first challenge for Spain’s next leader will probably be to establish control.
Recent surveys show the four main parties each winning between 17 percent and 28 percent of the vote. That would lead to the most divided parliament since 1978 and open a new era of horse-trading and alliances.
Then there’s the Catalan question that will be hanging over the new assembly. After a five-year campaign for independence, all the main national parties are seeking a way for the biggest regional economy to fit comfortably within the state’s structure. That may mean brokering trade-offs with other regions and a broader range of constitutional reforms.
And there’s still work to be done on the economy.
Time for Reform
Rajoy’s reliance on factors external to Spain such as ECB policy to spur growth may have made him complacent about making deeper reforms to the country’s economy, said Gutierrez. The new government taking office will need to take action to tackle flaws in Spain’s education system and spur competition in energy markets, he said.
The International Monetary Fund’s report on Spain in August highlighted the country’s still-high unemployment, the lack of competitiveness of its many smaller companies and its piles of public and private debt as obstacles to its growth potential. The increase in public borrowing under Rajoy has been almost as large as the reduction in private debt, leaving the country’s total liabilities at 2.7 trillion euros ($3 trillion).
Oil markets, the ECB and the momentum in the Spanish economy will at least give the new leader time and space to address those problems.
“The cycle still has a long way to go,” Gutierrez said. “There is still a lot more room for recovery.”