CHART OF THE WEEK
Spain’s political parties have been unable to form a government since the country went to the polls at the end of 2015 and fresh elections are now necessary. Political deadlock has led to King Felipe ending negotiations ahead of the formal May 2nd midnight deadline, and voters are likely to return to the booths on June 26th. If current polls are any indication, the outcome will closely resemble that of the 2015 election. This would mean negotiations resuming during the summer, but undoubtedly amid increased pressure to reach a quick agreement.
In the meantime, however, certain developments could shift the balance. Podemos, the anti-austerity party whose popularity has waned, is trying to negotiate an alliance with several small left-wing parties credited with about 5% of voting intentions. The objective is to forge a coalition that could overtake the Socialist Party and place it in a stronger negotiating position. The People’s Party (PP) would nonetheless remain Spain’s leading political force.
Our Analysis
Spain is not the only country trapped in political limbo: Ireland has been in a similar situation for two months and Belgium spent 541 days in 2010-11 with the outgoing government running the country on a day-to-day basis. That said, the stakes are not the same, with the Spanish government having to negotiate with the European Commission following budgetary slippage in 2015.
So far, the political uncertainty has not dragged on the economy, as good first-quarter growth figures show (+3.2% year-on-year), but if the uncertainty persists, it could start affecting market behaviour.
The opinion expressed above is dated April 29th, 2016 and is liable to change.
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