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Spain's political risk

National government

Spain's current national government is a minority coalition between Rajoy's Partido Popular (centre-right) with the support of Ciudadanos (centrist, pro-business).  The government was formed in Oct-16 after the PSOE (centre-left) decided to lift its veto, agreed internally within the PSOE party by 139 votes to 96.

Regional governments

Spain comprises 17 regions, called "autonomous communities", each with devolved powers. These powers include determining school curricula. 

Key questions:

• What is the risk to business and investors from politics?
• What is the risk of Catalan independence?
• What is the outlook for the minority conservative government?
• Why is it so hard for the political parties to form alliances in Spain?
• Why does Podemos, the anti-establishment and anti-austerity party, have so much support in Spain?
• How are the electoral candidates chosen?

What is the risk to business and investors?

Spain's 2015 budget deficit was 5.16% of GDP, versus the EU target of 4.2%. Spain's national debt rose to over 100% of GDP in Feb-16.

The new minority coalition is likely to have limited power and support to push through further structural reforms required to bring the budget into line and national debt under control. This leaves Spain vulnerable to the headwinds in the global economy.

The Spanish economy is proving to be resilient despite the uncertainty. GDP grew by 0.8% in Q1 2016 according to national statistics institute, which exceeded the Bank of Spain's estimate of 0.7%.

What is the risk of Catalan independence?

Background: Catalonia has its own language and culture, and has been a key industrial and economic centre. Although historically never a country in its own right, calls for Catalonia's independence have grown since the restoration of democracy in the late 1970s. One of the main complaints is that their tax revenue subsidises other parts of Spain. Successive Spanish governments have emphasised unity as mandated by the Spanish constitution and have resisted holding a referendum on independence.

Key potential impacts of Catalonia's possible independence:

• Regional GDP: Catalonia's GDP amounted to €209bn in 2014.
• Exports: from Catalonia amounted to €5.3m in May-15.
• Debt allocation: The effect of a Catalonian exit from Spain would also depend on how much debt it would take with it. If it were to take 19% of Spanish national debt - the same proportion the region contributes to GDP, the effect would be neutral for Spain. However if the debt allocation were to match the 16% population figure or 11% national expenditure on the region, Spain's debt-to-GDP would increase significantly.

Effects to-date from the uncertainty and actions taken:

• Companies relocating out of Catalonia: Uncertainty over the region’s future has led to thousands of companies, including two of the country’s top banks, moving their legal headquarters from Catalonia to elsewhere in Spain.
• Risk of civil disobedience: Attempts by the Spanish government to prevent independence will heighten the risk of social unrest.
• Expense and distraction: The national government reportedly spent €8m on security to prevent Catalonia's citizens from voting in the disputed referendum
• Polarisation of the issue and debate. It has become clear that the only tool the Spanish government seeks to use in resolving the Catalonia questions is the judiciary and the police. For all the efforts to keep Catalonia Spanish, the unionists are not using diplomacy and appealing to hearts and minds.
• Spain's image abroad: Reports of excessive police violence and a outright lack of political diplomacy have eroded any perceived moral high ground that the Spanish government may have had.

Recent developments:

1. In Nov-14, the Catalan government ran a non-binding vote on independence. 42% of an eligible 5.4m voters turned out, 81% of whom were in favour of a Catalan state. There was some debate over the legitimacy of both the vote and the democratic mandate, as less than 50% of the voting population were in favour of independence.
2. In Jan-16, the Catalan parliament elected Carles Puigdemont as its new president over a seccionist government tasked with leading Catalonia towards independence.
3. On 1st October 2017, a controversial independence referendum was coordinated by the Catalonian the separatist parties. It had been declared illegal by both the constitutional court of Spain, as it breached the 1978 Spanish constitution, and by the EU. There were calls of foul play on the parts of the separatists, and of the national police, who reportedly used excessive violence to prevent citizens voting. According to reports, c.90% of voters were in favour of Catalonia becoming an independent republic, although turnout was reported to be c.43%.
4. On 10th October, the Carles Puigdemont signed a declaration of independence. For their role in coordinating a constitutionally-illegal referendum, several politicians were arrested.
5. On 27th October 2017, the Catalan parliament voted to declare independence, boycotted by three opposition parties. The Spanish senate authorised the government to trigger Article 155 of the constitution, allowing the national government to assume direct rule. A snap regional election was also called for the 21st December 2017.
6. On 30th October, Puigdemont and 13 other sacked cabinet ministers were charged with rebellion, sedition and embezzlement. Puigdemont and five others fled to Brussels.
7. The election on 21st December, the three pro-independence parties won a slim majority of seats (70/135) but fell short of a majority by popular vote, securing only 47.5%. The party with the largest share of the vote was Cuidadanos, a pro-union party.
8. In Jan-18, as the candidate of the most-voted party within the independence block, Puigdemont intended to be re-elected at president, but this was hampered by the risk of being arrested by Spanish authorities upon returning from self-imposed exile. The constitutional court ruled that Puigdemont must be physically present in order to be sworn in as Catalonia's president, rather than by video call or by proxy.

Sources: The Telegraph, Financial Times, The Spain Report.

How are the electoral candidates chosen?

Spain operates a closed party-list proportional representation system where voters are unable to influence which party candidates are elected. Each political party pre-determines who will receive the seats allocated to that party in an election.

Why dID Podemos Gather so much support?

Podemos (literally "we can") was founded on socialist and anti-establisment principles. Support grew on the back of frustrations with Spain's economic crisis and political corruption scandals. Led by Pablo Iglesias, a self-described Marxist, the party attracts voters by seeking to stand up for the interests of those "below" the allegedly corrupt political caste. During the campaign for the Dec-15 elections, Podemos was seen to become less extreme in its views. More than a left-wing and anti-austerity protest vote, Podemos among its voters also stands for upheaval of the political system in Spain, and for supporting a referendum on Catalan independence.

Read here for a summary of Spain's electoral system.

On 10th May 2016, Podemos and the United Left party agreed to run a joint list in the repeat elections on 26th June which is expected to put considerable pressure on the Socialists.

During the months of political stalemate in 2016, Podemos maintained its strong reformist stances and pressure on the centre-left PSOE. After being beaten by PSOE in two consecutive general elections, the self immolation of PSOE has handed Podemos another chance to challenge a weakened PSOE for the leadership of the Spanish left. At the time the minority government was formed they claimed to be the de facto opposition force in the country. However since then, support for Podemos has waned.

Source: Financial Times, The Spain Report

Why is it hard for the MAIN political parties to form alliances?

Given the Dec-15 election results, there were two main reasons that the parties were unable to form a majority government:

• The only majority government that was mathematically possible would have involved a grand coalition between the PP on the right and PSOE on the left, whose rivalry can be traced back to the bitter civil war in Spain and subsequent rule under Franco. Fundamentally, PSOE saw an existential risk to itself by joining forces with PP.
• A PSOE-led minority coalition was sought involving Ciudadanos and Podemos and although Ciudadanos and PSOE struck an accord, a coalition including Podemos proved unattainable due to fears of PSOE's existence in its new rivalry with Podemos, and Podemos' support for Catalan independence.
• A PP-led minority coalition fell short on two occasions of the minimum level of parliamentary votes required. Under the former PSOE leader Pedro Sanchez PSOE members did not support nor abstain in order to let the Rajoy-led coalition to succeed. 

Spain's democracy is young. The post-Franco transition to democracy only began after his death in 1975. Since the transition, there have been majority governments of either PP or PSOE. The parties do not have experience of forming coalitions.

What is the outlook for the minority conservative government?

Matters not resolved under the caretaker government: between Dec-15 and Oct-16, Spain was governed by a caretaker government operating with limited executive powers. Matters unresolved during that period included the appointment of 44 new envoys, the ratification of 64 international treaties and the pursuit of business interests abroad were neglected during the political paralysis at home. Spain runs the risk of fines for not implementing a raft of European Union directives, such as one regulating the sale of explosives, and it has yet to approve its participation in high-profile projects such as a new China-based development bank or the Paris agreement to curb climate-warming emissions.

Source: Reuters