May 22, 2017 / 12:05 PM / 2 months ago

Spain is beginning to look more like Italy

3 Min Read

Socialists' Pedro Sanchez smiles as he celebrates victory after being elected as the party's leader in Madrid, Spain, May 21, 2017.Sergio Perez

LONDON (Reuters Breakingviews) - Spain’s rapid economic revival had it billed once as a rival to Germany. But after the leftist surge in Sunday’s socialist primaries, Madrid’s fragmented political landscape makes it look a bit like slower-growth peer Italy.

The new leader of the socialists, Pedro Sanchez, is also their old leader. He resigned after the socialists dropped their resistance to current Prime Minister Mariano Rajoy forming a minority government with his centre-right People’s Party. Sanchez’s return will revive opposition to the government. He may also try to drag the Socialist party further to the left, or form an alliance with the anti-establishment Podemos party.

What’s at stake is Spain’s ability to get its deficit of 4.3 percent of GDP under control and reform the economy. At worst, greater opposition could lead to an early collapse of the government, or the undoing of reforms already begun. Neither of those scenarios looks likely in the near term. Polls indicate that an early election would produce no winner. And the socialists and Podemos are still at odds and unable to form a majority.

Fragmented politics can make it hard to get things done. Fortunately, Rajoy’s to-do list is short, beyond getting his budget approved. Spain’s GDP grew 3.2 percent last year, nearly double the rate of Germany’s, helping debt fall and its deficit shrink. Over the longer term, though, he might need consensus. Unemployment remains high at 18 percent, and most new jobs are temporary contracts. That leaves workers vulnerable to a downturn and exacerbates social inequality.

The unfortunate comparison is with Italy, where the hollowing out of major parties and growth of upstarts like the 5-Star Movement has led to chronically weak government. Rajoy can count on a stronger economy, and the support of one new party, Ciudadanos. Still, the spread between Italy and Spain’s 10-year government bond yield is around 50 basis points, its lowest since late March.

The lack of a strong government doesn’t just affect Spain’s domestic prospects, either. Madrid has been a cheerleader of more European integration, calling for countries to pool their debt and fiscal policy in the face of resistance from Germany. As Rajoy’s grasp on the economy weakens, so will the chance of such ideas getting a proper hearing.

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