New elections remain the most likely outcome
The PP’s and Vox’s weak performance in Spain’s snap elections means that our base-case scenario will not materialize, with the remaining options either a loose PSOE coalition or new snap elections. Under a new PSOE government, fiscal policy is likely to remain unchanged, and the government will likely continue with a gradual fiscal consolidation, while supporting existing social programs and potentially extending windfall taxes. Under the more likely snap-election scenario, PM Pedro Sanchez, whose strong performance has solidified his position, will likely remain a caretaker PM and seek a new election date. The ability of the government to pass fiscal changes will likely be constrained, and the ongoing uncertainty will weigh on business sentiment in the medium term.
Overview
- Spain’s snap elections failed to produce a decisive winner, following a weaker-than-expected performance by the center-right PP and the far-right VOX parties.
- PM Sanchez’s PSOE defied pre-election odds and managed to gain two seats compared to the 2019 election, despite coming in second behind the PP.
- Both the PSOE and PP lack coalition partners that would allow them to form a stable coalition, increasing the likelihood of another election by December 2023.
Our View
Spain is no stranger to political gridlocks and the election on July 23 has seemingly produced another policy quagmire. Sanchez’s strategy seems to have worked, and both the PSOE and Sumar managed to attract voters that are disillusioned with the prospect of seeing VOX in a ruling coalition with the PP. The PP’s leader, Alberto Nunez Feijoo, also significantly underestimated the impact his regional coalitions with VOX would have on voter preferences and likely fell into Sanchez’s electoral trap. While our base case for the election called for a coalition between VOX and PP, in its current format the formation would be five MPs short of producing a stable government, and potential coalition partners are limited despite Feijoo’s assurances that he is in proactive negotiations with other parties, allegedly including the PSOE.
Even though the PSOE and the far-left Sumar cannot form a coalition, Sanchez has used the support of regional Basque and Catalan parties to his advantage and previously managed to secure their support for the coalition’s policies. However, even with the support of the Basque PNV and Bildu, Sanchez will need support from the Catalan pro-independence Junts, who have ruled out a coalition with the PSOE and whose controversial leader, Carlos Puigdemont, remains in exile in Belgium. To make matters worse, Spanish prosecutors are considering issuing an arrest warrant for Puidgemont that could sour relations further. There is a possibility that the latter is a negotiating tactic, as Sumar has indicated it is in touch with the Junts and is trying to negotiate for its support for a minority government to prevent the PP and VOX from gaining ground in a potential new election.
As things stand, new elections remain the most likely outcome. First, the PP could block negotiations for a new coalition by refusing to start the process of forming a government, which stipulates that Feijoo must receive a mandate from the king. He could refuse to do that, which in effect would mean that Sanchez remains the head of a caretaker government and would need to appoint a new election date. This, however, may cause the PP to leak additional support and is thus less likely—but not impossible. Additionally, Sanchez could fail to secure the support of the Junts and thus be unable to form a coalition. The PSOE’s strong performance, however, also indicates that Sanchez is unlikely to be ousted by his own party, solidifying his position as a potential caretaker PM. In addition, he would be heavily incentivized to call elections as early as possible, as this would minimize the impact of the PSOE having to adopt potentially unpopular fiscal measures.
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