Given ongoing negotiations between the PSOE and the Catalan ERC and Junts parties, acting PM Pedro Sanchez seems increasingly likely to be able to head a government in the upcoming weeks. MNCs should note that key to the PSOE/Sumar’s policy plans are substantial labor reforms, which include raising the minimum wage and reducing working hours, that may lead to a notable uptick in labor costs and a reduction in output capacity. Many of these may be funded through increased taxes on certain businesses and, in the long term, through revisions of the progressive tax system, which may affect demand from certain consumer segments.
Overview
- The PP’s leader, Alberto Feijoo, failed to win support to form a government despite securing the backing of VOX.
- Sanchez, acting PM and leader of the PSOE, will have the opportunity to form a governing coalition until November 27.
- The PSOE has already announced a predictable alliance with the left-wing Sumar but still falls short of the 175 votes needed to form a governing coalition.
- As expected, the PSOE is seeking to win the support of the Catalan pro-independence parties, the Junts and the ERC, offering amnesty for the participants of the 2017 Catalan referendum.
- The highly controversial move is likely to be challenged in Spain’s Constitutional Court and has sparked relatively small-scale protests across the country.
Our View
As outlined in our Spain Election Scenarios in June, a PSOE/Sumar coalition will have to rely on the support of Catalonian Basque parties to be able to govern, given that its combined number of seats of 152 falls well below the 175 threshold. The ongoing negotiations, however, represent a significant gamble on the PSOE’s part, given the highly controversial nature of the offered amnesty and the direct talks with exiled Junts leader and key organizer of the Catalonian referendum vote, Carles Puigdemont. Details about the deal are scant and likely to be challenged in the courts, but the PSOE’s strategy seems to present the Catalonian nationalist a choice: either accept the deal and support the PSOE in parliament or face the prospect of a much less forgiving PP/VOX government. The latter has significantly increased its standing in the polls and is likely to win much more decisively if the PSOE fails to cobble together a government, which will be followed by early elections in mid-January 2024.
Given these prospects, both the ERC and the Junts are likely to agree to support the PSOE/Sumar but are unlikely to enter an official coalition. The PSOE will need to win one of two votes, either an absolute majority or a simple majority vote, which would give Sanchez a minority government in parliament. Beyond the promise of amnesty, Sanchez has committed to a “generous” support package, and while details remain vague, such a proposal might involve incorporating key ERC and Junts policy demands, including increasing political decentralization. The PSOE announced that it will introduce several fiscal adjustments, including taxes on energy companies and large banks, as well as push for higher minimum wages, fewer working hours, and greater focus on energy sustainability.
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