Spain elects first hung parliament

published 23 December 2015

15-12-23-Rajoy-634 — Mariano Rajoy: glum about the leftists

A Spanish election has produced the first inconclusive result since the advent of democracy 40 years ago. The ruling centre-right People's Party (PP), led by Prime Minister Mariano Rajoy, finished first but lost its overall majority, while the Socialists came second.

The populist-left, anti-austerity Podemos party came third, doing better than anticipated, while the centrist, economically liberal Citizens' group, Ciudadanos, did worse than predicted, finishing fourth. If it proves impossible to cobble together a government from this perfectly hung parliament, new elections may be held in the New Year. The Spanish stockmarket slid by almost 3% on the news.

What the commentators said

The result also reflects "austerity fatigue and the country as a whole has clearly shifted to the left", according to sovereign bond strategist Nicholas Spiro. "We can certainly forget about reform." This is a great pity, said The Wall Street Journal, because Spain's economy has been greatly helped in the past few years not only by restrained public spending, but also by tax cuts and labour market reforms. These pro-growth measures help explain why Spain's GDP is set to expand by 3% in 2015.

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But there's more to do on this front, especially when it comes to liberalising the labour market, and some tax cuts aren't supposed to kick in until next year. So the danger now is that reform momentum will slow sharply and dent growth, said The Wall Street Journal. If this happens, "it would reinforce the basic belief that enacting tough but necessary reforms is the kiss of death in the eurozone". This has hampered crucial reforms in France, Greece and Italy.

An election like this would have terrified markets a few years ago, but this time "the numbing effect" of the European central bank's quantitative easing (QE) programme has kept investors relatively calm, said the FT's Elaine Moore.

A sell-off of Spanish debt, driving bond yields and hence long-term interest rates to bankrupting highs, is impossible now that the ECB is hoovering up bonds.The ECB has pre-empted a messy break-up of the eurozone. But there could now be a "corrosive showdown" with Germany over fiscal austerity, which is also facing serious resistance from leftists in Italy, Greece and Portugal, as Ambrose Evans-Pritchard pointed out in The Daily Telegraph. Europe's political fragmentation continues apace, which bodes ill for the single currency's long-term future.

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.