Could Spain’s free-spending government make it the next Italy?

Festivities in Madrid © Alberto Sibaja Ramirez/Alamy Live News
Spain is set for stasis

Spanish prime minister Pedro Sánchez’s decision to call a fourth election in four years was “a bet that failed”, says The Economist. Sánchez’s socialists emerged as the biggest party, but are no closer to being able to form a majority in the country’s fractured parliament than they were before Sunday’s vote. “Much hard bargaining lies ahead.”

The Spanish economy is likely to prosper despite further political stalemate, says Jessica Hinds for Capital Economics. Neither the Catalan independence crisis nor previous bouts of political gridlock have dented one of the eurozone’s fastest-growing economies. The benchmark IBEX 35 stockmarket index is up 43% since its 2012 nadir, although at about 9,300 it remains well short of the pre-crisis high of 15,945 in 2008.

A fading growth star

Spain was one of the European nations worst affected by the financial crisis, with unemployment spiking above 26% in 2013. That prompted politicians to pass difficult structural reforms. The result was an impressive recovery, which saw the country notch up 3.2% growth in 2016 and 3.1% in 2017, above the eurozone average.

Bond and equity markets remained “broadly flat” on news that Sánchez had again failed to secure a majority, says Christopher Thompson for Breakingviews. Yet growth is slowing. The International Monetary Fund expects GDP growth of 2.2% this year and less than 2% next year.

The most likely scenario now is that Sánchez will do a deal with the anti-austerity Podemos and separatist parties, which could bring a fiscally irresponsible spending splurge and more divisions over regional autonomy. “Spain could swiftly go from German to Italian.”

Yet, as former prime minister Felipe González puts it, while Spain has an Italian-style parliament, it has no “Italian politicians” to master it, says Daniel Dombey in the Financial Times. The result is likely to be not crisis but “policy stasis”, say Cedric Gemehl and Nick Andrews for Capital Economics. This isn’t just a Spanish phenomenon: the UK and Germany have had similar problems of late.

On a cyclically adjusted price/earnings ratio of 14 and a dividend yield of 4.1%, Spain’s equities are some of the cheapest in Europe. That partly reflects the fact that the local stockmarket is weighted towards the unloved, and risky, banking sector (Santander is the single largest component of the MSCI Spain index). That may deter some. Yet the IBEX 35 also includes businesses such as Zara-owner Inditex and Amadeus, a leading provider of IT for the global travel industry. The economy is still forecast to outgrow the wider eurozone. Just watch out for the banks.