Spanish elections bolster Rajoy's austerity policies

A strong showing in regional elections over the weekend gave the Spanish government much-needed breathing room – especially as it was coupled with the waning clout of its rival – to manage the country’s economic crisis. But it also opened the door to more instability as independence-leaning parties made defining gains.

On the economic front, the ruling Popular Party and the government won strong support for its pro-austerity policies. In the western region of Galicia that borders Portugal, the PP renewed its absolute majority in the regional parliament, increasing its control. And in the Basque Country, the Nationalist Basque Party returns to power with the kind of austere economic policy that the central government is imposing.

In both cases the Socialist Party, the closest national rival of the ruling PP and a vocal critic of austerity measures, suffered significant losses at the ballot box, albeit to the benefit of more left-leaning parties.

“The two elections suggest voters are taking into the account the severity of the crisis and that sacrifices are inevitable,” says Josep Oliver, applied economics professor in the Universidad Autónoma de Barcelona. The austerity policies implemented by the government “don’t appear to be considered unacceptable and indicate that Spain’s society, after some difficulty, is starting to understand that this crisis demands reforms.”

The unexpectedly strong showing of the PP not only gave the government more internal political capital, but a strong mandate to pursue its belt-tightening economic policy, in a welcome sign for capital markets. Spain is broadly expected to officially request a bailout for its troubled economy, even if it’s still trying to negotiate terms with the ultimate decider, Germany. The electoral results gave an unexpected boost to the government’s policies, and could thus alter the playing field, analysts say.

The election results indicate that vastly more Spaniards back economic reforms than oppose it. But they also warned that the government must gear for a perhaps more destabilizing scenario in which the country’s industrial powerhouses will push their independence aspirations.

In the Basque Country, the winning party is economically conservative, but it also is expected to now pursue a path to full sovereignty, especially with the support of the pro-independence coalition that won a close second place.

Catalonia, Spain’s most important economic motor, will hold elections in November and, as in the Basque Country, the leading party in polls is also economically conservative, but has already committed itself to seek full independence.

More austerity and nationalism

The PP won 41 seats of the 75-member Galicia parliament, five more than in 2009 elections. Socialists lost seven seats and now only have 18, while a left-leaning party made the biggest gains.

In the Basque Country, the ruling Socialists shed nine seats in its 75-member parliament, now having 25, while the Basque conservative nationalists won the most seats with 27. In close second with 21 seats came Bildu, a coalition of pro-independence left-leaning parties, led by the political branch of ETA, the terrorist group that renounced its armed struggle in 2011.

The anti-austerity campaign of Socialists thus backfired, while the PP’s economic policies got strong support in Galicia. And while pro-independence forces made strong gains in the Basque Country, the winning party is the regional economic equivalent of the PP.

Still, the government of Prime Minister Mariano Rajoy knows that dealing with the passionate issue of independence could be more lethal than economic policies.

Earlier this month, rating agency Standard and Poor’s downgraded Spain's debt to the lowest investment grade possible, just a notch from junk status, citing among other things “rising unemployment and spending constraints [that] are likely to intensify social discontent and contribute to friction between Spain's central and regional governments,” S&P said.

The government has tried to contain regional independence aspirations, at times diplomatically and at others confrontationally. But mostly it has chastised its regional conservative counterparts for manipulating nationalist feeling at this juncture because it adds instability to a worsening economic crisis that is spurring social unrest.

Reality bites

Even if in the Basque Country the results “are tainted by the nationalist undertone,” Professor Oliver said, the winning party also won on an austerity-driven economic platform. “Markets should welcome this.”

The results will inevitably weigh in on Spain’s decision to request a bailout. The government wants guarantees that it won’t be shut out of global capital markets, as in the cases of Greece, Ireland, and Portugal. Spain’s hand is strengthened, although Germany insists Spain doesn’t need a bailout yet, even if markets and most European countries say it’s just a matter of time.

The Spanish government also got official confirmation from European overseers that its economic crisis is as bad as international institutions suggest. The statistical office of the European Union, Eurostat, revised the country’s deficit in 2011 to 9.4 percent of gross domestic product, almost a point higher than the government’s previously reported 8.5 percent, once the bank recapitalization is added.

Only Ireland, with 13.4 percent, has a higher deficit. Greece also has 9.4 percent. The government in September had already acknowledged that for 2012 its deficit would be 7.4 percent and not 6.3 percent as previously estimated.

The International Monetary Fund earlier this month also warned that the government’s forecast of a 0.5 percent contraction of its GDP in 2013 is far too optimistic, forecasting instead a 1.3 percent contraction, while S&P expects 1.4 percent less.