The acting president of the Government, Pedro Sanchez, receives the general secretary of Podemos ... [+]
The Socialist Party (PSOE) has signed an agreement with the anti-austerity party Unidas Podemos “to form a progressive coalition government” in Spain. The alliance with the leftist group has raised concerns among investors, who fear an excessive increase in spending that could damage the Spanish economy.
Less than 48 hours after theis year’s second election took place, the acting Prime Minister Pedro Sánchez abandoned the idea of a minority government and started negotiations with Podemos leader Pablo Iglesias.
After losing more than a million votes while the far-right doubled its previous results, the left-wing parties have decided to put their differences behind them and come to an understanding. “The political project is so exciting that overcomes any disagreement between us,” said Sánchez.
“It's time to put any reproach behind us,” responded Iglesias, who assured that Sánchez could count on his “loyalty.” Podemos leader will become one of the vice-presidents of the new government, although the distribution of ministries and vice-presidencies has not been published yet.
Between November 12 and 13, the Spanish benchmark index (Ibex 35) fell 2%. The bad performing of Spain’s stock market was mainly related to the banking sector. Bank investors fear the alliance with Podemos, which has proposed the creation of a public bank.
Some of the measures proposed by Podemos—a new rise in the minimum wage, the increase of public pensions in line with the cost of living, and the creation of new taxes—have triggered fears of excessive spending that could lead to the increase of public debt and deficit.
PSOE and Podemos are in favor of introducing the Google tax and the Tobin tax to increase public revenue. They could also agree on increasing the corporate tax on big companies and raise the top rate of income tax.
Despite the distrust that these measures generate among economic powers, Spain is one in the countries with a lower tax revenue-to-GDP ratio in the EU. According to Eurostat, the EU stood at 40.3% of GDP in 2018. Spain (35.4% of GDP) is not only under the EU average but also far from the three other biggest economies of the Eurozone: France’s ratio was 48.4% of GDP, Italy’s ratio 42%, and Germany’s ratio 41,5%.
Another possible policy that raises concerns is the progressive increase of the minimum wage—which increased by 22% in January— from €900 ($990) to €1,200 ($1,320) per month until 2023. Podemos included the proposal in its political manifesto, although PSOE has not agreed to it as yet.
The rent price control has also raised controversy among the real state sector. The dispute in Spain started last June in Catalonia after the regional government approved legislation to regulate rent prices in “tense urban areas” like Barcelona.
However, this is not a new measure in Europe, where other capitals like Berlin and Paris are carrying out similar legislation to address access to housing for residents.
Brussels just wants Spain to form a government
Eyes were on Brussels after the coalition government’s announcement. Spain has been for years under the strict surveillance of the European Commission for exceeding the deficit limit and Podemos was born as an anti-austerity group against Brussels’ guidelines during the economic crisis.
The EU Executive has not given a statement since it is a national issue. But according to the Spanish newspaper El País, the institution has welcomed the news “with much more relief than concern.” The newspaper’s sources indicate that the priority for the Commission was for Spain to have a government.
The acting Minister of Economy Nadia Calviño may be key to bring peace of mind in Brussels. Sánchez has announced that Calviño will be the economic vice-president of the coalition government.
Calviño's appointment may be reassuring in Europe taking into consideration her technocratic profile and long experience in the EU, where she was director-general for budget of the European Commission from 2014 to 2018.
Another guarantee for Brussels is the 10-point agreement document that has been released, where both PSOE and Podemos have committed to a “control of public expenditure” for the sustainability of the welfare state.
“The Government will promote social policies and new rights in accordance with Spain's fiscal responsibility agreements with Europe, thanks to a fair and progressive fiscal reform that brings us closer to Europe and eliminates fiscal privileges,” the text says.
The rise of Eurosceptic and ultra-nationalist governments across the continent has become EU’s main concern in the last few years. On the other hand, the experience with lefties governments in countries like Portugal —where Socialist Prime Minister Antonio Costa has governed with the Left Bloc (B.E.), the Portuguese Communist Party (PCP) and the Ecologist Party (PEV)— has contributed to lowering the alarms about this type of coalitions.
Portugal is referred to as the “economic miracle” of the EU. Since Costa reached power in 2015, the unemployment rate lowered from 12,4% to 6,3% despite raising the minimum wage. The 2019 GDP growth is estimated to be 2% and the deficit is situated at 0,1% while in two years the surplus may reach 0,6% according to Eurostat.
Negotiations will continue in the following weeks. Sánchez and Iglesias will seek the support of smaller and regional parties and will most likely need the abstention of Catalan pro-independence forces in the investiture session.
The conservative party (PP) has described the coalition as “radical” and refuse to give its support, while the center-right party Ciudadanos has asked Sánchez to rectify and make an agreement with the right-wing to “reach a moderate and constitutionalist agreement.”
