Spain’s political deadlock has sparked warnings from business about the implications of a “power vacuum” in Madrid and spells trouble for parts of the EU’s agenda.
While the failure of the hard-right, anti-EU Vox party to gain a place in government was greeted with cheer in Brussels, neither the right nor left now has a clear path to office.
As Madrid holds the six-month rotating presidency of the Council of the EU, the lack of leadership is the source of widespread angst.
Corporate leaders, meanwhile, want political stability, lower taxes and are concerned the post-election stalemate will stand in the way of efforts to lower Spain’s huge public debt burden.
They are braced for weeks of unpredictable negotiations over potential parliamentary pacts. “We cannot afford to waste time in a situation where the economy is perceived to be slowing down and a possible recession is looming,” said Manuel Pérez-Sala, chair of the Círculo de Empresarios, one of Spain’s biggest business lobbies.
The IMF, however, on Tuesday increased its forecast for Spanish gross domestic product growth this year to 2.5 per cent from 1.5 per cent. Pedro Sánchez, acting prime minister, said Spain was projected to grow “almost three times faster” than the eurozone average of 0.9 per cent.
Sánchez appears to have the best chance of reaching the absolute majority needed to form a government. But he would need the help of a hardline Catalan separatist party.
Alberto Núñez Feijóo’s conservative People’s party won the most seats but, contrary to forecasts, failed to secure a majority in alliance with Vox. In the past two days, some of Feijóo’s potential allies have declared they would not join forces with Vox.
If no one has enough votes to form a viable government, Spain will head for fresh elections in December or January, the third such repeat election in eight years.
Here are the challenges the deadlock presents for the economy, business and Brussels.
Agreeing new EU fiscal rules
As holder of the EU presidency, Spain is tasked with finding agreement on critical — and politically complex — changes to the bloc’s fiscal rules.
Reform of the Stability and Growth Pact, which oversees member state national spending rules, is a commission priority, but has run into intense wrangling between capitals.
Berlin wants unified, binding rules to tackle high public debt, while Paris wants flexibility. Many in Brussels had hoped Spain would work to find a compromise.
Madrid has skin in the game. It will be under intense pressure to bring down its own budget deficit, which was 4.8 per cent of GDP last year, compared with the EU’s long-term ceiling of 3 per cent.
Ignacio de la Torre, chief economist at investment bank Arcano, said: “The problem is that what the EU and companies want to see is a plan, a road map to reduce the deficit over five years, and with a caretaker government they are not going to get that.”
Even if Sánchez cobbled together enough votes to become prime minister, de la Torre said there was no guarantee the same parties would support him in other parliamentary votes, especially ones involving tax increases or spending cuts. “So they make you prime minister, then what happens if the next month you can’t approve the budget?”
A distracted EU presidency
Madrid’s role as president of the EU Council is more important than usual because European parliament elections in 2024 mean most legislative work will grind to a halt early next year ahead of the June vote.
Spain’s job involves chairing ministerial meetings and finding compromises between member states and the European parliament — and it has said it wants to reach deals on more than 100 of the 200 legislative files that are still open. Among the most crucial is a new asylum and migration pact.
One EU official said the caretaker administration would be able to exercise all the responsibilities of the presidency. “There will be no major changes or shifts,” the official said. “It will be business as usual.”
But some worry that a caretaker government in Madrid, focused almost exclusively on either forming a new administration or contesting repeat elections, will be too distracted.
Miguel Ferrer, executive vice-president at the Spanish Association for a Digital Economy, said: “The political power vacuum . . . could cloud Spain’s leadership and make it difficult to present its ideas to other EU members.”
Leading EU efforts on Ukraine
The EU is debating a €20bn fund to finance weapons supplies to Ukraine over the next four years. But both the long-term focus and the relatively high suggested price have unsettled some member states, putting the onus on Madrid to lead efforts to convince them to sign up to it.
Ukraine is also heading for a crunch moment in its EU accession bid this autumn. In October, Sánchez or his successor will chair a special meeting of EU leaders in the southern Spanish city of Granada, where they will discuss Ukraine’s progress towards opening formal accession negotiations.
Kyiv is pushing for the EU to agree to start these negotiations by the end of this year, a decision that is set to be the most consequential under Spain’s presidency of the bloc.
“[Sánchez’s] attention will be focused on cobbling together a government, not providing political and policy leadership in Europe,” said Mujtaba Rahman, managing director for Europe at Eurasia Group.
Progress on EU energy reforms
Spain is one of Europe’s wind and solar power pioneers, partly because it is home to multinational renewable energy companies such as Iberdrola and Acciona, but also because it attracts a lot of foreign investment.
However, months of political gridlock will give companies more reason to defer big decisions.
The Sánchez government has been a vocal advocate of both the transition to greener energy and reforming the EU’s electricity market. The electricity reforms are designed to create a stable market that can cope with the volatility of supply shocks such as the Ukraine war and the growth of renewable power.
But progress has been held up by sparring between France and Germany over the shape of the reforms and whether state subsidies should be permitted for facilities such as French nuclear power stations.
Teresa Ribera, Spain’s energy and environment minister, played a crucial role during the first month of Spain’s EU presidency in trying to get Berlin and Paris to agree a deal. At a meeting of ministers in Valladolid, the French and Germans said progress had been made towards an agreement. But it is now unlikely to be resolved until after the summer break.
However, Vox’s weak showing does remove the possibility of the party bringing its denial of human-driven climate change on to the European stage. It would, said Rahman, “arrest momentum behind the idea that it is inevitable that the far-right will overwhelm the EU in elections next year”.
Additional reporting by Andy Bounds in Brussels and Carmen Muela in Madrid