Spain: will post-election government keep on the reforms path?

    
Spain has been able to reform its economy in the last three years. Since 2012 many progresses have been made. Being one of the best-growing countries in the Eurozone is the positive consequence. But relevant problems still remain. To keep on the reforms path a sound government would be a desirable outcome from the 20th december elections.

Structural reforms and changes allowed Spain to become one of the best performers in the Euro area. But much needs to be done still. Problems like the debt-sustainability and the high levels of unemployment for example. We believe a dual labour market, low productivity and one of the highest long-term unemployment rates among euro area countries require policy action. We also believe further productivity and growth gains are critical for fiscal and external solvency.
The boom-bust real estate bubble left excessively large volumes of debt. While good progress on deleveraging has been made in the private sector (NFC debt has fallen by over 40pp of GDP since its Q1 09 peak), the public sector is likely to reach nearly 100% of GDP this year, driven by moderate nominal growth and a large primary deficit. We think the next government will have to put forward a complementary 2016 budget to achieve the primary surplus required to stabilize public debt/GDP.

We believe the policies of the next government could determine whether Spain’s growth prospects move closer to Ireland’s or stay closer to its Southern neighbours’. With no party likely to win an absolute majority at the 20 December election according to the latest polls, it is not clear whether the next government will have sufficient parliamentary support to undertake the pending reforms and fiscal consolidation. Political alliances are possible we believe, as the centre Ciudadanos party could support either the conservative PP or the socialist PSOE. We would view either a PP-Ciudadanos or PSOECiudadanos alliance as market-positive if they were able to achieve an absolute majority. 

A PP-Ciudadanos alliance would seem most likely, as polls indicate that MPs from these two parties could add up to more than 176 in the 350-seat parliament. A PSOECiudadanos alliance, while possible, may not reach the 176 MPs needed for an absolute majority. A PSOE-Ciudadanos-Podemos alliance (following the template of some municipalities) could add up to well over 176 MPs, although we think this is very unlikely.

Source: Barclays Economics Research