BARCELONA – After enduring two general elections in 2019, Spain now has its first coalition government since the death of Generalísimo Francisco Franco. Led by Prime Minister Pedro Sánchez of the Socialists and Pablo Iglesias of the radical left Podemos, the coalition was forged with the explicit support of the Basque Nationalist Party (PNV), and with a crucial negotiated abstention on the part of the pro-independence Republican Left of Catalonia (ERC). Following an extremely close parliamentary vote – with 167 yeas, 165 nays, and 18 abstentions – the coalition will face fierce opposition from the right-wing People’s Party (PP) and a now-diminished Ciudadanos, as well as Vox, a rising far-right party.
The coalition’s objective is to “make Spain a reference point for the protection of social rights in Europe.” At the center of its program is a plan to reverse the crisis measures adopted by the previous PP-led government under Mariano Rajoy, which slashed social spending and introduced labor and pension reforms.
The coalition’s intent is not to breach EU fiscal guidelines or cast doubt on Spain’s eurozone membership. But, now that Spain has recovered from the post-2008 recession and regained its competitiveness, the new government wants to address the effects of unemployment (which has fallen from 25% but remains above 14%) and salary cuts incurred over the past decade. A significant segment of the population has yet to benefit from the recovery and is struggling to cope with rising housing prices and rents.
The coalition’s program – a compromise between the Socialists and Podemos – is mostly aspirational, with only a few concrete proposals. The government wants to increase social spending, raise the minimum wage to 60% of the average salary, re-index pensions to the consumer inflation rate, and introduce some form of basic income. This would (optimistically) all be financed through higher taxes on the rich, large firms (particularly banks and energy companies), and capital gains, with the aim of converging to the European average for revenue as a share of GDP.
Beyond these measures, the coalition plans to allow new rent controls in cities and eliminate health-care co-payments. It wants 100% renewable-electricity generation by 2050, gender parity in electoral lists, and an overhaul of education laws. Again, these policies are well-intentioned, but they may be difficult to implement.
The question, of course, is how to maintain fiscal discipline. Given that Spain already has a structural deficit that the European Commission wants reducing by more than €9 billion ($10 billion), it is hard to see how the planned pension reforms and increases in social spending will be made sustainable. Moreover, with the exception of some value-added-tax rates, Spain’s overall rate of taxation is not low; rather, its tax base is limited, owing to evasion, the underground economy, and various loopholes. As such, simply hiking tax rates could cause distortions without actually addressing the underlying problem.
The same applies to the government’s plan for reducing Spain’s high structural unemployment. Again, its proposals would not necessarily address the underlying issue, which is that the labor market is divided between protected and unprotected classes of workers. Likewise, the government’s intention to rely on rent controls could prove self-defeating, insofar as they discourage the construction of more housing. And the government has offered no clear plan to raise productivity.
Beyond social policies and the economy, the new government will have to tackle the “Catalan question,” which dates back at least to the seventeenth century, and was one of the main factors behind the Spanish Civil War of 1936-1939. More recently, the conflict has resulted in steep jail sentences for various secessionist leaders and several rebukes of the Spanish judiciary by European courts, following a thwarted independence referendum in October 2017.
Spain’s 1978 constitution allows for both “nationalities” and “regions” to exist within the Spanish state. But, since a failed military coup in 1981, there has long been a tendency toward re-centralization, which has fed renewed demands from individual regions for more autonomy. Complicating matters further, Spain’s right-wing parties object to the differentiated political arrangements vis-à-vis the Spanish state that Catalonia and the Basque country want to have. And Pablo Casado, the current PP leader, has vowed to pursue legal action against Sánchez if the new government does not keep the Catalan administration in line.
In any case, the new coalition favors a political solution rather than a judicial one and will be pushing for reinforcement of regional autonomy. Moreover, the agreement between the Socialists and the ERC calls for bilateral interactions between the Spanish and Catalan governments, even paving the way for a consultation with Catalonia’s citizens once a political settlement has been reached.
This is a striking departure from the previous positions held by both the Spanish government and Catalan pro-independence parties (including the ERC). In the best-case scenario, the new government will oversee a policy of détente toward Catalonia’s pro-independence camp, with the latter taking small steps toward more self-governance, and with both sides rediscovering the spirit of the 1978 Constitution. Ultimately, though, no constitutional reform will be possible without the PP’s buy-in.
The new government will thus be a fragile one. In addition to addressing an economic slowdown, it will have to build parliamentary majorities for each of its policy proposals in a deeply polarized political environment that recalls the “two Spains” described by twentieth-century Spanish poet Antonio Machado in the 1910s.
Still, as Portugal’s positive experience under a left-wing government shows, fiscal sustainability will still be possible, particularly if the centrist PNV is able to exert a moderating influence on the coalition. It will be rough going. But with skill and luck, the new government could both survive and deliver on some of its promises. If so, it will have rescued Spain from the political dysfunction gripping other European Union countries, and established it as a stabilizing force on the continent.
Xavier Vives is a Professor of Economics at IESE Business School.