Investors’ Guide to Spain’s Latest Election

Editors’ Note: Our political commentary is non-partisan by design. We favour no party nor any politician and assess developments for their potential economic and market impact only.

Spain went to the polls in late July, five months ahead of schedule, as Prime Minister Pedro Sánchez and his centre-left Socialist Workers’ Party (PSOE) sought to limit the damage from a resurgent centre-right Popular Party (PP). Voters returned a hung Parliament giving neither side a clear path to a majority, likely raising uncertainty for the time being—but also pointing to political gridlock in the longer term, which we think is likely to benefit markets as uncertainty gradually falls.

When Sánchez called a snap election after the PSOE lost badly in May’s local elections, commentators we follow pencilled in a win for the PP and its leader, Alberto Nuñez Feijoo.^[i] The PP had a comfortable polling lead at the time, and many political analysts we follow projected it would land them a coalition government with the more right-wing, populist Vox.^[ii] But Sánchez took the risk anyway, seemingly hoping the PSOE and its more populist left-wing allies, Sumar (formerly known as Podemos) could hang on to enough seats to leave the right-wing bloc shy of a majority—giving him a chance to reform a government with support from small regional parties.^[iii]

Now, with 100% of Sunday’s vote tallied, it looks like his gambit might have paid off … sort of. The PP topped the leaderboard, taking 136 seats in the 350-seat chamber—47 more seats than it won at 2019’s election.^[iv] But Vox lost 19 seats, winning just 33.^[v] That gives the right-wing bloc (which also includes the Navarrese People’s Union, a tiny regional party) 170 seats, 6 short of a majority. Complicating matters, the PSOE gained 2 seats—winning 122—whilst Sumar won 31. If Sánchez can successfully corral all the left-leaning regional parties, his alliance would have 172 seats. Closer to a majority than the right-wing alliance, but not quite there. Meanwhile, waiting in the wings as kingmaker: Catalan separatist party Junts, which won seven seats and whose leader is a fugitive living in exile in Belgium.^[vi] 

Party leaders have nearly a month until the new Parliament sits on 17 August, giving them a few weeks for preliminary negotiations. Then, King Felipe VI will sit down with the leaders, determine which is likeliest to be able to win a confidence vote, and invite them to form a government. From there, the nominee gets several weeks more to reach an agreement on a coalition. If the new cabinet doesn’t win an absolute majority on the first try, it can aim for a minority government in the second vote. Round two requires only a simple majority, making it possible for a minority administration to win if enough MPs abstain.

How this all shakes out is unclear—hence the near-term uncertainty. The PP’s alliance with Vox will likely be an obstacle for smaller parties, and their stance against regional separatism seemingly makes Junts an unlikely ally, to say the least. It also seems unlikely, in our view, that enough left-leaning parties would abstain from a second-round vote to land them in office, but stranger things have happened. On the flipside, we don’t think it is clear that Sánchez can pull together all the disparate parties and interests necessary to get a left-wing alliance in office, especially if the concessions necessary to win Junts’ support prove unpalatable. Hence, we could be looking at a second election later this year.

Overall, though, we think gridlock looks like the ultimate winner. Whether or not there is a second election, the next government looks almost certain to be a multiparty mix. In our experience, even ideologically aligned coalition partners tend to get very little done after squabbling over legislation. Major initiatives often get sanded down into something too watered-down for hardline members of Parliament’s tastes. Thus, few major changes tend to pass, which we think gives businesses more clarity—enabling more risk-taking and investment. So whilst uncertainty could be a market headwind in the near term, perhaps bringing more short-term volatility, we think that likely fades into the tailwind of gridlock over time.