Investors’ Guide to Spain’s and Britain’s Latest Elections

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

One week out from European politics’ traditional silly season—aka the slow-news stretch in August, when most major players go on holiday—pols in Spain and the UK got some last-minute business out of the way. Spanish voters hit the polls for a general election Sunday, while some Brits voted in by-elections to replace three outgoing Conservative Members of Parliament (MPs). The main thread and winners were near-term political uncertainty and longer-term gridlock, which should benefit stocks as the dust settles and investors realize the likelihood of major economic change creating winners and losers remains low.

Both Sides Win … and Lose … in Spain

When incumbent Spanish Prime Minister (PM) Pedro Sánchez called a snap election after his center-left Socialist Workers’ Party (PSOE) took a drubbing in May’s local elections, most pundits penciled in a win for Alberto Nuñez Feijoo’s center-right Popular Party (PP). At the time, the PP had a comfortable polling lead that most presumed would land them a coalition government with the more populist right-wing Vox. But Sánchez took the risk anyway, 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.

With nearly 100% of Sunday’s vote tallied, it looks like his gambit might have paid off … sort of. The PP topped the leaderboard and is on course to take 136 seats in the 350-seat chamber—47 more seats than it won at 2019’s election. But Vox lost 19 seats, winning just 33. 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—while 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. 

Party leaders have nearly a month until the new Parliament sits on August 17, 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 hash out 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 be a stumbling block for smaller parties, and their stance against regional separatism seemingly makes Junts an unlikely ally, to say the least. It also seems unlikely 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, it isn’t 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, gridlock looks like the ultimate winner. Whether or not there is a second election, the next government will almost surely be a multiparty hodge-podge. 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 MPs’ tastes. Thus, few major changes tend to pass, which gives businesses more clarity—enabling more risk-taking and investment. So while uncertainty could be a headwind in the near term, perhaps bringing more short-term volatility, that likely fades into the tailwind of gridlock over time.

UK PM Rishi Sunak Goes 1-for-3

By comparison, three by-elections in Britain might seem inconsequential. But with the next general election due by January 2025, pollsters watched this one closely for clues as to how that contest could go and what PM Rishi Sunak’s center-right Conservative Party needs to do to avoid getting trounced by Sir Keir Starmer’s revitalized center-left Labour Party and the resurgent centrist Liberal Democrats. It seems this picture is starting to take shape.

Of the three seats up for grabs—all of which were held by the Conservatives heading into the contest—each major party won one. Labour took the seat in northern England, overturning the Conservatives’ 20,000-vote majority and cutting into the “red wall” of northern seats that underpinned the Tories’ 2019 win. The Liberal Democrats took the seat in southwestern England, winning a 29-point swing and cutting into the “blue wall” of traditionally Conservative strongholds. But the Tories clung on to former PM Boris Johnson’s Uxbridge seat in suburban northwestern London by 495 votes. This was the major surprise, as conventional wisdom said voters were keen to punish the party and its former leader for the string of scandals leading to his ouster and formal censure by Parliament. But as much as this irked voters, they appear even unhappier with the London Mayor’s ever-expanding Ultra-Low Emission Zone (Ulez), which hits drivers of older vehicles with a £12.50 daily charge. Initially confined to Central London, Ulez is set to hit the outlying suburbs later this summer, causing a lot of unhappiness amid still-high inflation. Returning Uxbridge to the Conservatives appeared to be an Ulez protest vote.^[i]

As a result, Labour and the Conservatives appear to be triangulating. Starmer, who has pushed moderation since becoming Labour leader, used the Uxbridge loss to continue tugging his party to the center—this time on environmental policy. Sunak, meanwhile, has hinted at abandoning the scheduled ban on the sale of new gas and diesel-powered cars, which is due to take effect in 2030. When asked if he stood by the ban, Sunak talked only of “investing more in home-grown energy, whether that’s more nuclear or offshore wind.”[ii] The unspoken refusal to commit isn’t surprising. The ban was one of Johnson’s flagship environmental policies, but it has become increasingly unpopular and, according to most analysts, unfeasible. It seems the Ulez revolt opened a shiny political door for a U-turn, though an official announcement is still pending. But if the Tories were to moderate here, it would clear one of the country’s major economic uncertainties.

Elsewhere, some have suggested Sunak should follow Sánchez’s lead and call a snap election now in hopes of catching the opposition off guard and limiting the damage. So far, that seems to be a political science thought exercise rather than a viable probability. The Conservatives’ two losses last Thursday were decisive, and results suggest people voted tactically for the party with the best chance of unseating the Conservatives in each seat. Moreover, the party remains deeply divided over both economic and social policies, making it rather complicated to draft a cohesive general election manifesto now. Most earlier indications were that Sunak would prefer to run out the clock in hopes of being able to cut taxes before the next vote, which seems logical.

But this, too, points to gridlock. Internal divisions water down big bills in the same way divided coalitions do—the horse trading just happens between factions instead of parties. A snap election could raise uncertainty, but absent that, intraparty gridlock should keep politics from being a major headwind for UK stocks.