Spain Faces Crucial Election Sunday

Spaniards will vote in a crucial parliamentary election on Sunday to determine how the government will tackle the economic crisis that has strangled the country for at least the past two years.

With a collapsed property market and a Eurozone-high unemployment rate in excess of 20 percent, unrest and anger run deep against the ruling leftist Socialist Workers Party, which is almost guaranteed to lose the election.

Recently, the yield on Spain’s 10-year sovereign bonds soared to just under 7 percent, raising alarm bells over Madrid’s perceived ability to tackle the debt and deficit. The 7 percent barrier typically triggers the need for huge bailouts -- i.e., the scenario in Greece, Ireland and Portugal.

However, given the size of Spain’s economy, a financial rescue there would be cataclysmic for Europe.

Burdened by high fiscal deficits, Spain is also straitjacketed by anemic GDP growth, with many expecting the economy to slip into recession next year.

Prime Minister Jose Luis Rodriguez Zapatero (who will not stand again for re-election) called an early election amid massive discontent over the nation’s disastrous finances and demands for a snap poll by the opposition.

Although Zapatero insists that he has established a sturdy program for an economic recovery -- through a series of draconian and highly unpopular austerity measures -- the right-of-center Popular Party is virtually assured to win. Indeed, the Socialists already lost local polls in May.

The Popular Party, who have been out of power since 2004, will place its leader Mariano Rajoy Brey as its candidate for Prime Minister. He will be opposed by the former Socialist Interior Minister Alfredo Perez Rubalcaba.

Clearly, the deteriorating economy (and how to uplift it) will take center-stage in this election.

While the public is irate over the Socialists’ handling of the economy, there exists doubt and concern over exactly what Rajoy can do. He has refused to clearly spell out his program, leading to charges from the Socialists that he secretly seeks to order huge spending cuts (beyond what has already been proposed by the Socialists) and massive privatization of state-owned assets.

All Rajoy has said is that he will cut spending across the board (except with respect to pensions), but he hasn’t provided details to satisfy either the public or the markets.

Professor Pablo Fernandez of the IESE Business School, in Madrid, told The Independent newspaper of Britain: There is total uncertainty about the cuts. We know there'll be cuts but we don't know where or how deep. If Mr. Rajoy announced who his Minister of Finance and economic team will be, that would be one less doubt for the markets, too.

Fernandez added: This insecurity about the measures [Rajoy] will take will continue to trouble investors, certainly until he names his economic team ... and we mustn't forget that some people are interested in the instability continuing, when the values rise and fall like this [is] where they make their money.

IHS Global Insight of London also is skeptical that a Popular Party government can make much of a dent in Spain’s crushing fiscal woes.

“Although the [Popular Party] could secure an overwhelming parliamentary majority, it will not have an easy ride,” IHS said.

“Expectations are high and the party will need to move quickly to convince the markets that Spain is committed to lowering its fiscal deficit and reviving economic growth. Inevitable austerity measures could trigger a negative public reaction, which would make their implementation, and the [Popular Party]'s job, even more difficult.”

Interestingly, IHS noted that Rubalcaba is more popular with the public than Rajoy, but that will mean little given the country’s grave economic backdrop.

Assuming a victory by the Popular Party, the key will be if they can secure an absolute majority in parliament (which would preclude the need to make concessions to pesky smaller coalition parties).

“Such an outcome would be positive as it would give Rajoy enough leeway to proceed with heavy budget cuts without being forced to offer concessions to smaller regional parties in return for their support,” IHS said.

Still, the conservatives, IHS asserts, are more likely to take definitive measures to fight the debt crisis.

“The [Popular Party] has pledged to support small- and medium-sized enterprises and self-employed individuals, calling them the backbone of the Spanish economy,” the group stated.

“The party will be more likely to introduce further cost-cutting measures; although, similar to the [Socialists], it has stated that any such measures would exclude the health care, education and pension systems. Instead, the conservatives want to concentrate on a revolution in human resources and structural reforms. The [Popular Party] plans to offer tax breaks for job-creation and reinvest profits for innovation and reduce bureaucratic red tape.”

Furthermore, IHS adds, the Popular Party also plans to “free up the labor market by simplifying employment contracts and giving preference to wage deals at a company level, rather than broader collective agreements. The party also plans to introduce tough sanctions for public authorities that spend unbudgeted funds, and to close down public bodies ‘whose work can be done by the administration’.”