By: Sebastian Mariz, CEO of Influence Spain
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Inflation rates not seen since the 1940s, gloomy economic forecasts until 2027, shifting voter tendencies, the on-going war in the Ukraine and tensions in the energy market, have marked the Prime Minister’s agenda and that of his cabinet during the month of April, and had pushed consumer and business confidence down several percentage points to levels not seen since April of last year.
Lower growth forecasts for Spain
Peaking at nearly 9.8%, and dropping slightly to 8.4% this month, Spain’s record high inflation rate, is having a cascade effect on the macroeconomic projections made by several national and international institutions, including the IMF and the Bank of Spain itself. Both have lowered the growth forecasts for Spain this year to between 4.5% and 4.8% from the 5.4% forecast before the Ukrainian war, and to between 3.9% to 2.9% in 2023. These figures are not high enough to get Spain out of the recession caused by the Covid-19 pandemic, before 2024. This is something which Europe’s other major economies, have already been able to do this year. These growth figures are not high enough to allow the Government to significantly reduce the high public debt to GDP ratio of 119%, or the public deficit level of 6.76% of GDP.
End of quantitative easing for Spain
The high inflation rates registered to date, have led the European Central Bank to announce the end of its quantitative easing policy for Spain, and the purchase of Spanish Treasury bonds. This announcement will reduce the Government’s margin for using public debt to finance public services, public pensions and social welfare programmes, and may push the European Commission to enforce euro stability criteria on public finances sooner rather than later. If the European Commission were to do so, it would put the PM in a very difficult position by further straining the already very tense relations with the junior partner in the coalition.
Weak economic data and high inflation rates could also spell further challenges for the Prime Minister later this year, when he is forced to decide whether to stick to his promise of indexing public pensions to the inflation rate, or not. If rates remain high, this could mean billions of euros in additional spending for the Government, further pushing up public debt and deficit figures. If he decides to decouple pensions from inflation rates, he could anger more than 15 million voters who depend on public funds for pensions, salaries or unemployment insurance, as well as generate additional conflict with his junior partner in the Government. In order not to provide pensioners, civil servants and his junior partner with an indexation figure they could later claim, the Prime Minister has instructed his Finance Minister to remove oil, gas and electricity prices from the macro-economic projections she has sent to the European Central Bank on Saturday the 30th of April.
Intervention on the gas market
In the meantime, the Environment Minister has been able to convince Brussels to agree to a temporary twelve-month State intervention of the gas market so as to bring electricity prices down. The intervention proposed by the Minister, and agreed on with Brussels, is to set electricity prices for electricity generated in gas fired power stations, to €50 MW/h. This is expected to have a knock on effect on the price of electricity on the spot market, bringing it down to €120 MW/h, thus cutting electricity prices by 50%. Utility companies, and electricity retailers are adamantly opposed to Government intervention, as are some of the other European Union members, including the Netherlands. They are concerned that allowing the Government to intervene, the gas market could set a dangerous precedent and will mortgage future consumers. According to the utility companies, this mortgage could total up to 5 billion euros, the difference between the price paid to gas companies for gas used in gas fired power stations, and the price at which the electricity generated in these plants is sold on the spot market. The Minister’s proposal is to spread this cost amongst Spain’s 29 million electricity consumers, who would have to pay for it, in future electricity bills.
Conservative coalition
With the agreement on intervening in the electricity market, and the Government’s earlier intervention in the petrol market, the PM hopes to rebound in the polls, and increase his lead over the conservative Popular Party. The latest polls, published by the State owned sociological institute, the CIS, on the 13th April, show the socialists still in the lead with 30.3% of voter support, dropping only 1.2% with respect to figures reported on in March, but only 3 points ahead of the conservative Popular Party. With 27.2% of voter support, the Popular Party has been able to successfully capitalize on the unanimous appointment of a new party leader, Alberto Nuñez Feijoo, and the formation of a new coalition government with the far-right Vox party in the region of Castilla and Leon. According to these latest polls, if elections were held today, the conservative Popular Party, would be able to govern in coalition with the far-right Vox party, obtaining 41.6% of the votes, vs. 41% by the socialists and the communists. The liberal Ciudadanos party would not be represented in Parliament, and the other smaller regionalist and radical parties from the Basque Country, Catalonia, the Canary Islands and Galicia would obtain more or less the same number of seats in Parliament, with the exception of Catalonia’s ruling ERC party, and one of the PM’s parliamentary coalition partners, which could lose half of its seats in the Parliament.
Aware of these shifting tendencies in voter support, and convinced that the economic crisis will allow him to win the next general elections, the Popular Party’s new leader is focused on consolidating his leadership of the party, in creating a new shadow government, and in calling for a generalized reduction in taxes, which he knows the Government cannot agree to. Several names have already been leaked as potential candidates for the positions of shadow finance, fiscal affairs and energy ministers, as well as the new party spokesperson. Names which include former ministers under the Rajoy and Aznar governments, such as, Alberto Ruiz Gallardón, Iñigo Méndez Vigo and Josep Piqué. The regional Premier of Andalucia has also announced early elections in the region this spring, in which he hopes to be reelected, but which could require the formation of a new coalition with the far-right Vox party. Winning these elections could further bolster voter support for the Popular Party at a national level.
Parties such as ERC and the Basque conservative Party, the PNV, are also adapting to these new polls. In the case of ERC, aware of its declining popularity amongst Catalan voters, the strategy has been to increase public criticism of the Prime Minister and the coalition government, without breaking ties all together. The PNV, stuck with parliamentary support from the socialists in the Basque parliament, has remained quiet, but has also congratulated Alberto Nuñez Feijoo for his appointment as new party leader of the Popular Party. The regional Premier of the Basque Country and Nuñez Feijoo enjoy good and constructive relations at an inter-regional level.
Possible call for general elections
These shifting tendencies are eroding confidence levels within the PM’s coalition government, and in particular within the socialist party itself. Several regional party leaders are warning the PM that the worsening economic situation, and the growing popularity of the Popular Party and the far-right Vox party amongst voters, could mean losing several important municipal and regional governments in the regional and municipal elections of May 2023. Historically, losing municipal and regional elections, usually means losing the general elections. This puts additional pressure on the PM to decide whether or not to call general elections before May of next year. His personal preference is to wait until the end of the legislature in December 2023, allowing him to preside over the European Council of Ministers during the Spanish Presidency of the European Union in the second half of 2023. The PM is also gambling on a stronger economic recovery thanks to the new record number of French, British and German tourists visiting Spain this year and whose growing numbers are expected to allow tourism figures to fully recover from pandemic lows.
The reelection of Macron in France, the PM’s partnership with President de Sousa in Portugal, and warming relations with the Biden administration, also work in favor of the PM’s plans to hold out until the end of the legislature in December 2023, and reduce the risk of new elections. A worsening of the economic situation, new shocks on the international front, and infighting within the communist party, and between members of the PM’s cabinet, could, however, ruin the PM’s plans, and force him to call elections later this year, or in early 2023.
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