Stephanie Kelly (Aberdeen) | The fragmented nature of the Spanish political system makes it unlikely that any party will secure an absolute majority to govern. Therefore, if a government is going to be formed after these elections – something that cannot be taken for granted given the fractured political system – it will be a minority or coalition government.
It is likely that this dynamic will generate much noise and the new parliament will have trouble approving policies effectively and efficiently. In particular, Spain will continue to have trouble approving the Budget. That said, the increase in political noise will have limited impact on Spain´s economic outlook. Political volatility has had little impact on economic growth in recent years, and with economic issues taking back stage in these elections, we see few reasons why this should change. The existing fiscal plans are globally neutral for 2019 and 2020.
In our opinion, these elections are not a major risk event for the market. This is because the Spanish economy is strong; Spanish populist parties are not Europhobic nor as unpredictable as their Italian counterparts; and the system remains anchored in the existence of two major centre parties. It is possible that the Catalan issue will repeatedly arise, but the serious opposition it faces makes real independence very unlikely in the medium term. Of course, this does not mean that markets will not be unnerved if the Catalan tensions return. But we believe that, provided there was no major change in support for Catalonia, or its tactics, it would be an exaggerated and short lived reaction, like last time.
