Spain's Election Winners Promise Podemos Won't Derail Economy

(Bloomberg) -- Spain’s Prime Minister Pedro Sanchez has a message for investors: the economy is in safe hands.

Sanchez won the greatest number of seats in parliament in elections on Sunday and his Socialist Party is well-positioned to cobble together a governing alliance that would give the premier a shot at four years in power. If he secures a second term, Sanchez would continue to whittle down Spain’s budget deficit and debt pile and boost public spending, probably by raising some taxes.

“I want to send a firm and reassuring message to investors and markets: The economic policies will continue,” Manuel de la Rocha, senior economic adviser to Sanchez, told Bloomberg TV on Monday. “Fiscal consolidation, macro-economic stability and reduction of inequalities and very pro-European policies will be the priorities for the next government.”

Sanchez reduced Spain’s budget deficit to 2.5 percent at the end of 2018 and has pledged to narrow the gap to around 2 percent for 2019. Spain has one of Europe’s widest budget gaps and investors have expressed concern that a potential alliance with anti-establishment Podemos would force Sanchez to bow to the party’s demands for more hikes in public spending. De la Rocha said that regardless of who ends up being Sanchez’s parliamentary partners, the premier’s commitment to fiscal consolidation will be “unwavering.”

Spain's Election Winners Promise Podemos Won't Derail Economy

Sanchez has already shown that’s his game plan, De la Rocha said. Since becoming prime minister in June, he has been relying on parliamentary ally Podemos to pass legislation that’s focused on boosting social spending -- hiking the minimum wage and pension payments -- while also chipping away at the budget deficit.

Spain’s central bank expects the economy to expand by 2.2 percent this year and economists don’t expect a Sanchez-led government to knock that expansion off track. The economy has continued to defy a broader euro zone slowdown. The unemployment rate is slowing ticking down, boosting consumer spending, the motor of Spain’s economy.

Spain's Election Winners Promise Podemos Won't Derail Economy

A Socialist-led government is likely to continue to stimulate the economy with fiscal measures, which should help to support growth in the short term, Bloomberg Intelligence economist Maeva Cousin says. The risk is that higher taxes or an additional increase in the minimum wage could hurt Spain’s competitiveness in the longer term, she notes. Podemos has said it wants to increase the minimum wage again after a 22 percent increase that took effect in January.

What Bloomberg Economists Say

“Labor market policies, increases to the minimum wage and higher taxes could impact Spain’s structural position and reduce potential growth in the medium-term.”
--Maeva Cousin, Euro Area Economist
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Spanish equities underperformed the European market on Monday and the country’s IBEX 35 is the worst performer index among the largest European peers, with utilities among those falling the most. The reaction in bond markets was somewhat positive, with the extra yield investors demand to hold Spanish 10-year debt over similar German securities narrowing by three basis points on Monday.

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