Spanish government begins to make up for lost time

October 24, 2016

The author is a Reuters Breakingviews columnist.  The opinions expressed are her own.

Spain is no longer waiting until manana to form a government. The country looks set to finally have a functioning administration after the country’s Socialist Party agreed to allow acting Prime Minister Mariano Rajoy a second term, ending 10 months of political deadlock. He will now begin arduous tasks like cutting the budget deficit as the economy slows. A fractured parliament won’t help.

Spain’s political vacuum hasn’t so far done much damage to the economy.  GDP is set to grow by 3.1 percent this year – nearly four times faster than Italy’s, according to forecasts by the International Monetary Fund. Low interest rates and energy prices have helped, as has booming tourism. Job creation helps boost confidence and spending.

Rajoy’s main challenge will be to shrink the country’s budget deficit to 3.1 percent of GDP next year, in order to comply with European Union rules. This will require some combination of higher taxes and a tighter leash on government spending. As a result growth is expected to slow to 1.8 percent in 2017, according to Barclays analysts.

Madrid must also grapple with other issues like the restive Catalonia region, whose government has pledged to hold an independence referendum in 2017. Then there are a host of other reforms pending in the labour market and pensions.

The political climate will complicate those tasks. The Socialist Party is engaged in an acrimonious internal dispute which led to the recent resignation of leader Pedro Sanchez. Though it is deeply ambivalent about allowing Rajoy a second term, polls suggested it would have fared even worse in an election. The leftist Podemos party has its own internal problems but isn’t short of ambition. Centrist Ciudadanos is reform-minded, but also ambivalent about Rajoy and the ongoing corruption scandals engulfing his People’s Party.

All this points to a weak and possibly short-lived parliament. Still, a weak centre-right government is better than nothing. Spanish voters were in no mood to go the polls for a third time in a year.  Rajoy will have to work hard to make up for lost time.

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