Lack of government in Spain could add to economic shock from Brussels sanction

Recent opinion polls reignited market concerns about a Podemos-led government in Spain, but that was still far from a ‘done deal’, although the possibility did exist now of a costlier budget battle with Brussels , strategists at SocGen said.

Nevertheless, should those polls prove correct then Spain’s Socialist party, which is known by the acronym PSOE, could see itself pushed into the role of ‘king maker’ and be made to choose between supporting Podemos or a Grand Coalition, the broker said.

In turn, the likelihood that PSOE would end up as a minority partner meant it faced significant risks of its base of support being weakened at the next elections.

In any case, the formation of a new government in Madrid was likely to be a drawn-out process and would likely to take a few months, SocGen analyst Yvan Mamalet said in a research report sent to clients.

That would add to the uncertainty-induced economic slowdown in the country and lead to a more challenging showdown with Brussels on the Spanish budget, the broker said.

“Note that the lack of stable government (or lack of government at all) in the context of the looming EU Commission decision on the Spanish budget (due during the summer) will no doubt add to the uncertainty shock and hence negatively impact GDP growth further.

“The political instability will make any adjustment to the 2016 and 2017 budgets challenging, further increasing the chance of sanctions from the EU Commission.”