Sanchez Wins Spanish Vote But May Need Help From Separatists

(Bloomberg) -- Socialist Pedro Sanchez is set to return as prime minister of Spain with his left-leaning allies close to a majority, though he may still rely on Catalan separatists to govern.

The Socialists won 123 seats in Sunday's election, up from 85 in 2016. Its left-wing ally Podemos has another 43 seats while the Basque Nationalists, another group likely to support Sanchez, has six. That would give Sanchez 172 seats. He needs 176 for a majority.

With parties preparing to fight the European elections at the end of May, it is likely to be at least a month before any alliance takes shape.

If the 47-year-old Sanchez can deliver Spain's first stable government in almost four years he'll have a chance to chart a way forward for the country after years of political turmoil. With the economy growing faster than the euro-zone average, he'll also become the standard bearer for social democracy across Europe.

A second Sanchez government bucks the trend of crumbling voter support for Europe's other center-left parties. He's already served 10 months as the head of a minority government but was forced to call a snap election when he failed to pass his budget.

Read More: SPAIN REACT: Stronger Sanchez-led Force Would Help Economy

Sanchez has two main options: an alliance with the liberals of Ciudadanos or a cobbled-together government with Podemos and a hodgepodge of smaller, regional parties with the support of moderate Catalan separatists. The arithmetic for an alliance with Ciudadanos is more straightforward -- together they have 180 seats -- but politically it's problematic.

Ciudadanos's leader Albert Rivera has ruled out supporting Sanchez to focus on becoming the the dominant force on the right, while Sanchez's supporters are similarly opposed. Socialist voters chanted “Not with Rivera” as he made his victory speech at the party headquarters in Madrid. Sanchez, however, said Sunday night that he was still keeping his options open.

Esquerra Republicana, the more moderate of two Catalan separatist groups, won 15 seats. If Sanchez doesn't convince Esquerra Republicana to vote in favor of his premiership, he could settle for the party's abstention. Spanish parliamentary statutes stipulate that if a candidate for prime minister doesn't win a first round of voting by a majority, he can still be appointed if more lawmakers vote in favor of him than against him in a second round of voting.

For Sanchez, those numbers appear to add up. 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. In the stock market, however, the benchmark IBEX 35 Index underperformed European counterparts.

The premier has wooed Spaniards by boosting the minimum wage and pension payments while remaining committed to spending within the fiscal limits set by the European Union.

Sanchez also capitalized on the emergence of a new nationalist party to motivate supporters, who have historically been less reliable than voters on the right. Vox is entering parliament for the first time, but with 24 seats, it fell short of expectations. The traditional conservative group, the People's Party, lost about half its seats and will have 66 deputies in the new parliament.

Newcomers

Vox's parliamentary presence will mean Spain is no longer exempt from the right-wing populism that's swept across Europe and the U.S. But Spain remains a particularly enthusiastic member of the EU. Not even Vox is suggesting pulling out.

The campaign was dominated by the question of how to handle the aftermath of Catalonia's 2017 push for independence. Sanchez said the best way to calm tensions after an illegal independence referendum is to talk about granting Catalonia more autonomy, though he's ruled out an official vote on secession.

His hand strengthened post-election, a second-term Sanchez would likely continue down the policy path of more social spending paid for by somewhat higher taxes on corporations and the wealthy.

Spain's budget deficit fell in 2018 to 2.5 percent and Sanchez and his ministers have pledged to keep whittling it down. Sanchez is unlikely to undertake the sweeping reforms that Spain's economy needs to tackle its high unemployment rate and other structural problems, but neither is he likely to implement measures that would derail Spain's robust recovery.

--With assistance from Charlie Devereux, Katerina Petroff, Thomas Gualtieri, Esteban Duarte and Todd White.

To contact the reporter on this story: Jeannette Neumann in Madrid at jneumann25@bloomberg.net

To contact the editors responsible for this story: Ben Sills at bsills@bloomberg.net, Charles Penty

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