Last weekend’s dismal local election results in Spain should be a wake-up call for Europe. Since not only do those elections suggest that Spain now has joined the ranks of other major European countries like France and Italy, where political fragmentation has taken root. Those results also have clouded significantly the prospects for a compromise IMF-EU Greek loan arrangement. This could very well heighten the probability of an early Greek default that would usher in a new and more difficult phase in the Eurozone debt crisis.
The most significant aspect of the Spanish local elections was not simply that Mariano Rajoy’s conservative Partido Popular, which barely mustered 27 percent of the vote, was handed its worst drubbing in recent memory. Rather, it was that Spain has now moved from a stable two-party system to a potentially very much less stable four-party system. Indeed, whereas in the recent past, the two establishment parties, the Partido Popular and the Socialist Party, normally garnered at least two-thirds of the overall vote, in last weekend’s election they barely received half of the vote. Instead, they found themselves not much ahead of two upstart parties, the radical-left Podemos Party and the reformist minded Ciudadanos Party.
The immediate fall out of these local elections is that they could heighten political uncertainty ahead of the Spanish general elections, which are expected to take place towards the end of the year. In particular, they could heighten the anti-austerity rhetoric of all three political parties not in government, which served them so well in the local elections. It also makes it all too likely that the next Spanish government will be a minority government, where the radical Podemos Party could very well be the king-maker.
This will almost certainly raise questions in markets as to whether Spain will stay the course of economic adjustment. Making matters more serious yet is the fact that this uncertainty would be occurring at the very time that the Greek crisis is coming to a head and that Portugal is headed to general elections in October, where the anti-austerity Socialist Party is ahead in the polls.
The Spanish local election result is also all too likely to have an important bearing on the already fraught Greek negotiations with the IMF and Greece’s European creditors. Since those creditors will not wish to give the radical Podemos Party a leg up in the forthcoming Spanish general election by being too generous to Greece and by thereby allowing Podemos to campaign on the platform that it pays to stand-up to Spain’s European taskmasters. With Greek Prime Minister Alexis Tsipras having little room for maneuver in making concessions to Greece’s European creditors for fear of splitting his already divided Syriza Party, the last thing that Europe needed was to lose its room for maneuver for fear of the broader fallout of making any concessions to Greece ahead of the forthcoming Spanish general elections.
One has to hope that European policymakers are alert to the heightened risks that now face the European economy following the Spanish elections. One also has to hope that they now redouble their efforts to get the European economy moving again with a view to limiting further damaging political fallout from Europe’s very poor economic performance over the past six years.
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