With yet another election on the horizon, Spain feels like one of Europe’s most politically fractured countries. But investors are not worried.
Why? The markets sense a still-robust economy and a pro-European consensus. That wasn’t the case in Italy and Brexit-battered Britain, two nations that also flirted with imminent elections but whose Euroskepticism raised red flags.
So even if Spaniards head back to the polling booths on Nov. 10 for the fourth time in as many years, who cares. Stocks rose and the spread between 10-year Spanish and German bonds narrowed.
Spain’s mainstream parties have been struggling to form governments since 2015 and while the stalemate is a cause of angst, the splintered politics have kept the more extreme populist fringes at bay. If anything, Spain feels more integral than ever to the European Union.
“This is not political instability as we see in Italy,” said Alfonso Benito, chief investment officer at Spanish asset manager Dunas Capital. “Both parties with real chances to lead a government are mainstream parties, both pro-Europe and that’s what markets care about.”
There is little reason to expect that any government that might emerge will do things such as raise taxes excessively or start over-regulating business — the unresolved Catalan question remains the biggest headache. A climate of ultra-low interest rates helps keep things ticking along.
King Felipe VI ruled on Tuesday that there was no chance of a government being formed, a decision that set the constitutional monarchy on course for elections in two months.
Back in April, Pedro Sanchez’s Socialists emerged as the biggest party but he was short of an overall majority in parliament. He is acting prime minister and talks to secure the support of the anti-austerity party Podemos led nowhere.
The thinking now is that in a new election, he might be able to raise his standing and somehow manage to do without a pesky, unreliable ally that would force his hand into potentially market-unfriendly measures.
That’s not to say no one is worried about what’s happening in Spain.
The chairman of the country’s main business lobby described the deadlock of the last four years as a “lamentable spectacle.” One likely scenario is a new minority Socialist government emerges that can’t pass a budget or enact basic economic reforms.