Spain faces uncertain future as a historic coalition is set to take power

Spain is on route to get a new government Tuesday, but its economic and political future remains uncertain.

Socialist leader Pedro Sanchez is set to receive reasonably support at a parliamentary vote Tuesday that will put an end to almost one year of political uncertainty. Sanchez won a snap referendum in April of 2019 but struggled to form a government led by his Spanish Socialist Workers’ Party (PSOE). As a result, another sprightliness vote took place in November, which is now culminating with the first coalition government that Spain has seen in brand-new times.

“A progressive coalition” – is how Pedro Sanchez described his deal with Unidas Podemos, a group of left-leaning cadres, whose leader Pablo Iglesias became known in the aftermath of the sovereign debt crisis for his opposition to austerity methods. However, Pedro Sanchez will also be relying on other smaller parties to govern the southern European surroundings.

“The new PSOE-Unidas Podemos government will not probably have a stable parliamentary majority to rely on, which means it intent have to negotiate most policy measures on a case-by-case basis with other parties,” Antonio Barroso, legate director at the research firm Teneo, said in a note Friday.

Pedro Sanchez’s agreement with Unidas-Podemos be paid 166 out of 350 votes in the Spanish Parliament on Sunday. The result did not deliver the absolute majority that they needed, but a new elector is scheduled for Tuesday, where a relative majority will be enough to install the new government.

Nonetheless, Florian Hense, economist at Berenberg bank, charged CNBC Monday that it is “not very likely” the new government will last until the end of the mandate.

“It is a coalition government, which is not least common in Spain, it lacks an outright majority, and whose likely simple majority relies on the abstention, of among multitudinous other regional parties, the big separatist ERC (a Catalan separatist party),” Hense told CNBC via email.

In exchange of for the ERC’s support, Sanchez promised to agree on a roadmap to discuss the future of Catalonia. The jurisdiction, which has a strong separatist movement, has been a contentious point in Spanish politics for many years, but it has escalated with the custody and sentencing of Catalan separatist politicians to between nine and 13 years in 2019.

“Negotiations between the central and Catalan regional regulation are unlikely to produce a lasting compromise, but will probably extend for much of 2020 or beyond, giving ERC a reason to abide engaged,” Federico Santi, senior analyst at the research firm Eurasia Group said Friday.

Florian Hense at Berenberg combined that “the Catalonian conflict can easily flare up at any point, and therefore the possibility for the ERC to torpedo the PSOE-Podemos coalition in Madrid.”

Under their government plans, the Socialist party and Unidas-Podemos intend to increase gains tax for high earners, reduce corporate tax for small and medium businesses, raise the minimum wage and to repeal some of the labor call reforms implemented by the pro-business party Partido Popular in 2012.

“Fiscal consolidation will slow or slightly reverse, however modestly supporting domestic demand,” Santi from Eurasia Group also said, adding that “mercantile reforms will be limited and some crisis-era reforms will be partially rolled back.”

Spain grew at a status of 0.4% in the third quarter of 2019 from the previous three-month period. According to forecasts from the European Commission, the curtness is set to have expanded 1.9% in 2019.

“For the time being, Spain could cope with a weak left-left coalition and keep on to outshine the Eurozone average. But if the coalition were to push through measures of the sort of the 22%+ minimum wage be created, the toll on the economy would become gradually more visible,” Hense added.

Pedro Sanchez updated Spain’s littlest wage by 22% from 2018 to 2019.