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Spain Could Follow Greece Down Anti-Austerity Trail

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As Greece continues to duke it out with the European Union over an end to the bailout and its attendant austerity measures, Spain is no doubt watching very carefully.

The victory of Alexis Tsipras’s Syriza party in the Greek elections, on a platform to end cuts in services and benefits as conditions of its bailout from the EU, has emboldened Spain’s Podemos (We Can) party. Spain too has been laboring under austerity measures, and Podemos has gained popularity in tandem with tough economic conditions that include high unemployment and growing discontent with the country’s leaders.

Greece, facing the possibilty of running out of cash next month, reached an agreement with European finance ministers Friday to keep bailout funds flowing for “four months under conditions” that have yet to be finalized, Bloomberg reported.

While Greece and Spain are very different countries, as both current leaders in Madrid and Podemos itself are quick to point out, the fact remains that many Spaniards have been cheering from the sidelines as Syriza kept its campaign promise to challenge the terms of Greece’s bailout. They hope that at home, Podemos might do the same—although they will have to wait till November’s elections to have the opportunity.

In one similarity to Greece, Podemos, led by Pablo Iglesias, has toned down its anti-austerity rhetoric, much as Syriza did pre-election in Greece. However, that has not dampened the enthusiasm of many for what they see as Podemos’s promise to wreak change that the current Spanish government will not pursue. A massive rally at the end of January saw tens of thousands gathered to cheer Greece and celebrate the possibility that Spain too could renegotiate its financial arrangements with the EU.

Yet Spain’s present government is not excited at the prospect, particularly since it loaned Greece 26 billion euros—a fact that Prime Minister Mariano Rajoy undoubtedly had in mind when at a recent summit in Brussels he insisted that Greece should keep all its financial commitments.

Spain has finally begun to exit from seven years of financial difficulties, and its growth is among the fastest in the euro zone. Still struggling with a high rate of unemployment, however, Spain has seen investors grow happier than people struggling to find jobs and make ends meet. Its borrowing costs are around record lows, and Spain has no trouble with finding cash in capital markets.

According to Fitch Ratings, Spain’s banking system has been growing stronger under restructuring in the wake of the country’s bank bailout. An increase in tax receipts, said the ratings agency, is due “in part to better-than-forecast domestic demand.” In fact, it’s doing so well that Fitch said, “Spain was the only major eurozone economy to see its growth forecast revised up in our September ‘Global Economic Outlook.’”

But austerity has of course not been popular in Spain any more than it has in Greece, and other measures enacted in the areas of labor, the pension system, and the country’s fiscal framework have certainly not won any popularity contests.

Greece’s bailout expires at the end of the month, and negotiations have been less than productive—although it thus far has stuck to its guns in refusing either to consent to an extension of the bailout package or to drop its demands for concessions on austerity measures and debt repayment. Madrid’s current government has distanced itself from Podemos, insisting that the differences between the two countries include the fact that Spain did not have to resort to a full-scale bailout (it did receive a bailout for its banking system, however, which it has already exited).

But with the rise in popularity of Podemos, often compared to Syriza, Madrid’s current leaders may nonetheless find themselves out in the cold come elections. Markets are beginning to think so, as evidenced by the increase in Spanish bond yields since Syriza emerged victorious at the polls.

Spanish yields had been lower than those on Italian bonds, with Italy viewed as perhaps less willing to stick with economic reforms. However, the retirement of Italy’s president before the end of his term made investors nervous, lest whoever took his place might fail to support Prime Minister Matteo Renzi’s program of fiscal reforms; their fears that the populist wave could engulf Italy as well made themselves known in the bond markets.

But since the election of Sicilian judge Sergio Mattarella as the new Italian president, and investors’ perception of him as a supporter of Renzi’s reforms, has largely assuaged the worries of investors. In addition, the changing situation in Greece coupled with the increasing likelihood of a Podemos victory in Spain has changed the dynamic, with investors instead now viewing Italy as more willing to stick to reforms than Spain, and consequently punishing Spain in the markets.

According to Francisco Torralba, economist, Morningstar Investment Management, “The political reverberations of Greece to Spain will be very different depending on what happens in Greece.” Podemos was formed in the first place to protest austerity measures, and although it’s a young party—just formed in 2012—its growing popularity could give it the steam to win elections.

Torralba said, “Parliamentary elections will be held in November, and the polls right now place Podemos as the runner-up party, right after the incumbent moderate-right party, and well ahead of the moderate-left Socialist party. This is quite a departure from the traditional political spectrum in Spain, which was always dominated by two moderate parties (moderate right and moderate left), followed at a great distance by minority parties.”

He continued, “Podemos’ results in the November election will be shaped by a combination of domestic and foreign factors. At home, rumors of connections to the Venezuelan regime and tax evasion by some leaders of Podemos could be downfall of this new party. And we’re still quite a few months away from November.

“Abroad, Greece’s fate might play a role too. If Greece were to leave the euro, capital controls, rapid inflation and a deep recession would undermine the popularity of Syriza and, by extension, of Podemos. If Greece stays, while obtaining some concessions from Europe, the popularity of what Syriza’s represents will rise, boosting Podemos, perhaps even leading to a victory.” However, Torralba thinks this is unlikely.


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