Wishy washy

Spanish election offers only weak choices

Britain doesn't have a monopoly on difficult democratic decisions. While investors are preoccupied by the European Union (EU) referendum on June 23 and its aftermath, those in Spain are also worried about general elections taking place three days later. The second round of elections since December will either produce a weak centre-right minority, or hard-left coalition. Neither is what the euro zone's fourth-biggest economy needs.

Spain has held up remarkably despite having a caretaker government for the past six months. Gross domestic product (GDP) expanded 0.8 per cent in the first quarter. But the country still faces big challenges that need further structural reforms. The unemployment rate is 21 per cent and the proportion of temporary workers is high. The country missed its EU-agreed budget deficit targets by a wide margin last year, and public debt ended last year at almost 100 per cent of GDP.

The latest polls show the results may not differ much from last time, with the incumbent People's Party (PP) taking the most votes. There is one important caveat. Polls show anti-austerity Podemos and the United left, which joined forces in May to form Unidos Podemos ("United We Can"), would overtake the socialists as the second party. Nobody would have sufficient seats in parliament to form an absolute majority.

A grand coalition looks unlikely, and the socialists would be caught in the middle. Their beleaguered leader, Pedro Sanchez, may be forced to choose between facilitating a government of the incumbent PP and possibly smaller centrist Ciudadanos by abstaining. But he could instead choose to be a junior partner to Unidos Podemos.

The first outcome - which seems more likely - would yield a weak and probably short-lived government. The second one would also be weak but arguably make investors more uneasy. Unidos Podemos has vowed to push for a referendum on independence in Catalonia, and give public spending a big boost, among other things. Also worrying is the promise to roll back existing labour-market reforms, or increase the role of public banks. One consolation is that Spain's room to make radical changes is somewhat limited by EU fiscal rules and could be tempered by the inclusion of the socialists. Either way, political uncertainty will persist.