Socialists jump into bed with the far left after disappointing election results. What might the resulting government mean for foreign investors?

Pedro Sánchez (left), Pablo Iglesias (right)

The most likely next government of Spain will be an unstable coalition of left-wing and regionalist parties, but with a programme that shouldn’t alarm foreign investors too much.

Elections last Sunday didn’t work out as planned for the Socialist caretaker-president Pedro Sánchez, who expected to boost his position, but in the end lost some seats whilst the right made gains, especially the new kids on the block – the far right Vox party.

Within 48 hours of the result the Socialists (PSOE party), led by Sánchez, reached a power-sharing agreement with the far-left Podemos party, led by Pablo Iglesia, who also lost seats in his worst election result to date. They now have to get a bunch of regional parties on board to stitch together a parliamentary majority to inaugurate the new government. Regional support will not come cheap, especially in Catalonia, so another round of elections next year is not out of the question.

The Socialists (PSOE) and Podemos have signed a rather vague agreement of principles for their coalition government made up of nine points including consolidating growth and employment, fighting corruption, protecting the environment, promoting feminism, and guaranteeing the right to housing. There’s not much to frighten investors in this ‘pre-agreement’, though the devil will be in the detail.

The Spanish hard-left at the gates of power

Since the transition to democracy the hard left has been almost irrelevant in Spain, but all that changed with the advent of Podemos (which means ‘we can’ in Spanish).

The Podemos party emerged from the indignation caused by Spain’s economic crisis and corruption scandals that tarnished both the centre-left PSEO and centre-right PP parties after the boom years turned to bust, and the falling tide exposed all the rot in Spanish politics. Neo-Marxists like Iglesias harnessed the mood, and turned it into a political movement to challenge the PSOE on the left.

Given Iglesias’s communist background, firebrand politics, and vocal support for the brutal regimes of Cuba and Venezuela, he doesn’t inspire much confidence outside of Podemos. His economic proposals are seen by many as a threat to growth and jobs, and he makes business and investors nervous. That lack of confidence alone won’t help the economy, on which the housing market relies.

But the reality of Eurozone economies today is that national politicians don’t have as much power as they used to. They have no say over interest rates, and budget deficits are constrained by the EU. If you can’t print money, or borrow too much, and higher taxes only go so far, what’s a left wing populist gonna do? Iglesias has already warned his followers that Podemos will have to “give ground in lots of areas” and to expect a path with “many limits and contradictions.” Hard-left publications like the are already already denouncing the “treachery of Podemos.”

A coalition government with the PSOE and others will also prevent anything too radical coming from the next government, whatever their electoral promises. In the light of the PSOE-Podemos agreement the Spanish stock market dropped a bit, and the bond spread over Germany ticked up a bit, but on the whole the result was greeted with a yawn outside Spain. Brussels simply sounded relieved their might be a Government in Spain.

So the next Spanish government might be the most left wing in recent times, but I’m not expecting anything too radical that might freak out investors, expats, or the holiday-home market. We’ll have to wait and see if the Socialists-Podemos government even gets off the ground, but if it does, the following might be on the way:

  • Taxes and spending will go up as much as Brussels will let them get away with, but with no impact on the local rates homeowners pay, which are not set by Madrid.
  • Tax breaks for landlords might be revisited.
  • There may be more attempts at rent controls in the cities.
  • Tourist rental regulation and most housing policies are devolved to regional governments so I don’t expect much from Madrid other than support for regions taking a harder stand.
  • Real estate investment funds called SOCIMIs might come under threat – Podemos hate them.
  • Likewise the Spanish Golden Visa scheme might come under threat, as Podemos and the EU hate it.
  • The counterproductive Modelo 720 world-wide asset declaration regulation will stay in place despite discouraging foreign investors because I can’t see a left wing government doing anything that looks soft on tax evasion.
  • Economic policies might reduce growth and create another headwind for the housing market already slowing down in the face of other uncertainties.

On the bright side, there’s little chance of economic policies in Spain so damaging as those proposed by Corbyn’s Labour party in the UK, which might have more of an impact on British demand and the holiday-home market in Spain than anything we can expect from the next Spanish government

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