Spain chems demand industry-friendly cabinet but instability may persist on hung parliament

LONDON (ICIS)–Spain’s second general election this year has delivered another hung parliament which could make governability difficult. The chemical sector is hopeful, however, that a cabinet led by the Socialists could pass industry-friendly policies that lower energy costs.

The Socialist party (PSOE) came first with 120 seats in the 350-strong chamber (see bottom graph).  Click here for a full list of results from the Spanish Ministry of Interior.

Its natural ally would be the far-left UP, with 35 seats, but it would still need the support of smaller, regional parties to achieve an overall majority of 176 to be able to pass meaningful measures.

Spain’s chemicals trade group FEIQUE and the main chemicals trade union CCOO told ICIS on Monday that the priority now should be to form a cabinet which can pass a budget that could cushion the potential economic.

Chemicals has been one of the best performing manufacturing sectors after the 2009 crisis but they insisted lower energy costs are key to protect the sector’s competitiveness.

According to the EU’s statistical agency Eurostat, Spanish corporates and households pay the fourth highest electricity price within the 28-country bloc. A full list can be seen here.

SPAIN BECOMING ITALY
The general election on 10 November was the fourth in as many years. Political instability has become a feature in Spain, where political analysts are starting to talk about the country’s Italianisation.

The economic crisis in 2008 changed Spain’s political landscape, with the resurgence of new parties putting an end to the bipartisan dominance of PSOE and the conservative PP.

The newly formed, far-right party Vox, with 52 seats, has become the third largest party. Its promises of higher state spending, controls to immigration, and a hard hand with regions like Catalonia – where nationalist movements are strong – gained support in provinces with high unemployment and economic inequality.

Spain’s Prime Minister Pedro Sanchez has been on the post since June 2018, when a vote of no-confidence ousted its predecessor Mariano Rajoy, from the PP.

With only 85 seats, Sanchez’s PSOE struggled to pass any meaningful measures.

The Budget currently in place is that passed by the last Rajoy Administration.

The lack of a majority to pass a new budget forced Sanchez to call an election in April 2019. While the Socialists came first, they fell short of a majority.

Sanchez and UP were unable to form a government, giving way to the 10 November poll, in what most analysts interpreted as a gamble by Sanchez to reinforce PSOE’s majority.

With three fewer seats and with UP also losing seats, the gamble did not work and Sanchez’s upcoming attempt to form a cabinet is set to be harder than after the April poll.

Analysts at London-based consultancy Oxford Economics said the chance of a new election in 2020 is still at close to 50%.

“Market reaction has been muted. Spanish equities are slightly down on the day but bond markets – a more accurate barometer of political risk – remain extremely calm,” said the analysts.

“Although we still think the political situation will have a limited impact on the Spanish economy in the short term, the persistence of political paralysis is becoming increasingly dangerous given the Spanish economy is now facing a period of substantially lower growth.”

Spain’s main stock exchange IBEX 35 was trading down 0.43%, compared to its Friday close, by midday London time.

CAN SOMEONE GOVERN, PLEASE?
FEIQUE and CCOO said on Monday the country needs to form a government as soon as possible to avoid further instability that could dent economic growth, already slowing down on the back other EU partners slowdowns and the effects of the US-China trade war and the upcoming Brexit.

While trade groups do not tend to favour left-leaning cabinets which could increase taxation, denting their profits, FEIQUE said the approach of the Sanchez administration to industry was the correct one, adding that Spain’s chemicals main problem is the cost of electricity.

Moreover, while Spanish businesses used to consider the presence of far-left UP in a potential cabinet a danger, the urgency of forming a government has made the prospect a lesser evil.

“Another election needs to be avoided at all costs. The Sanchez administration gave industry the prominence it deserves, and we celebrate that. It should be maintained,” said FEIQUE’s director general Juan Labat.

He said Sanchez’s decision to dedicate a ministry to industry exclusively was right, adding that FEIQUE’s conversations with UP also showed the party had a pro-industry approach.

A government led by those two parties, he added, could improve chemicals’ prospects.

In fact, UP’s electoral programme included one measure to withdraw a tax on production of electricity which could greatly benefit the industry, said Labat.

The head of chemicals at trade union CCOO Daniel Martinez was more lenient, however. Criticising the political class in general for being unable to form a government after the April poll, he said Sanchez’s gamble had only contributed to delay the approval of measures which would have benefited industrial sectors and the economy in general.

He also agreed with FEIQUE’s demands on electricity costs, but added that instability will persist, potentially contributing to lower economic growth.

While costs have been low this year – the lowest since 2014, according to FEIQUE – this has been related more to the fall in natural gas prices due to global oversupply than measures adopted domestically in Spain.

Labat concluded: “What we need is an industrial policy that looks at lowering energy costs as its main target. With low natural gas prices, we are importing a lot of US gas and is softening the blow, but we need measures at a national level to make this sustainable in the long term.”

Spain general election results

Source: Spain’s Ministry of Interior

Pictured above: Sanchez addresses supporters in Madrid on 10 November
Source: Juanjo Martin/EPA-EFE/Shutterstock

Focus article by Jonathan Lopez