Global Daily – Thoughts on the Spanish elections

by: Aline Schuiling , Nick Kounis

Euro Politics: Coalition formation will be difficult and could take time – Spain will hold general elections on Sunday 28 April. The most recent polls show that the social-democratic PSOE led by prime minister Pedro Sánchez will probably become the biggest party, with around 29% of the votes, or around 125 of the 350 seats in parliament. A result in line with these polls would give Mr Sánchez the initiative in the negotiations to form a coalition. This formation will probably be complicated, though. The PSOE’s preferred coalition partner would be the left-wing Unidos Podemos (P-IU). However, the two parties combined would not get a majority of the seats in parliament and would need the support of some smaller left-wing regionalist or separatist parties. As is the case with regards to P-IU, these parties would all be in favour of holding a referendum about independence in Catalonia. In contrast, Mr Sánchez has recently hardened his position on Catalonia and became more outspoken against a referendum, although he would be in favour of giving autonomous regions more say on certain matters. As the stance towards Catalonia’s strive for independence has become the bone of contention in Spain’s national politics, it seems that a coalition between PSOE, P-IU and the smaller regionalist/separatist parties would not be feasible. Next, Mr Sánchez would probably try to form a coalition with the centrist Ciudadanos (Cs), which also is against a Catalonia referendum. Cs would get around 15% of the votes, or 49 seats in parliament according to the polls, implying that a centre-left coalition of PSOE and Cs would almost get a majority of the seats in parliament. Still, Cs have shifted more to the right side of the political spectrum in recent years, while its leader Albert Rivera has ruled out any possible alliance with Mr Sánchez.

The alternative for a coalition led by PSOE, would be a centre-right coalition of the Partido Popular (PP), Cs and the far-right nationalist/populist Vox. According to the polls, a combination of these three parties would get a total of around 47% of the votes or around 161 of the 350 seats in parliament, which would be short of a majority. Moreover, it will probably be difficult to bridge some of the ideological differences between Cs and Vox, or even between PP and Vox. Therefore, the formation of a centre-right coalition will probably also be difficult. All things considered, we think a centre-left coalition consisting of PSOE and Cs would only be feasible in a later stage of the formation process, when all the other options have been tried and failed and the two parties would join forces merely to protect national stability and avoid yet another round of indecisive elections or another minority government. Overall, coalition formation will be difficult and could take time. Having said that, it seems that no matter what the outcome of the election will be, the next government will again be dominated by mainstream parties located around the centre of the political spectrum. (Aline Schuiling)

ECB View: Coeure pours cold water on tiered deposit rate system – ECB Executive Board member  Benoit Coeure came out clearly against the central bank adopting a tiered deposit rate system in the near future. In an interview with the German newspaper Frankfurter Allgemeine Zeitung, he said that ‘at the current juncture, I do not see the monetary policy argument for tiering’. He argued that ‘those who would profit from tiering are, above all, banks with high excess liquidity, of which many are located in France and Germany where bank lending is already running high. Thus there is no evidence so far that the negative deposit rate is bad for lending. On the contrary.’ He did admit that this view had to be reviewed regularly, as the net effect of negative rates can change over time, with the adverse effects becoming more prominent. Although a few Governing Council members have already expressed doubts about tiering, Mr Coeure is the first Executive Board member to do so and his remarks are significant as he is a very influential voice at the ECB. We agree that the evidence up until now of the impact of negative rates on banks and the economy is actually positive. Although that will likely change over time, the cost of holding funds in the ECB’s deposit facility is a relatively modest part of the issues that are likely to emerge. The narrowing spread between bank lending rates and deposit rates is the more significant issue going forward and tiered deposit rate system would do nothing to alleviate that issue. (Nick Kounis)