Spain stuck between EU sanctions and political deadlock

It risks a fine of up to 0.2 percent of GDP - or €2.1 billion - and a freezing of EU structural funds. On Tuesday (12 July), the EU said Spain had 10 days to submit a request to reduce its fine, which will be proposed by the EU Commission at the end of July.

In response, De Guindos promised that Spain would raise €6 billion extra this year by increasing the amounts that companies have to pay mid-tax year, meaning they would pay more in 2016.

He also said the state would raise €1 billion extra by cracking down on tax fraud and would save €1.5 billion in lower interest payments on its debt.

The main measure requires a change to the law, which many experts consider beyond the remit of a caretaker government.

De Guindos and Rajoy's Popular Party (PP) has already been a caretaker government since an inconclusive general election last December, and will remain so until a government can be formed after a repeat election in June.

“I don’t think this is going to cut it with the EU,” said Angel Talavera, a eurozone economist at the Oxford Economics think-tank in the UK.

“The lower interest rates are a given. Revenues from stopping tax fraud are always a nice idea but it’s often extra money talked of which never quite happens.”

He said although the details of the measure to increase payments for large companies still had to be fully disclosed, it initially looked like “an accounting trick”.

The opposition parties have accused the government of Rajoy of breaching the deficit targets by lowering taxes in the run-up to local and national elections in 2015 to win support, and by promising further tax reductions even while telling the European Commission it would implement further budget austerity.

'Disguised tax hike'

“It’s the working class who pay for his broken commitments with Brussels,” socialist leader Pedro Sanchez said on Wednesday (13 July).

“Mr Rajoy designed electioneering budgets last year and now we’re being served the first of the dishes we can expect in the next few months. Rajoy has announced a disguised tax hike”.

The threat of the EU fine loomed as Rajoy held meetings with rival leaders to try to win backing to remain prime minister following the June election.

The PP is the best placed party to govern, having increased its seats to 137, while other parties lost votes or seats. However, it still falls far short of the absolute majority of 176 seats in the 350-seat parliament.

On Wednesday, Sanchez, whose party is the second largest force in the parliament with 85 seats, told Rajoy his MPs would not vote for him in a confidence vote and nor would they abstain to facilitate his government.

“Mr Rajoy has got a long road to travel between 137 seats and 176. The Socialist Party won’t be on that road,” Sanchez told reporters after the meeting.

Bitter pill

Some veteran Socialists have called for the party to abstain to let the PP govern if it can come close to 176 seats through gaining the support of centrist Ciudadanos (“Citizens”), which has 32 seats, and some of the smaller parties like the Basque Nationalist Party, which has five.

Other Socialists fear the party could lose support as a result to anti-austerity party Podemos whose leader Pablo Iglesias said an abstention would mean the socialists would be PP's “partner”.

“I think ultimately the Socialists will swallow what is a very bitter pill because they won’t want to be seen as the guilty party for forcing third elections,” Talavera, the economist, said.

“But politically it will be really very difficult for many socialists to support their arch-enemy.”

For the PP to convince the EU it has credibility to cut the deficit, it needs to not just secure support for Rajoy’s confidence vote - he also needs to secure support for the 2017 budget.

Analysts fear the next government may be too weak to implement further economic reforms, which include the need to prevent the pension reserve fund from running out.

Long process

“A minority PP government seems to be the most likely outcome at this point but a third election can’t be discarded,” said Antonio Barroso, deputy director of research at the US-based political risk consultancy Teneo Intelligence.

“It’s far from straight-forward to agree on fiscal consolidation.”

The pro-business Ciudadanos could be a crucial ally to the PP in passing reforms but the party has so far ruled out entering a coalition or voting in favour of the PP while Rajoy is the candidate for prime minister.

Rajoy said on Wednesday he intended to seek the confidence of the parliament on 2 August but added he would “reflect” if he could not guarantee he would win.

An investiture speech followed by a vote would trigger a two-month deadline to form a government or dissolve parliament and call a fresh election.

“I don’t think the forming of the government is going to happen fast,” said Barroso.