A Tiny Regional Election Could Be A Big Problem For Spain, And Therefore All Of Europe

spanish elections

[credit provider=”AP Images” url=”http://www.apimages.com/OneUp.aspx?st=k&kw=spain%20elections&showact=results&sort=date&intv=3d&sh=10&kwstyle=and&adte=1332765499&pagez=60&cfasstyle=AND&rids=72cf30258c064a8a84f5e90e54d931fa&dbm=PThirtyDay&page=1&xslt=1&mediatype=Photo”]

Spain’s ruling People’s Party failed to secure a majority in Andalusia’s regional elections on Sunday. In his latest note, Nomura’s senior political analyst Alastair Newton said this would be a significant setback to efforts to bring in Spain’s deficit. Constitutional autonomy in many of these regions makes party links crucial to determining the policies of the regional governments. From Newton:

“Governance of Spain’s regions is a key factor in deficit control, with the 17 regions accounting for a total of around 36% of public expenditure (including education and health). Three of those regions – Andalusia, Catalonia and Madrid – account for just under half of that total.

…Failure to win in Andalusia, whose regional deficit was over double its 1.3% of Spanish GDP target for 2011 and which voted against the central government’s 1.5% target for this year, represents a potentially serious setback in efforts to rein in the total national deficit to 5.3% this year from 8.5% last (and to 3% next year in accordance with the eurozone’s proposed fiscal compact).”

The failure to secure a majority also threatens the People’s Party at a national level. For now it could boost support for a general strike on March 29 to protest proposed changes to Spain’s labour laws.  And it could be a blow to market sentiment. Remember Spanish 10-year government bond yields have been inching higher.

Italian prime minister Mario Monti said today that he is worried about contagion from Spain. Newton said that eurozone finance ministers are meeting on March 30 when they expect to reach an agreement on increasing the size of eurozone’s firewall to protect Spain and Italy from contagion. It will also mean eurozone leaders will be watching Spain’s 2012 budget more closely when it is revealed on March 30.

Don’t Miss: UBS Answers – Who Are The Fittest Countries In Europe?