By Antonio Barroso
A surprise proposal from Spanish Prime Minister Jose Luis Rodriguez Zapatero to amend the constitution to ensure that future budgets both satisfy EU mandates and are balanced has increased the opposition's Popular Party (PP) chances of victory in upcoming elections. There is a chance that a break down in discipline from the Socialist Party (PSOE) could trigger a referendum and jeopardize the approval process, but that looks unlikely. The amendment will, however, further alienate PSOE voters, who are already deeply unhappy with Zapatero's austerity policies, and looks like sealing its fate in the upcoming Nov. 20 elections.
The PP's leader Mariano Rajoy quickly stated that his party would support the amendment, but it did not take long before several senior members of the ruling PSOE and other smaller leftist parties expressed their unhappiness. The dissent is driven by the feeling that the amendment's timing and content represent an intrusion by markets and the European Union (especially Germany) in Spanish politics. Trade unions are also expected to mobilize against the proposal for the same reasons.
The final amendment needs the support of three-fifths of the deputies in each legislative chamber (210 lower house deputies and 156 senators) to be adopted. But it can be sent to a referendum if one-tenth of any of the two chambers (35 deputies or 26 senators) request it. At this stage, the reform has the support of the PSOE and PP, which together have 321 deputies and 246 senators. But there is a chance that some PSOE members of parliament (MPs) may join with smaller parties to force a national referendum. In that case, the amendment would probably fail.
That possibility seems unlikely at this stage. The PSOE's candidate for prime minister Alfredo Perez Rubalcaba has worked hard to convince the party that the reform is necessary and appears to have secured the support of most socialist MPs. Some MPs (especially the Catalan contingent) might vote against the reform, but it is unlikely that they will join the calls for a referendum from minority parties. A national referendum would likely be portrayed as a plebiscite on Zapatero and his policies, which is the last that the PSOE wants before the elections.
The constitutional amendment could nonetheless be the kiss of death for the PSOE's chances in the elections, despite earlier hopes of limiting the damage after the introduction of austerity measures. Rubalcaba is focusing his campaign on getting the party "back to the left" by proposing measures such as increasing the wealth tax or imposing a tax on bank profits that resonate with the party rank and file. The constitutional amendment undermines that strategy. Also, Spanish voters tend to punish internally divided parties. Given that a number of senior PSOE figures are openly rejecting the proposal, voters who would otherwise have likely voted for the PSOE are now probably going to consider other parties or abstain altogether. As a result, it looks likely that the economic crisis in Europe will claim another victim.
Antonio Barroso is an analyst in Eurasia Group's Europe practice.
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By Antonio Barroso
Spain's ruling Socialist Party (PSOE) suffered a major defeat in Sunday's regional and local elections, shifting the political focus firmly to the national parliament. Prime Minister Jose Luis Rodriguez Zapatero remains unlikely to resign, despite calls from the opposition Popular Party (PP). The results do, however, complicate the government's efforts to introduce further reforms, which however remain likely to be approved.
The PP trounced the PSOE, leading in the overall vote count by more than ten percentage points. The PP retained control of regions and cities, such as Madrid, but also scored wins in former PSOE bastions such as Castile-La Mancha and Extremadura. The vote reflects the historical volatility of leftist support for the PSOE compared to the well understood stability of support for the PP.
The defeat puts the socialists on the defensive, but Zapatero has no intention of either calling an early legislative election or holding a confidence vote for now. The PSOE will stick to its strategy: wait for the economy to recover and give the party enough time to select a new prime ministerial candidate. The government will likely continue to push for reforms such as a review of collective bargaining agreements or the restructuring of the Spanish financial sector in order to avoid an external intervention. But those reforms will be tougher to push through parliament now.
The PSOE will try to rely on its legislative deal with the Nationalist Basque Party (PNV) and the Canary Coalition (CC) to implement economic measures. Although PNV leader Inigo Urkullu recently threatened to withdraw from the agreement if extreme-left wing nationalist party Bildu was not authorized to run in the elections, the PNV is likely to stick to the agreement. Urkullu wants to use the PNV's leverage at the national level to control the debate about the end of violence in the Basque Country and to ensure that the national government follows through on its promise to grant more policy autonomy to the regions. Urkullu also knows that a PP government with an absolute majority, as some polls currently suggest is a possibility, would be less sensitive to demands from the autonomous regions.
This scenario could change, however, if Zapatero is forced into implementing further austerity measures in order to comply with deficit targets. Additional spending cuts would almost certainly increase social discontent and the nationalist parties could decide to withdraw their support in order to avoid sharing the political penalties implicit in additional austerity.
Antonio Barroso is an analyst with Eurasia Group's Europe practice.
By Ian Bremmer and David Gordon
2010 was a difficult year for Europe, and things won't get easier in 2011. The eurozone will remain intact, but there's a serious risk that the debt crisis will become increasingly unmanageable this year. As peripheral countries struggle to implement structural reforms, the politics of austerity will put additional public pressure on supporters of the EU project in core countries like Germany and France.
In recent weeks, the EU has done little to allay investors' fears about the solvency of both sovereigns and banking systems in a number of peripheral eurozone countries. Key questions on the nature and timing of future financial bailouts remain unanswered, and important potential remedies, like increasing the European Financial Stability Facility (EFSF) and introducing new eurozone bonds, have been taken off the table, at least for now.
At the moment, the core countries, led by Germany, are committed to the euro and the European integration project, even as they avoid efforts to find systemic solutions to the crisis. In Spain and Portugal, governments are moving to fast-track fiscal consolidation and structural reform in an effort to preempt market pressures. While markets remain skeptical, the hope in Brussels, Berlin, and Paris is that this is just the beginning of a sustained rebalancing that will help stabilize the eurozone. In this view, the European economic crisis is the catalyst needed to restore policy convergence within the eurozone and to enforce peripheral Europe's compliance with the "Lisbon agenda" of labor and product market reform. Yet the idea that the EU, the ECB, and national governments can rapidly remake fiscal patterns of peripheral Europe -- let alone their labor markets and regulatory regimes -- strains credulity. That's especially true given the weak economic forecast for these countries and their inability to undertake currency devaluations.
Ireland, Greece, Portugal, and Spain have all taken impressive first steps on the fiscal side, but policy sustainability remains an open question. Politicians in each of these governments will have a hard time enforcing cuts to wages and entitlements that erode their nations' standards of living. Structural reforms like privatization and trade union regulation will threaten well-organized groups, which will mobilize in opposition. The result will not be explicit rejection of these programs, let alone an exodus from the eurozone. Peripheral Europe is more likely to take a page from developing countries in how they manage relations with the International Monetary Fund and World Bank -- with a lot of fudging and passive opting out of important parts of their plans.
The political challenges facing reform in the periphery will make it more difficult for defenders of financial bailouts within core countries, and we're likely to see new political fissures on this issue, especially in Germany. This problem will heighten the sense of broader political conflict on the continent, increase policy coordination risk (especially between Berlin and Paris), and undermine market confidence in the EU's ability to sort out the crisis.
All of this leads to the real danger: that the eurozone countries big enough to matter in global finance -- namely, Spain and Italy -- will find it increasingly difficult to borrow at rates that are financially sustainable. If that happens, the chances of a systemic crisis will grow dramatically.
On Wednesday, we'll look at no. 3 on our list of Top Risks for 2011: the geopolitics of cybersecurity.
Ian Bremmer is president of Eurasia Group. David Gordon is the firm's head of research.
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By Eurasia Group's Europe practice
It hasn't been an easy year for Europe, and 2011 doesn't look much better. Hopes that a rescue package for Ireland would halt the debt crisis contagion have been dashed -- Portugal, Spain, Italy, and Belgium already face market pressure, and if the situation deteriorates, the European Union and IMF are likely to push for some form of structured assistance to Portugal. It may not end there. Italy and Belgium could be the next to face bond market problems, and non-eurozone countries like Hungary and Romania could face growing scrutiny about their finances. Eurozone watchers are already questioning the ability and willingness of core eurozone countries (particularly Germany) to spend additional bailout money beyond the current European Financial Stability Facility (EFSF) commitments that would be required. Such concerns raise both existential and tactical questions about the longer-term viability of the euro.
If countries abandon the euro, everybody loses. That scenario isn't a significant risk at this point, but some countries face the real prospect of restructuring and/or default, and they'll be much poorer following internal devaluation and/or a bout of domestic deflation. The next few years will be particularly tough for Greece, Ireland, Portugal, Spain, and Italy. In broader terms, there's a clear North-South divide emerging. Southern countries, in both Western and Eastern Europe, face a variety of challenges ranging from fiscal policy to macroeconomic rebalancing and competitiveness that will be extremely difficult to overcome in the short term. We've already seen social unrest in several countries as a result, and we'll see more in 2011.
In the broadest sense, the process of EU convergence has been thrown into reverse. For capital markets, this means that yields on bonds issued by non-core members are no longer converging to the lower rates that markets give core members. The widening spreads are obvious not only in peripheral eurozone countries like Greece, Ireland, Portugal, and Spain, but are also showing up among non-eurozone EU member states like Hungary, Romania, and Bulgaria. This divergence comes from two sources: a decline in the belief that the European Union will provide universal bailouts within the eurozone, and doubts among market players about the strength of political enthusiasm in Eastern Europe (where bond spreads have stabilized for now) for adopting the euro.
In 2011, the idea of an ever-closer union will provoke deeper skepticism than we've seen in years, but the European Union has an opportunity to use this crisis to build support for the sorts of reform that only crisis can make possible. Policymakers are working along three tracks. First, they want to establish a permanent crisis resolution mechanism -- an extension of the EFSF that includes some form of burden sharing with private investors. The second element would consist of fiscal reforms that actually enforce growth and stability pact targets that have been ignored in several capitals for many years. The third part would involve macroeconomic rebalancing, with a focus on labor market and judicial reforms to improve economic competitiveness. But during the European Council summit in mid-December, leaders made only limited commitments to take these issues head on, and more talks will be necessary in coming months. They did agree, however, on a permanent mechanism to help eurozone nations crippled by debts. Market players need a lot more detail on how the crisis mechanism will work, but it's a step in the right direction. Monitoring and enforcing fiscal targets will be more straightforward, with some enhanced penalties and European Commission oversight rules.
Then there's the need to make several European economies much more competitive. Belief in the ability of the European Union to force true macroeconomic rebalancing requires faith in the political will of both Brussels and core eurozone countries to push through systemic changes that will generate lots of pain. Selling those changes, and persuading crisis-weary publics to accept that the pain will last well beyond 2011, will prove the biggest challenge of all.
This post was written by analysts in Eurasia Group's Europe practice.
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The Call, from Ian Bremmer, uses cutting-edge political science to predict the political future -- and how it will shape the global economy.