A Spanish Uprising?

Will Spanish Prime Minister Mariano Rajoy say ahoy to another four years in office or bid his post adiós in December? Based on last Sunday's local election, many folks predict the latter, as populist upstarts knocked established parties down a few pegs-fueling concerns Syriza's rise in Greece might not be a one-off, but the start of more radical europolitics. Some fear this all spells trouble for the euro, but that seems quite hasty to us. Even if euroskeptic anti-austerity parties continue rising in Spain and across the eurozone, it is beyond a stretch to assume a rush of political stalemates between national governments and Brussels will break the union.

Spain's two establishment parties-the center-right Popular Party (PP) and the center-left Socialist Party (PS)-didn't lose a massive chunk of the popular vote Sunday. Together they retained 52% of voters, down from 65% in 2011, as PP's share dropped from 37% to 27% and PS's slipped from 27% to 25%. But because of how local elections are structured, the PP will control just 3 of the 13 regions that voted compared with 11 last time around. The big difference this year: the rise of upstart parties like Podemos and Ciudadanos. Podemos-a far-left, anti-austerity populist party (Spain's version of Greece's now-ruling Syriza)-grabbed about 12% of the vote.^[i] Because of their success, leftist coalitions could end up running almost half of Spain's major cities. Podemos also took some prestigious positions: A Socialist/Podemos coalition will give a Podemos-backed candidate the mayor's office in Madrid and another won outright in Barcelona. Ciudadanos, the pro-market populists, won 7% of the votes as a third party. Though a seemingly natural partner for the center-right PP, Ciudadanos also has certain conditions-like introducing party primaries-before agreeing to any deals. They also support Catalan independence-a big sticking point.

While the elections reveal Spain's political fragmentation and do highlight the possibility a leftist coalition succeeds Rajoy, it's too early to handicap. Early polls aren't very predictive, and local elections aren't always telling about national trends. Even the limited perspective offered by extrapolating Sunday's results to a general election isn't telling. According to Spanish newspaper El País, which crunched the numbers, PP would get 120 seats, PS 108, Podemos 37, Ciudadnos 18, and the remaining 67 would go to 15 other parties. It takes 176 seats to secure a majority in the Spanish Congress, so if that projection comes true, they would have a lot of horse-trading to do. Even if a leftist coalition emerges, multiparty alliances rarely accomplish much-too much infighting. Junior coalition partners and even the main party's backbenchers are often hard to control. However, gridlock isn't such a bad outcome. Rajoy's government has already made some progress on labor market and other tough-but-needed reforms. A gridlocked government unable to undo these positive steps might be for the best.

Some compare Podemos' rapid ascendance to Syriza's rise in Greece-fretting similar policy standoffs and austerity reversal-but this is far from reality. Spain isn't Greece. Unlike Greece, Spain isn't trying to swap reforms for bailout funding in an attempt to battle a cash crunch and stave off a third default in three years. That, friends, is where Greece's reform battles come from: Austerity U-turns would violate conditions of still-ongoing bailout. Spain never even received a full sovereign bailout-just a provisional line of credit to assist with its troubled banking sector in 2012, and it tapped less than half of the $137 billion made available. Unlike Greece, Spain was never shut out of capital markets. The biggest kerfuffle potentially arising between Madrid and Brussels would be over the eurozone's arbitrary budget and deficit requirements-and other eurozone members like France and Italy have dealt with those inconveniences before with little incident. Turns out those limits have few teeth, and strongly worded letters have even less bite.

As for markets, we see little evidence they're concerned about Spanish debt-or how it might change under a spendthrift government. The possibility has been widely discussed for months now, and the election is squarely in stocks' typical 3-30 month time horizon. Yet Spanish yields are low and have mostly headed lower in recent months. Perhaps markets are (rightly, in our view) focusing on Spain's strengths. Like the aforementioned tough labor and tax reforms, which have started bearing fruit. Or the seven consecutive quarters of GDP growth, with recent growth rates among the eurozone's fastest. Or leading indicators, like The Conference Board's Leading Economic Index, which suggest Spain's growth streak looks likely to continue.

Now, concerns about populist parties aren't just relegated to Spain. Finland had parliamentary elections in April, with The Finns, an anti-euro party grabbing Cabinet seats. Worries about a "second revolt" from Socialists in Portugal are growing, too. Though Denmark doesn't use the euro, it's also worth noting populists there look set to make a strong showing in next month's contest. We caution investors from reading too much into bombastic headlines about different populist groups popping up across the eurozone. For one, they all have different purposes and ideologies-this isn't a uniform movement. But also, they don't have the political clout to make the huge wholesale changes they campaign on. Grabbing a few seats in parliament gives them a platform to be heard, but it isn't a mandate for radical action. Consider Greece: For all their bluster, what has Syriza actually done? In our view, folks fretting what anti-austerity/anti-euro/anti-establishment parties may do is a false fear and overlooks the many positives the eurozone has going for it-a bullish development.