Spain PM calls early election, conservatives ahead

Reuters News
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Posted: Jul 29, 2011 1:20 PM
Spain PM calls early election, conservatives ahead

By Carlos Ruano and Elisabeth O'Leary

MADRID (Reuters) - Spain's prime minister called early elections on Friday, gambling that a summer jobs boom may allow his Socialists to snatch an upset victory despite economic stagnation that has contributed to the euro zone's debt crisis.

Opinion polls suggest the opposition Popular Party will easily win the November 20 vote, called four months early, but Jose Luis Rodriguez Zapatero's Socialists, in power since 2004, hope they can at least deprive the conservative PP of a majority.

PP leader Mariano Rajoy has pledged to implement tougher austerity if his party wins, slashing public administration spending and making it cheaper to hire and fire.

"The PP will lead the necessary political change in Spain. For us change means economic recovery," Rajoy told reporters.

With the electorate squarely focused on Europe's highest unemployment rate, 20.9 percent, the Socialists may struggle to claw back votes they lost in a May regional election rout, when many left-wing voters stayed home in disgust.

"The PP has a very big lead, and it won't be easy for the Socialists to catch up. But cutting that lead is certainly a possibility," said Julian Santamaria, politics professor at Madrid's Complutense University.

An inconclusive result that produced a hung parliament, as in Britain or Belgium, would spook markets hoping for a clear mandate to implement tough and unpopular measures to restore the euro zone's fourth largest economy to health.

"The aim is to create political and economic certainty in the coming months," Zapatero told a news conference, explaining why he was bringing forward the vote. The deeply unpopular premier said in April he would not run again.

His announcement came on the day credit rating agency Moody's put Spain's sovereign rating on negative outlook for a downgrade, citing weak growth and fears of overspending by its autonomous regions.

The Socialists are seven points behind in a leading state opinion poll. The PP had a 10 point lead in April.

Most economists expect employment figures to improve during the tourism season, a key driver of the economy, which could help the Socialists narrow the gap. Third quarter unemployment data are due on October 28, less than a month before polling day.

A minority government of either big party would be dependent on support from regional nationalist groupings to pass its budget and other key reforms.

The weaker its mandate, the greater the risk of social unrest and therefore the harder it would be to pass painful public spending cuts, one of Spain's biggest fund managers said.

HEMORRAGE

The Socialists hemorrhaged support after being forced to impose a range of austerity measures to rescue public finances and fight a rearguard action from investors over its debt, which fed into the broader euro zone crisis.

They cut public sector pay and pensions, raised the retirement age and made it less expensive to lay off workers, angering their own core electorate.

The bearded Rajoy is basing his campaign on a serious image -- in contrast to Zapatero's image as a lightweight -- and the perception that the PP would be a better economic manager.

But its planned austerity measures could yet scare off many voters still reeling from the shock of Socialist spending cuts.

A poll this week showed that the Socialist candidate, well-liked former Interior Minister Alfredo Perez Rubalcaba, is rated as more efficient, honest and better at dialogue than Rajoy.

"The Socialists have a fighting chance of putting up a good show. Rajoy isn't terribly good as a candidate," said Charles Powell, a historian at the San Pablo-CEU University in Madrid.

Rubalcaba has started to voice ideas which might attract disenchanted left-leaning voters back.

But whoever wins, the task is to balance public finances with publicly unpalatable measures, persuading a disenchanted public of their necessity.

MORE UNCERTAINTY?

"I don't believe this constitutes any kind of game changing event for the Spanish economy and where reforms are concerned. Anything that turns the spotlight on political risk in Spain is negative," Nicholas Spiro, head economist at Spiro Strategy, said.

A long history of fiscal devolution between the central and regional governments could complicate matters if the new government does not have a large majority, he argued.

The risk premium investors demand to hold Spanish bonds over benchmark German debt rose by around 12 basis points after the election announcement to 3.57 percentage points, close to euro-era highs.

"I'm not convinced an election alone, even if it creates a fairly stable new government, will calm down markets," said David Bach, an economist at IE business school.

Even the date chosen for the election was controversial as it is the day Fascist dictator Francisco Franco, who ruled Spain for almost four decades, died in 1976.

(Additional reporting by Madrid newsroom; Writing by Elisabeth O'Leary; Editing by Paul Taylor)