After his failed bet to strengthen the socialist presence in parliament and a historically strong showing of the far-right party VOX (52 seats out of 350), PM Pedro Sanchez (socialist party) agreed with Pablo Iglesias (Podemos, left-wing) to propose forming the first coalition government in Spain’s modern history. A left-wing coalition is likely to slow if not halt Spain’s fiscal consolidation efforts as it will implement higher social spending. However, given the current state of negotiations and socialist stance we do not see a risk of a major fiscal drift as economy minister Nadia Calviño, the former Director-General of the European Commission for Budget, is expected to remain in place, sending a strong pro-Europe signal. We expect higher corporate taxes to be implemented, as part of the coalition’s redistributive policies. But the coalition is not a done deal yet. It does not have enough seats to secure a majority of 176 seats in parliament. To win the confidence vote, it will have to rely on the abstention of a major separatist Catalan party, which has indicated it would oppose the vote rather than abstain.
