Mariano Rajoy left the political arena in Spain. Catalan and Basque separatists avenged Rahoy’s brutal persecution during last year’s Catalan independence movement by voting for the socialists and leftists from Podemos who ousted Rajoy from the government.
The political situation in Spain was complicated almost two years ago, as Rahoy headed the government, relying on a very weak coalition. The coalition was formed under pressure from the EU to prevent the Podemos party, which opposes austerity measures, seize power, and in order to prevent the Catalan independence project.
The leader of the Socialist Party, Pedro Sanchez, promised to discuss the situation in Catalonia in a “government with government” regime, which is a radical change after Rahoy’s refusal to even have a dialogue with former Catalan leader Carles Puigdemon, who is in Germany, after he was arrested by German authorities at the request of Rahoy .
The Spanish parliament denied confidence in the government of Mariano Rajoy. The new prime minister will be the leader of the socialists Pedro Sanchez. The debate in the legislature has lasted for the past two days. How was the discussion?
Now the political future of Spain is in limbo, while the populists in Italy are determined to either break off their relations with the EU or force Brussels to agree on new reforms.
Matteo Salvini is preparing to deport thousands of refugees. Italian politicians urge Germany to leave the euro, opposing German power over the rest of Europe. And now, the Spanish socialists are trying to gather a weak minority government that lifts its nose in front of Podemos, taking advantage of its support to get rid of Rajoy and gain power.
Sanchez is trying to do this alone, using the support of 20% of Spanish voters to create a cabinet. He does this in order to prevent Brussels from protesting the participation of Podemos in the new government, which will insist on the abolition of the austerity policies required by the EU, ECB and IMF.
Obviously, he is ready to repay the separatists for their support. Brussels cannot push it too hard, because it will simply allow the Catalans to advance their independence this fall, while at the same time throwing a dice to internal opponents, weakening the policy of economy.
Brussels is currently deprived of the leverage to combat populist movements in southern Europe. Even the experts of large banks finally recognized that this time, unlike the situation with Greece in 2015, everything is really different.
Italy has little chance of improving the situation, remaining in the euro zone. Virtually all of her incentives, thanks to the strong current account surplus and the fulfillment of her TARGET 2 obligations, are to leave the euro zone.
That is why Paolo Savona says that it would be better if Germany left the euro and not Italy. This perfectly underlines the main problem that Germany squeezed the continent dry due to currency arbitrage.
Germany’s exit will be similar to the release of the new lira, since the euro will fall by 20% per night and this adjustment will lead to the “turbocharging” of the rest of Europe.
It would also help Spain, which in this respect would not be able to benefit from withdrawing from the euro due to its less favorable position in relation to foreign net investment.
The essence for both countries is a simple old adage: when you owe a bank a thousand dollars, this is your problem, when you owe a trillion dollars to a bank, it is a bank problem. And the bank in question is the ECB, as well as the Bundesbank.
Sanchez follows an absolutely correct logic, trying to reassure Brussels by abandoning Podemos as a coalition partner. He also bluntly says that Catalonia’s complaints about Madrid will finally attract attention that earlier the EU authorities simply ignored, given the possible collapse of the Spanish financial system. If Catalonia becomes an independent state, Madrid will not be able to fulfill its debt obligations.
Infographics
Dynamics of 2-year government bonds of Spain in 2018
The big question is whether Sanchez can take the path he has chosen. Probably no. Even if they come together, there are real risks associated with the fact that his government will not live long. However, it is interesting that he is trying to find the right balance. In any case, the markets will not like it. And the problem here is Spain’s substantial debt.
If Sanchez forms a government, he will have an automatic ally in the new leadership in Italy. And together they can really put pressure on Brussels in a way that they could not have done before.
Podemos leaders will be convinced that the goal is to break Brussels in terms of Spain’s finances and be patient. It is not known how this might work, but tactically this is the right way.
New Catalan Prime Minister Kim Torra has already scheduled an independence referendum on October 1. So the clock started again. Because if the independence-inclined government in Madrid lasts the next 4 months, the whole situation will completely change.
