Spanish PM Mariano Rajoy's Difficult Friday

Spanish Prime Minister Mariano Rajoy faces a no-confidence vote today. The forex market once again slips into a short lull, coming off of anxiety over Italy's political crisis; but all signs suggest Rajoy nears the end of his reign, as the Basque Nationalist Party which holds the crucial five votes has said that it will support the motion tabled by the Socialist Party - which may propel Socialist leader Pedro Sanchez into office. It seems Rajoy had his chance to resign as PM, but an official from Rajoy's People's Party has insisted no such thing will happen. Difficulties for the EU (and by extension its common currency the Euro) looks to be extended and while the currency seems like it might be on the rebound, this episode might augur further weakness.

While the Italian 'crisis' seems to have ebbed somewhat, two other prevailing problems pose challenges to the EU. Firstly, Trump's import tariffs affecting Mexico, Canada and the EU. As with any of Trump's initiatives, this has already drawn widespread criticism, with some suggesting that over '146,000 Americans will lose their jobs' (see https://qz.com/1293821/trump-trade-war-146000-us-job-will-be-lost-to-steel-tariffs/) as a result of the ensuing trade war (see https://qz.com/1293821/trump-trade-war-146000-us-job-will-be-lost-to-steel-tariffs/). Of course, arguments could be made for both sides, especially in a discipline as indeterminate as economics. Nevertheless, I am inclined toward the side of criticism, especially given the US' important role in the global economy. Import tariffs border on protectionism and this has mostly been of use to developing economies in their bid to strengthen their industry. However, the positive effects are rather dubious for developed countries like the US, who might benefit more from the competition. In fact, jobs might be lost (although I do not pretend to have an estimate like the economists quoted in the Quartz article above) given the increased costs to American employers. After all, it has been a long time since the American isolationism of the 19th century, such that American companies cannot pretend to source all their materials domestically. A further downside is the alienation of longtime US allies, potentially souring international relations. 

No doubt the effects would be detrimental to the EU, affecting $7.5 billion worth of EU exports (see https://qz.com/1293592/trade-war-begins-trump-slaps-steel-and-aluminum-tariffs-on-the-eu-canada-and-mexico/).

The second issue is that facing Spain. Again the integrity of the European Union is challenged; fears over the feasibility of the common currency among other things have routinely boiled over in domestic and regional politics since Brexit - the rise of a Socialist leader in Mr Pedro will do nothing to ameliorate those fears. Nevertheless, Sanchez hasn't, unlike Italy's new leaders, expressed skepticism against the EU and the common currency, which might be the one saving grace. But one has to wonder if the Socialist Party's policies might flout the EU's manifold conditions, making it more costly than beneficial to stay.

A Socialist leader is more than a possibility. Overall, Sanchez has rallied the support of 6 parties in the Spanish Parliament, bringing the total number of votes on his side to 180, which is more than the absolute majority of 180 needed to take power.

But the problems do not stop with Sanchez; the whole issue precipitating the no-confidence vote is the 'Gurtel case', a corruption scandal in which a Spanish court found officials of Rajoy's Popular party guilty of operating a slush fund. A slush fund is a reserve of money kept open for illegal purposes such as political bribery. A strong economy might not be able to save Rajoy in the face of a withering political assault by Sanchez's "frankenstein" coalition.

Whether Spain will descend into political chaos, or whether Sanchez's coalition can keep things together, remains to be seen in the days ahead.

Edit: Support for the motion by Sanchez was perhaps best encapsulated by the words of separatist law maker Carles Campuzano:

This shows that you can't govern Spain against the will of the Catalans... We're voting in favour of this motion to bring an end to the Mariano Rajoy era.

Thus spells the end of a 'generation of corruption'.

Edit 2: At 9:40am, Mariano Rajoy made the following statement, “It seems that the no confidence motion will go forward. I want to congratulate Mr. Sanchez and I will accept the result of the voting... It has been an honour leaving Spain better than I found it. Thank you all. Thanks to the Spaniards for their understanding and support.”

Frederick Yorck