The Economist UK - 16.11.2019

32 Europe The EconomistNovember 16th 2019

2 One worry is that the slump will not be

bad enough to trigger meaningful action.

Another, says Jens Südekum, an econom-

ics professor at Heinrich-Heine-University

Düsseldorf, is that a late, hastily imple-

mented stimulus could cut against Ger-

many’s long-term investment and restruc-

turing needs. For example, subsidies or tax

cuts could encourage car companies to

keep plugging old technologies. Mr Süde-

kum is among a growing number of econo-

mists who want Germany to exploit low

borrowing costs to fund a multi-year trans-

formative public investment plan. Yet even

were the government to dispense with the

black zero it would run into the “debt

brake”, a constitutional ban on structural

deficits over 0.35% of gdp designed to tie

the hands of spendthrift politicians. The fi-

nance ministry estimates this headroom

would allow for only €6.5bn in fresh spend-

ing next year, barely 0.2% of gdp.

Various wheezes have been proposed to

get around this, including off-balance-

sheet vehicles linked to public bodies like

universities or housing associations that

can tap markets without violating the debt

brake. A more ambitious approach, pro-

posed by the Green Party, would ditch the

black zero and complement the debt brake

with an investment rule that would exploit

less stringent euregulations. The Greens

think this could kick-start public invest-

ment worth €35bn a year. But it would re-

quire a tricky constitutional change.

Some Germans have tired of foreign

criticism. Public investment grew by 3.8%

last year, they point out (although it re-

mains below the euro-zone average, and is

too low even to maintain the capital stock).

Eckhardt Rehberg, who is leading the cdu

in discussions over next year’s budget, says

capacity constraints and red tape make it

hard to spend more without accelerating

costs in construction. Local governments

often fail to spend allocated funds as it is.

In Germany’s tight labour market, compa-

nies cannot meet orders, and a chronically

understaffed public-sector workforce

struggles to manage them. Critics counter

that a long-term targeted investment

scheme, rather than the stop-start pro-

grammes of recent years, would provide

firms with the guarantees they need to ex-

pand capacity.

Such rows will not end soon. Mean-

while the outlook is uncertain. Germany’s

export-heavy economy remains exposed to

risks like a no-deal Brexit and the uncer-

tainty around America’s trade spat with

China. “German business expectations

have fallen off a cliff,” according to ihs

Markit, a research firm. The European

Commission thinks German growth will

outpace only Italy’s in 2020. Amid such

worries, critics will continue to decry the

German government’s tightfistedness. The

chances are that it will continue to resist. 7

I

n septemberPedro Sánchez, Spain’s act-

ing prime minister, said that if he agreed

to a coalition between his Socialists and

Podemos, a farther-left party, he “wouldn’t

sleep at night”. Two months later, just

hours after an election on November 10th

in which both parties lost ground while the

hard right surged, Mr Sánchez and Pablo

Iglesias, Podemos’s leader, signed an out-

line agreement to form Spain’s first co-

alition government since the 1930s. Many

details are lacking and the deal is not itself

enough to guarantee a majority in Con-

gress. But after their fourth general elec-

tion in as many years, Spaniards may be

spared a fifth, at least for a couple of years.

The Socialists have emerged again as

the largest party, but with only 120 of the

350 seats in Congress, down three on the

previous vote in April. Podemos lost seven

seats (two to a splinter party). Between

them, the pair mustered almost 1.4m fewer

votes, partly because turnout fell by six

points and partly because of continuing

fragmentation, as an unprecedented 16

parties won seats in Congress.

The big change was that Vox, a hard-

right Spanish nationalist party, surged into

third place with 15% of the vote. Its rise

came partly at the expense of Ciudadanos,

a rudderless formerly centrist party, which

was almost wiped out. Albert Rivera, its

founding leader, resigned. The voters thus

punished, to varying degrees, those they

held responsible for failing to form a gov-

ernment after the April poll. That was

when Mr Rivera deprived the country of its

only realistic prospect of a strong, reform-

ist administration by setting his face

against an agreement with Mr Sánchez.

Chastened by his pyrrhic victory, Mr

Sánchez chose to eat his words and accept a

coalition in which Mr Iglesias would prob-

ably be a deputy prime minister and have

two or three other ministries. The two have

disagreed about the economy and about

Catalonia, the biggest issues facing Spain.

Mr Iglesias wants to squeeze the rich and

repeal a labour reform which made firms

more competitive. Mr Sánchez has at-

tempted to assuage the concerns of busi-

ness folk by saying he will put Nadia Cal-

viño, his fiscally sober economy minister,

in overall charge of economic matters. Po-

demos may kick against her.

The campaign was dominated by the

conflict in Catalonia, after the Supreme

Court last month imposed swingeing pri-

son sentences on nine Catalan separatist

leaders for their role in the illegal referen-

dum and declaration of independence in

October 2017. That prompted sometimes

violent protests which continued this

week with the blocking of motorways in

Catalonia. The separatists’ threat to nation-

al unity has fuelled the rise of Vox, which

wants to limit Spain’s sweeping regional

autonomy. It also loudly complains about

illegal immigrants claiming welfare bene-

fits (though few do).

Podemos has hitherto backed the sepa-

ratists’ demand for a referendum on inde-

pendence. The draft coalition agreement

calls for the government merely to pro-

mote talks “always within the constitu-

tion”, which does not recognise a right to

self-determination. To scrape together the

majority needed to form a government, Mr

Sánchez must now rely on the support of

regional parties and, probably, the absten-

tion of some Catalan separatists. Given the

climate in Catalonia, that will not be easy.

For now, the prime minister appears to

have rejected a second option, to seek an

agreement with the mainstream conserva-

tive People’s Party, the Socialists’ age-old ri-

vals. That is not clearly on offer, but most

leaders accept that the country’s political

deadlock needs to be broken. To resort to

yet another election would be “dangerous-

ly badly received by Spanish society” and

would lead to even greater fragmentation

and stir up still more support for Vox, says

José Luis Ayllón of Llorente y Cuenca, a po-

litical consultancy. That prospect should

concentrate minds. 7

MADRID

It prompts a first step towards a

left-cum-regionalist government

Spain’s election

An electio-shock

The elusive majority

Source: Ministry of Interior

Spain, general election results, seats in Congress

November 2019

April 2019

Podemos

35 Socialists 120 Others 44 10 People’s Party 89 Vox 52

Ciudadanos

Majority

42 123 38 57 66 24