While Prime Minister Pedro Sánchez contends that a workable formula will emerge, poll results still show no clear majority. Negotiations may prove intricate and potentially lead to a new election. No bloc currently holds a decisive majority in the remaining seats, which could push Spain toward an executive that faces lengthy bargaining and possible re-elections in the coming months. The People’s Party secured 136 seats and 33% of the vote in the latest elections, yet that tally does not guarantee a coalition. Vox, a key potential ally for the PP, dropped votes compared with the previous vote, ending with 33 seats. Both blocs remain far from the 176-seat threshold, and the difficulty of securing nationalist supports for a potential impeachment pact adds to the challenge. In the left block, the majority remains unclear as well. PSOE won 122 seats, but that alone may not be enough to appoint a new head of government, and with Sumar taking 33 seats, gains would require the support of parties like ERC, Junts, or BNG.
In this political climate, the mood in the economy is unsettled. Political instability is widely regarded as the worst-case scenario by economic actors. With a government lacking stable legislative power, companies, investors, and savers must navigate the coming months without a clear policy agenda. In such periods, investment tends to slow as market participants seek clarity on who will represent the public sector, and essential reforms to public finances and pensions, or deficit reduction measures, require a capable majority. A government with limited legislative capacity cannot sustain long-term plans.
You may recall Belgium’s experience, where a prolonged caretaker period stretched to 493 days after elections in May 2019. Despite the stalemate, the country managed to improve certain economic indicators. Nevertheless, for political scientist Javier Martín Merchán of Universidad Pontificia Comillas, such a scenario would be unfavorable for Spain. “Investments are likely to be delayed and job creation slowed. Market confidence erodes when stability is in doubt, and investor funding remains crucial for Spain at this moment,” Merchán notes.
One major consequence of a political standstill is the potential expansion of the General Government Budget. Current accounts hold until December 31, and legislative work would be constrained as the government can only meet existing expenses. If new budgets cannot be prepared, extensions may be needed into early January 2024, warned Diego López Garrido, vice-president of Fundación Alternativas and professor of Constitutional Law at the University of Castilla-La Mancha. Ongoing expenditures will continue, but delays in new spending could impede growth opportunities.
Historically, Spain has faced similar gaps. The 2018 public accounts crafted under Cristóbal Montoro were extended for successive years, and the Sánchez administration had to operate without approved accounts in 2019, with extensions continuing into 2020. Regions began signaling liquidity and treasury pressures as the economy showed some improvement and tax receipts rose.
According to Luis Martín, an economist with Abencys, the worst outcome of a parliamentary stalemate would be a delay in structural reforms. “Progress on pension systems and regional finances is essential for reducing the public deficit. That work hinges on political stability,” Martín argues. For construction firms, the stall directly affects sales. The opportunity cost of a non-governing period is difficult to quantify, but political and economic instability tends to deter foreign investment.
Regulatory agencies and public companies
A prolonged deadlock would also slow the renewal of leadership in key regulatory bodies such as the National Securities Market Commission. Markets crave certainty and will favor a government that attracts foreign investment. Companies likely to feel the impact first are those controlled by a few large managers, including firms like Indra, Iberdrola, and Endesa, noted Diego Morín, an analyst at IG Mercados. Trading shows weakness in these sectors, with Indra and Endesa near a 3% dip on a recent session, while financials across the Ibex 35 also faced declines.
The immediate effects of government inertia would first appear in fixed income and equity markets. Job prospects are likely to be the first casualty of prolonged uncertainty, according to Javier Martín Merchán of the Comillas Pontifical University.