2016: The Year of Ungovernability? Part 1

Article written by Fernando Betancor.

 

As if last year was not rowdy enough, 2016 has already opened on a new note of ungovernability that promises to surpass what we’ve seen before. No new themes have been exposed, though they will surely come up; but the deep fractures that governments and institutions are desperately attempting to paper over continue to wreak havoc and make those efforts go awry.

Europe’s Mediterranean Headache is Symptomatic

The year opens with the entire Iberian Peninsula in political chaos and with the prospect of three critical elections by March. Three? Aren’t there only two sovereign nations in Iberia? True enough, but Catalonia, Spain’s prickliest region, aims to be the third and recent events there continue to ratchet up the tension.

Regional elections in September that saw the pro-independence party Junts pel Sí fall short of an absolute majority in the ballot count, yet still win a substantial plurality in the Parlament. Another pro-independence party, CUP, also had a historic turnout and together the two “secessionist” parties should have been able to easily form a majority government that would press forward the Transition Plan, which is the Catalan Govern’s roadmap to independence by the creation of parallel state structures over 6 to 18 months.

Unfortunately for the nationalist aspirations of many Catalans, the CUP despises the Artur Mas and his center right Convergencia party even more than they do the government in Madrid. During two separate votes of their party members, the left-wing organization has finally refused to support the candidacy of Mr. Mas to continue as President of Catalonia. There is still a remote possibility of a deal: a compromise candidate like Raul Romeva might be found that would be acceptable to the CUP membership: but it would hardly be acceptable to Artur Mas, Convergencia and his pro-business, affluent backers. So rather than moving into 2016 with the momentum of the elections and some very stirring rhetoric during the Parlament’s opening session, the ‘Catalan Way’ isn’t able to clear the starting gate and is rapidly losing what international credibility it may have achieved over the past four years.

Without a President, the Catalan charter requires new elections to be held by the end of March; the fourth regional election in five years. Without Artur Mas, the separatist movement is likely to lose its tenuous plurality as the more ideologically moderate backers of Catalan independence are unwilling to create a nation just so that the ERC and CUP can run it into the ground. It is difficult to see the Junts pel Sí coalition maintaining itself into March: the balance of power has shifted between Convergencia and Esquerra Republicana since the December national elections. An exclusively leftwing coalition seems increasingly likely, with Esquerra Republicana, CUP and Podem-Sí Que Es Pot in agreement on social issues and on their distaste for the monarchy. The main difference is the latter’s preference for a true referendum on independence and negotiation with Madrid, while the first two are convinced that such a referendum is no longer needed and that negotiation is impossible. But these are not insurmountable differences; nor is a far left coalition ruling Catalonia something that will improve the situation from Madrid’s point of view. Getting rid of Artur Mas will not achieve a definitive end to the independence movement.

It is not even certain who the Catalan government would be negotiating with in Madrid, for Spain has also failed to form a stable coalition after the December 20th elections returned a completely fragmented parliament. The ruling Partido Popular, yoked to vast and unending corruption scandals, lost over 60 seats and its legislative majority in a historic defeat, though it retained a plurality of votes[1].  The Socialists and left-wing Podemos came in second and third respectively, with centrist Ciudadanos posting a disappointing fourth place. The last minute collapse of Ciudadanos rules out the most obvious coalition choice for the Populares; and a “Grand Bargain” with the Socialists appears very difficult to achieve. The chaos in Catalonia only makes it more difficult to reach agreement: a solid pro-independence government would at least have united the Populares and Socialists on the need to maintain national unity.

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The other possibility is of a left-wing coalition of the Socialists with Podemos; but although PSOE leader Pedro Sánchez is open to such a deal, his party barons are against it due to Podemos’ support for a sanctioned Catalan referendum on independence. Without Podemos, there is no alternative combination that will put Mr. Sánchez into the Moncloa Palace. There remains a chance that the PSOE and Ciudadanos will abstain from voting during Mr. Rajoy’s second investiture vote, during which the candidate need only win more votes in favor than against in order to be elected Prime Minister[2], but it seems unlikely at this time.

Thus Spain is likely to lurch into another election and another fragmented results at the same time Catalonia does, creating additional uncertainty in both the political and economic arenas. That bodes ill for Spain’s recovery, which has remained relatively fragile; and the examples of Pescanova and Abengoa only serve to underline the need for further debt reduction and liberalization of the economy. The economic model remains largely that of the Franco years:  corruption and cronyism is rampant, as the Project Castor fiasco only too clearly demonstrates. Too many Spanish companies remain parochial, inefficient, dependent on state support or intervention, both direct and indirect: such as when Mr. Rajoy’s government gave a not very subtle nudge to the country’s already burdened banks when retailer El Corte Inglés needed to refinance 5 billion euros in debt. Telefónica and Iberdrola are two more flagship firms that are overly burdened by debt and under much greater foreign scrutiny than before. Let know one claim to be surprised if 2016 proves yet another year of “surprise” corporate meltdowns in Spain.

Portugal too is in a dual political-economic meltdown. The government is currently in the hand of the Socialist Antonio Costa, leading a coalition of left-wing parties that campaigned against the EU-imposed austerity program of his center right predecessor, Pedro Passos Coelho. Mr. Costa assumed office only after a highly fragmented election resulted in the President of Portugal, Aníbal Cavaco Silva, decided to ignore the claims of the Socialists to be able to form a majority in the Parliament and instead backed Mr. Passos Coelho to form a minority government. The infuriated Socialists immediately forced a no confidence vote that ousted Passos Coelho; but the coalition looks highly unstable even as it faces its first significant challenge.

The country is struggling to finalize the restructuring of its financial system, damaged in the 2008 financial crisis. Banco Espiritu Santo was broken up and the “good assets” placed into Novo Bank – literally “new bank” – and the auction of the new institution completed within two years. This sale has been long delayed, however, and the ECB said in November that an additional 1.4 billion euros in capital need to be paid into the lender by the state. This is on top of the 4.9 billion euros the state has already paid out to from its resolution fund in the first place. Novo Bank also has the dubious merit of being the first institution recapitalized using Europe’s new orderly resolution mechanism: institutional investors were required to pony up 100,000 euros each held by the worthless Banco Espiritu Santo – thus were losses imposed on the creditors in Europe’s first official (rather than ad hoc) bail-in. While that may not seem too terrible, be warned: the EU’s shiny new toy also allows the state to impose a similar bail-in on depositors, meaning your savings could be appropriated without so much as a ‘by your leave’ to clean-up the bad bets of irresponsible bankers.

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Adding to the painful necessity, the government is also faced with the need to restructure and refloat Banif, which failed over the Christmas weekend. The resolution mechanisms in place worked quickly and most of the performing assets were snapped up by Spain’s Banco Santander; but that leaves the government with the need to inject approximately 2 billion euros into the busted bank.  The Communist partners to the Socialist government have balked at this new demand and have indicated that they may vote against an amendment to the already approved 2016 budget to fund it. A political schism at this juncture, on this vote, would damage Portugal’s other financial institutions as well as the hard-won credibility of the government.

Even as the Prime Minister faces a January showdown within his coalition that could lead to a vote of no confidence and new elections, the new President of Portugal is being elected in this month. The office of President is mostly symbolic; but as the October decision of the outgoing Mr. Cavaco Silva to support Mr. Passos Coelho shows, the office is not without influence. Mr. Cavaco Silva has reached his term limit and cannot run again; this time, there are 10 candidates seeking election to that office, a record number. If no candidate achieves more than 50% of the vote, a run-off election is held in February: an almost guaranteed result with so many contenders. Portugal will be bereft of stable leadership during a critical period.

And across the Mediterranean lies another country where fragmentation and ungovernability are becoming endemic. Greek Prime Minister Alexis Tspiras has so far defied the odds and maintained the delicate balance of his coalition government, which holds only a 2-seat majority in the Parliament. He has succeeded mostly by deferring the majority of the thorniest reforms required by the Troika until 2016, especially a painful reform to the pension system to cover a 600 million euro deficit.

Yet Mr. Tsipras is also at the heart of a political storm that is just as big as the Euro crisis; Greece is the main entry point for the hundreds of thousands of Syrian refugees that have streamed into a “borderless” Europe and provoked a nationalist backlash not seen since the 1930’s. The Greek government, like most European states, has struggled to deal with the flood of refugees; but it has justifiably complained that it is being asked to spend millions on border controls even as its Troika creditors are withholding bail-out funds until it cuts millions from its budget.

Into this space, the European Union has thrust itself with its usual tact and discretion. Indicating that no one state could be allowed to put the Schengen Treaty and union at risk – especially, by implication, a small, insignificant and troublesome state like Greece – the EU has declared that its border control agency Frontex will assume responsibilities for controlling the flow of persons into the European Union with or without the consent of the implicated state. And they have done just that, pouring increasing numbers of Frontex personnel and equipment into the Aegean Sea. For the moment, Mr. Tsipras has welcomed this “assistance”; but then again, he was also forced to swallow the bail-out terms he declared to be intolerable. Greece’s steady transformation from an independent, sovereign state into a Gau of the European Union continues apace.

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Sources and Notes

[1] The irony was not lost on the Catalans, who noted that a plurality was enough for Mr. Rajoy to insist on his right to govern, but an even greater plurality was apparently not enough for Mr. Mas to make a similar claim.

[2] The Spanish Constitutions grants the King the authority to invite the leading party member of his choice to form a government; this is usually the party with the most votes, though the law allows the monarch to use his judgment in the selection. During the first round of voting, the candidate must receive a support of a majority of delegates, i.e. 176 votes. Failing this, the candidate may present themselves in a second round of voting during which a simple plurality of votes in favor suffices. If this second attempt also ends in failure, the Constitution requires new elections to be held.

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