The combination of recession and austerity are fuelling the escalation of social unrest and separatist sentiment
Spanish society is currently experiencing one of its most unstable periods since the end of the Franco era almost 40 years ago. As a consequence of the economic and financial crisis currently under way in the country, Spaniards suffer from high unemployment, reduced income, higher taxes as well as lower social benefits and public services. Social unrest has gathered momentum and is spilling over to regional separatist movements in some regions. Demonstrations in Madrid and Catalonia, as well as a challenge to the Constitution by the Catalan president threaten political stability. The social crisis is only the next phase of the crisis, but could well be far more damaging.
The first significant illustration of the social crisis in Spain was the emergence of the Indignados movement in 2011, which essentially protested against what it saw as the damages caused by capitalism and corrupt politicians. Social and political discontent have only grown since then, fuelled by the economic recession and ever harsher austerity measures, which have so far been the government's main response to the crisis, a move that will surely prove self-defeating in a recessionary environment.
Social discontent finds its source in the economic recession and the austerity drive
Encouraged by its European partners and the European Commission, the government has passed several austerity packages since it came into office less than a year ago. From the introduction of co-payment for some medicines to the cuts in benefits and public sector wages and the increase in taxes (notably a three percentage point increase in value-added tax), the Spaniards have been painfully affected by austerity. Further reforms of the labour market will also lead to more redundancies in the short term, adding to the pressure on income and public finances. Confronted with an ever-worsening economic environment, the population is now challenging the government and the legitimacy of its policies.
This was illustrated by demonstrations in Madrid such as the one on September 25th and 26th, when demonstrators surrounded the Parliament building and confronted riot police. The protest began with a massive march to protest against budget cuts and demand that the Popular Party (PP) government of Prime Minister Mariano Rajoy resigns.
In Greece, where the population has experienced austerity and recession for some time now, social anger is directed towards the government, but also towards some European countries and Europe itself. In comparison, Euroscepticism remains fairly low in Spain, as illustrated by recent opinion polls. However, social anger is evolving into regional separatist resentment, particularly in Catalonia, in a way that could prove particularly challenging for the government. Furthermore, we expect that when Spain applies for a bailout (or the equivalent), social discontent towards Brussels will grow very rapidly.
The economic and social crisis is fuelling the resurgence of regional separatist sentiment
Relations between the central government and Catalonia -as well as other regions- have historically been contentious and sometimes violent. In September, between 600,000 and 1.5m pro-independence people protested in Barcelona to demand Catalonia's autonomy from Madrid. Their main claim was to gain more control over taxes collected in Catalonia (something equivalent to what is already in place in the Basque region), at a time when the region experiences financing problems.
Catalonia is the country's richest region, with an economy almost the size of Portugal's, but has been shut out of financial markets since earlier this year, forcing its government to request a €5bn credit line from the state. Given that Catalonia is a net contributor to the central budget, the Catalans regard the money with which they will be bailed out as their own. In addition, seeing that a significant proportion of the 2011 budget overshot came from the regions, the central government will use this credit line, as well as other legal modalities, to increase its scrutiny over regional public finances. It is encouraged to do so by Brussels, which sees regional finances as one of the weakest links in Spain's fiscal setting.
However, the more austerity the central government imposes in the regions, the stronger regional separatist sentiment will grow. The threat of a referendum on Catalan independence has also mounted in recent months, but the Constitution rules that no region can unilaterally hold a referendum without the central government's approval, which will not happen during Mariano Rajoy's mandate. The Catalan president, Arthur Mas, therefore called for early elections to be held in late November, which will in essence serve as a proxy referendum on independence. Opinion polls indicate that his party, Convergencia I Unio (CiU), would win an overwhelming majority and a clear mandate to push for independence.
Spain is a relatively young democracy, built on a consensus struck at the end of the Franco era. This fragile status quo has long been challenged by separatist groups and political parties, but has rarely experienced such a strong constitutional challenge. Although we do not expect Catalonia, or any other region, to gain much additional autonomy soon, let alone independence, the current row against the central government and its obsession with austerity will send shockwaves through Europe's peoples.
Remember the markets? The worst is to come
Spain's situation is very fragile and has been under intense pressure in financial markets in recent months. The European Central Bank (ECB) announced that, provided Spain first applies for support or at least for a precautionary credit line from one of the euro zone's rescue funds, it would be ready to buy unlimited amounts of Spanish short debt in secondary markets. This announcement has been welcomed by financial markets, as illustrated by the drastic fall in the country's bond yields since early September.
But the government has so far delayed its application to rescue funds, and financial markets are getting impatient. Rising social and political instability, alongside uncertainty over the key terms and shape of Spain's previously agreed €100bn bail-out for its banks, is paving the way for another round of market panic, as illustrated by 10-year bond yields rising above 6% again today. Market players have waited long enough to test the new bond-buying programme. We expect their time to come soon.