Spain’s Socialist Government faces an uphill struggle in reforming the economy after large election loses and growing protests.

According to MarketWatch, Spanish stocks fell sharply today due to worries about debt and a Moody’s report on the government’s difficulties in controlling spending by regional and municipal governments.

The stock plunge came on the heels of significant losses by the ruling Socialist Party in last month’s local elections. According to Reuters, the Socialists last week named veteran politician Alfredo Perez Rubalcaba to head the party and run for Prime Minister on the Socialist slate in March 2012. Current Prime Minister Jose Luis Rodriguez Zapatero will remain in his post until elections. The election losses came in the midst of massive protests against high unemployment and the government’s handling of the economy.

Analysis:
The Socialists are trying to respond to its election rout and the need for economic reform with the compromise choice of Rubalcaba. This could avoid a potential division in the party and indicates that the Socialist Party plans to continue economic reforms. The party will attempt to rebuild popularity around Rubalcaba before elections, leaving Zapatero to take the blame for unpopular austerity measures. Elections losses by the government could complicate economic restructuring, however, as it cause could municipal authorities to back away from Madrid’s economic belt tightening policies.



Socialist Government to Stick with Economic Reforms
Despite public discontent with the economic austerity, the government remains committed to implementing reform. Shortly after the municipal loss, the Socialists announced they would not modify the economic program. However, some analysts now say lack of control of municipal and regional governments could undercut the program. Citigroup economist Giada Giana stated that the government may have difficulty offsetting government spending at the regional level, and it may be difficult for the economy to grow three percentage points this year. “So we see some slippage in the government's main target."

Analysis:
The government appears committed to the long and arduous reform process despite the political cost, and almost certainly hopes some reforms will bear fruit before the next elections. The Socialists see little option other than severely restructuring Spain’s failing economy and working with the euro zone on a bailout package. With soaring deficit, .9% economic growth, a destroyed property market, and unemployment running at 21.3% overall and youth unemployment at 45%, the country would move toward an even more severe crisis without drastic reform.



The center-right Popular Party is calling for immediate elections, saying the significant loss by the Socialists in the Municipal Elections indicates the electorate has lost faith in the government and its economic policies. The Socialist government however, is refusing to call for early elections.

Analysis:
Elections before March are highly unlikely. The Popular Party lacks the votes in Parliament to force an early vote unless the minority Basque Nationalist PNV defects from its alliance with the Socialists. The PNV has reiterated support for the Socialist economic agenda and does not appear interested in early elections. The Socialists do not want early elections, and almost certainly hope the official emergence of Rubalcaba combined with some positive economic news will bolster their position over the next ten months. Moreover, Rubalcaba, known for building cross-party relations, likely will focus on retaining the PNV support against early elections.




Lisa M. Ruth is a former CIA analyst and officer. She is currently Managing Partner of C2 Research, a boutique research and analysis firm in West Palm Beach, Florida and is Vice President at CTC International Group, Inc., a private intelligence firm.