Setback in Spain Raises Concerns

By JONANTHAN HOUSE And DAVID ROMAN
 

MADRID—An electoral setback for Spanish Prime Minister Mariano Rajoy raised new doubts about his ability to push through tough austerity measures and dragged on European financial markets Monday.

Reuters

Spanish Prime Minister Mariano Rajoy (R) and Spain's centre-right People's Party candidate Javier Arenas wave during a campaign rally in the Andalusian capital of Seville last Friday.

Though Mr. Rajoy's conservative Popular Party won Sunday's elections in Andalusia for the first time ever, it failed to clinch the parliamentary majority needed to ensure it could govern there, as recent pre-election opinion polls had forecast. It is now widely expected that the incumbent Socialists will form a coalition government with the United Left bloc to maintain control of the country's most populous region.

Spain's major parties had framed the Andalusian contest as a referendum on Mr. Rajoy's efforts to overhaul one of Europe's largest, ailing economies, just four months after he was brought to power by a landslide victory in November national elections. 

In a separate election Sunday in much smaller Asturias, the Popular Party managed only to maintain the 10 seats it already had in the local parliament, while the Socialists captured an additional seat, boosting their total to 16.

The electoral setbacks come at a bad time for Spain, with investors increasingly worrying it could be the next domino to fall in Europe's three-year debt crisis and the European Union pressuring it to accelerate its budget-cutting efforts. Spain's borrowing costs, as measured by its 10-year government bond yield, has hit three-month highs.

Foreign-exchange traders said concerns on Spain are probably weighing on the euro, as it fell against the U.S. dollar in European trading, and broke through key psychological levels. The euro last traded at $1.3255. Likewise, Spain's blue-chip index was down 1.4% recently, leading losers in Europe, with banking shares among the worst performers. 

Ricardo Santos, economist at BNP Paribas in London, said Sunday's electoral setback "suggests that the austerity measures and the reforms that the government intends to start are biting into [its] general support."

On Thursday, the government faces another test for its popular support in the form of a general strike called by unions have to protest government budget cuts and a labor market reform that undermines their power and weakens employment protections.

On Friday, the government faces a test of EU and investor support when it belatedly presents its 2012 budget, which will be key to assess the country's ability to reduce its budget deficit to 5.3% of GDP this year and 3% of GDP next year from 8.5% in 2011. The government is widely thought to have put off announcing new budget cuts until after Andalusian election.

Write to David Roman at david.roman@dowjones.com

Fuente: THE WALL STREET JOURNAL