Spain’s Improviser PM Sanchez Keeps His Entire Country on Alert

(Bloomberg) -- Spain’s Pedro Sanchez is giving the country five days to think about what life would be like without him.

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The Socialist prime minister is taking a break from public view as he considers whether to quit over a criminal investigation against his wife, something he says is a right-wing stitch-up.

His move has plunged Spain into uncertainty and triggered frantic speculation over what he’ll decide. But there’s also a question over how much is genuine and how much is merely yet another tactical ploy to regain the upper hand.

His supporters and political antagonists in the country of 48 million have plenty to argue over about his six years as leader. It’s a period marked by backroom deals that won him three terms, a decent economic performance and broken promises that executives say threaten investment.

“It makes us all think about what would happen if he steps down,” said Luis Arroyo, a sociologist who served as an official under a former Socialist prime minister.

For executives, frustrated and cynical after years of policy made up on the fly, it might be a relief. For the Spanish nationalists that Sanchez kept at bay, it would offer a chance to impose their authority on the separatists groups that he cut deals with to stay in power. For his partners and allies, it would be ugly.

Polls suggest that a snap election would hand power to a right-wing coalition, ousting the Socialists and their far-left coalition partner Sumar. The Catalan and Basque nationalists who lent Sanchez their votes would forfeit the leverage they were handed in last year’s close election.

That’s why, in keeping with Sanchez’s tactical successes so far, the most likely outcome is some kind of conjuring trick to try to keep the government going.

Even if he does that, there are other major challenges fast approaching. Catalonia will hold regional elections in early May, which have taken on additional importance given that separatist leader Carles Puigdemont is due to return from years of exile following an amnesty deal with Sanchez. A month later, European Parliament elections could see gains for the far right.

Read More: Spain’s Sanchez Threatens to Quit. What Are His Options?

One scenario gaining currency in political circles in Madrid is that Sanchez could use the weekend to broker a deal with the multiple parties that put him in power and Deputy Prime Minister Maria Jesus Montero could take over.

One person who deals with the Socialist group said lawmakers and officials were looking devastated on Wednesday night when Sanchez’s bombshell dropped. But their mood had noticeably improved by the next day, suggesting a degree of confidence in how the move will play out, according to the person, who spoke on condition of anonymity.

Montero is known for developing quite strong relationships both inside and outside the party. She’s been one of Sanchez’s top negotiators for talks with other parties — including the 2019 negotiations to form the first coalition government.

Former Prime Minister Jose Luis Rodriguez Zapatero, who is close to both Sumar and the separatist groups, is another name being floated.

“It depends on how both political adversaries and supporters of the government react,” said Paloma Roman Marugan, director of the Political Science faculty at Madrid’s Complutense University. “If they react positively to his demands or abandon him.”

Parachuting in a successor would allow Sanchez to step back from frontline politics without unleashing the chaos that an election might bring. People who’ve spoken to his team insist that the sentiments expressed in his letter are genuine, despite his track record of political stunts.

“I’m a man deeply in love with my wife and have watched with impotence the smears that they have thrown at her day after day,” he said in the letter.

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The reaction from the Spanish business community – which has often been the target of Sanchez’s grandstanding – was skeptical. Two executives from companies in the benchmark Ibex-35 see his actions as a maneuver to strengthen his position.

The paradox of Sanchez’s Spain is that despite the increasingly toxic and divisive politics, the economy is going well.

The Ibex-35 touched its highest level in seven years last month. It’s gained 14% since Sanchez came to office via a parliamentary coup in June 2018. The economy is set to grow more than twice the euro-area average this year, according to the International Monetary Fund.

But those gains aren’t felt by everyone. Poverty risk in Spain is higher than the EU average and the country underperforms in terms of income and employment.

“The GDP numbers hide a lot of weakness,” said Luis Garicano, an economist at the London School of Economics and former European lawmaker for the center right party Ciudadanos. “It feels fantastic in Madrid, but I don’t see sustainable growth.”

Read More: SPAIN REACT: Another Vote Risks More Instability, GDP Drag

If Sanchez’s strength is as a master tactician who kept his party in power, his weakness has been his lack of authority to move the country forward.

That’s led to the lost opportunity of billions of euros of EU recovery funds. Spain is failing to fully access them because Sanchez doesn’t have the authority within his coalition to push through the reforms required to unlock the money.

Several executives and politicians who’ve worked with Sanchez say that there’s a more fundamental problem: no one trusts him.

After six years in power, Spain has seen him break clear promises not to, for example, join a coalition with the far-left group Podemos or to approve an amnesty for Catalan separatist. He ditched both when it was necessary to stay in office.

The business community has seen him slap a windfall tax on banks and energy companies when it became necessary to keep political allies on side, and then send out contradictory signals over whether they would become permanent.

Many in Sanchez’s team were shocked when he made Wednesday’s announcement, according to a person with knowledge of their discussions. He had spoken about it only with a small group of people.

Corporate leaders could empathize, having long struggled to figure out the government’s attitude to business.

Oil company Repsol SA has said it could cut investments because of uncertainty about the tax framework. Infrastructure giant Ferrovial SA moved its headquarters to the Netherlands and was publicly attacked by the prime minister.

On Wednesday, Endesa SA Chief Executive Jose Bogas told shareholders at the company’s AGM that the extraordinary tax “detracts from our ability to invest.”

Deputy Prime Minister Montero will have her chance to gauge Socialist sentiment on Saturday, when the party’s executive committee is set to meet.

Despite the pressures, she believes Sanchez will fight on: “We are all expecting that the decision he makes Monday is to continue with the project, in spite of the noise and the rage.”

--With assistance from Clara Hernanz Lizarraga, Laura Millan and Shelby Knowles.

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