Spain’s Political Tactician Sanchez Leaves His Country Guessing

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(Bloomberg) – Spaniard Pedro Sanchez is giving the country five days to think about what life would be like without him.

The Socialist prime minister is taking a break from public appearances while he considers whether to resign over a criminal investigation against his wife, something he says is a right-wing plot.

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His move has plunged Spain into uncertainty and sparked feverish speculation about what he will decide. But there's also the question of whether what's real and what's just another tactical ploy to regain the upper hand.

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His supporters and political opponents in the country of 48 million people have much to argue about his six years as leader. It's a period marked by behind-the-scenes deals that earned him three terms, decent economic performance and broken promises that executives say threaten investment.

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

For executives, frustrated and pessimistic after years of hastily instituted policy, that may be a relief. For the Spanish nationalists whom Sánchez has kept at bay, this will provide an opportunity to impose their authority on the separatist groups with whom he has struck deals to stay in power. For his partners and allies, it will be ugly.

Opinion polls suggest that holding early elections would hand power to a right-wing coalition, ousting the Socialists and their far-left coalition partner Soumares. Catalan and Basque nationalists, who lent their votes to Sanchez, will lose the influence they gained in last year's close elections.

For this reason, and in keeping with Sánchez's tactical successes so far, the most likely outcome is some kind of magic trick to try to keep the government going.

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

Read more: Spaniard Sanchez threatens to resign. What are his options?

One scenario popular in Madrid political circles is that Sánchez could use the weekend to broker a deal with the multiple parties that brought him to power and Deputy Prime Minister María Jesús Montero could take power.

One person who deals with the socialist group said lawmakers and officials appeared devastated Wednesday night when the Sanchez bombshell fell. But their mood had improved significantly by the next day, indicating a degree of confidence in how the move would be carried out, according to the person who spoke on condition of anonymity.

Montero is known for developing very strong relationships within and outside the party. She has been one of Sánchez's chief negotiators in talks with other parties – including the 2019 negotiations to form his first coalition government.

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Other names being floated include former Prime Minister Jose Luis Rodriguez Zapatero, who is close to Somar and separatist groups.

“It depends on how political opponents and government supporters react,” said Paloma Román Maroján, director of the School of Political Sciences at Complutense University of Madrid. “If they respond to his demands or abandon him.”

Umbrella-appointing a successor would allow Sánchez to step back from front-line politics without unleashing the chaos that an election might bring. People who have spoken to his team insist that the sentiments expressed in his letter are genuine, despite his track record of political stunts.

“I am a man who loves my wife dearly, and I watched helplessly as they hit her day after day,” he said in the letter.

The Spanish business community – often the target of Sanchez's displays – reacted with skepticism. Two executives from companies in the Ibex-35 index see his actions as a maneuver to strengthen his position.

The paradox of Sánchez's Spain is that despite increasingly toxic and divisive politics, the economy is doing well.

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The Ibex-35 index touched its highest level in seven years last month. It has risen 14% since Sánchez came to office via a parliamentary coup in June 2018. The economy is expected to grow at more than twice the euro zone average this year, according to the International Monetary Fund.

But these gains are not felt by everyone. Spain's poverty risk is higher than the EU average, and the country performs poorly 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 a former European lawmaker for the center-right Ciudadanos party. “It feels great in Madrid, but I don't see sustainable growth.”

Read more: Spain's reaction: Another vote threatens further instability and drag on GDP

If Sanchez's strength lies in being a tactician who succeeded in keeping his party in power, his weakness lies in his lack of the authority necessary to move the country forward.

This has led to the loss of billions of euros in EU recovery funds. Spain fails to fully reach it because Sanchez does not have the power within his coalition to push through the reforms needed to unlock the funds.

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Many executives and politicians who have worked with Sanchez say there is a more fundamental problem: No one trusts him.

After six years in power, Spain has seen clear promises broken not to, for example, join a coalition with the far-left group Podemos or agree to an amnesty for Catalan separatists. He abandoned both when it was necessary to remain in office.

The business community has watched it impose a windfall on banks and energy companies when it became necessary to keep political allies on side, and then send mixed signals about whether those alliances will become permanent.

Many on Sanchez's team were shocked when he made his announcement on Wednesday, according to a person familiar with their discussions. He only talked about it with a small group of people.

Business leaders, having struggled for so long to understand the government's stance toward business, can sympathize.

Oil company Repsol SA said it may reduce its investments due to uncertainty over the tax framework. Infrastructure giant Ferrovial SA has moved its headquarters to the Netherlands and been publicly attacked by the Prime Minister.

On Wednesday, Endesa SA CEO Jose Bogas told shareholders at the company's annual general meeting that the extraordinary tax “detracts from our ability to invest.”

Deputy Prime Minister Monteiro will have a chance to gauge socialist sentiment on Saturday, when the party's executive committee meets.

Despite the pressure, she believes Sanchez will keep fighting: “We all expect that the decision he will make on Monday is to continue with the project, despite the noise and fury.”

—With assistance from Clara Hernanz Lizarraga, Laura Milan, and Shelby Knowles.

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