Democracy is often on a collision course with economic elites, sometimes in less subtle ways than others. Spain’s current plight is one such example. Last month, the country’s Socialist leader Pedro Sánchez was toppled in a party coup, paving the way for his fellow MPs to abstain in a vote to allow the conservative Mariano Rajoy to resume office. For many traditional Socialist voters, Rajoy’s Popular party is the political wing of a venal, corrupt right-wing establishment: allowing them to form a minority government was an act of betrayal. But Sánchez’s subsequent revelations exposed the machinations of powerful Spanish interests.

After two elections that marked the collapse of the country’s two-party system but failed to produce a governing majority, Sánchez had attempted to assemble a leftwing alliance, much like the one that governs in neighbouring Portugal. His ambition had been to form a government alongside Podemos – a recently formed party that emerged from movements protesting against cuts that have devastated Spanish society – and backed by Catalan nationalists.

But this week, Sánchez revealed that he was blocked by powerful corporations, including banks and Spanish telecoms giant Telefónica. These interests run El País, the country’s largest newspaper. Unless Sánchez allowed Rajoy to return to power, or accepted a new round of elections, El País would launch a vicious campaign against Sánchez. A coalition with Podemos was simply intolerable.

Here was direct interference in Spanish democracy by unaccountable vested interests to stop a progressive government taking power. “Sánchez has recognised the pressure of the oligarchic powers and that it was a mistake not seeking an agreement with us,” says Podemos leader Pablo Iglesias.

Pedro Sánchez: ‘A man riven with regret.’ Photograph: Javier Soriano/AFP/Getty Images

Indeed, Sánchez is a man riven with regret. He had attempted to form an alliance with the centre-right Citizens’ party – another beneficiary of the implosion of the two-party system. But it was all a ruse: Podemos was asked to back such an alliance, even though it meant signing up to rightwing economic policies that would have been impossible to accept. It was nothing more than an attempt to blame Podemos for preventing Rajoy’s return to power.

Spain’s Socialists are now in a terrible situation. Their grassroots are alienated, while the triumphant conservatives know they can coerce the Socialists to back their regressive budgets, threatening a snap election that would decimate their rivals if they refused. The Spanish Socialists were already halfway to suffering the fate of their Greek sister party, Pasok, which so alienated its natural supporters that they defected en masse to Syriza. The Catalan socialists are enraged by the party leadership’s actions, and could even split. Podemos can now position itself as the real opposition. But that is of little comfort to Podemos’ base, who could now endure years more of a conservative government that they had every hope of overturning.

What is happening in Spain is revealing about events far beyond the country’s borders. In Britain, Jeremy Corbyn’s internal opponents quite legitimately point to the Labour party’s abysmal poll ratings. It says much about the state of European social democracy that Labour’s polling is higher than almost all of its sister parties across the Channel. When Tony Blair won his landslide 1997 victory, social democrats were on the march across the European continent, including in Germany, France, Italy and Scandinavia.

Today’s social democratic parties are haemorrhaging support to the new left, the populist right and civic nationalism. The German social democratic leadership may be committed to the sort of “third way” politics some would like Labour to adopt, but in the latest poll they languish at 22%. The French Socialists face being beaten by the far-right Front National in the first round of next year’s presidential elections. Sweden’s social democrats hang on to power by their fingernails, while their Nordic allies are exiled from power. Italy’s centre left is a rare exception, but its only hold on power is precarious and challenged by the rise of the populist Five Star Movement.

May 2012: demonstrators in Barcelona mark the anniversary of the beginning of the ‘indignados’ movement in Spain. Photograph: Emilio Morenatti/AP

The core base of European social democratic parties has fragmented: between younger and older voters; university-educated and working-class voters in small towns; between those hostile to immigration and those who are not. The fury exchanged between centre-left and radical left forces across Europe is, all too often, a deflection from an uncomfortable truth: that neither has so far produced a convincing answer to how these multiple divisions can be straddled, and how a viable electoral coalition can be produced that would win power.

It is frustration at unaccountable elites that produced Podemos in the first place: its whole narrative has been vindicated. Five years ago, millions of Spaniards who were disillusioned with the political establishment and determined to make it pay for a crisis not of their making mobilised across the country. Without these so-called indignados, Podemos and its allies would never have emerged as mass political forces. Podemos has much to teach other European leftists about how to communicate beyond traditional comfort zones. But Podemos’ results in June’s elections were disappointing: it had expected to eclipse the Socialists as the second party, and was traumatised when it failed to do so. In other local elections it routinely underperforms its opinion poll ratings. The party is now engaged in profound soul-searching, debating how to democratise the party’s own internal structures to re-engage with the mass movements that produced it.

If Podemos capitalises both on disillusionment with the Socialists and the Popular party, it could provide an example for the left across Europe. If it fails to do so, there could be terrible consequences across the continent. Rightwing populism is on the march, and it is making considerable inroads into working-class communities that traditionally opted for the left. If discontent continues to sweep the western world – or if there is another crash – then the populist right will be well placed to gain.

The old social democratic model is crumbling, but there is no guarantee that progressive forces will fill the vacuum it leaves. In Poland, the left has effectively ceased to exist: politics is a debate between David Cameron-style liberal conservatives and rightwing populism. If the left fails, Polandisation beckons for European politics. No pressure, Spain: but Europe’s future may depend on you.