PM Pedro Sánchez (l) and Podemos leader Pablo Iglesias. Zipi / EFE

Spanish Prime Minister Pedro Sánchez and Podemos leader Pablo Iglesias on Thursday sealed a deal to reinforce the former’s minority government and avoid early elections.

The cornerstone of the new partnership is an agreement on the 2019 budget, which would include a raft of socially oriented measures such as raising the minimum wage by 22%, the biggest hike in 40 years.

A responsible government that wants to govern cannot sign off on a minimum wage raise of over 20% when it has a 15% unemployment rate

EU official

The budget has become a major hurdle for Sánchez, whose Socialist Party (PSOE) only has 84 lawmakers in the 350-seat Congress, while the Senate is controlled by the conservative Popular Party (PP). And even Podemos’s support does not guarantee passage, as this will require additional backing by Catalan separatist parties, who are demanding to see steps in connection with the jailed secessionist leaders and self-determination.

What’s more, the increased spending contemplated by the PSOE and Podemos will require a negotiation with Brussels, where officials have already expressed doubts about the measures.

Shift to the left

The deal between the Spanish socialists and the anti-austerity party seeks to underscore a shift to more progressive policies from the center-right approach taken by former PM Mariano Rajoy of the PP. Rajoy was removed from office in a historic no-confidence vote that took place in late May, led by Sánchez with support from Podemos and regional parties. The new PM has signaled that he wishes to serve out the remainder of the political term rather than hold early elections.

From a political point of view, the PSOE-Podemos agreement could also herald a wider collaboration between both parties with a view to next year’s local and regional elections, and to the national election set for 2020.

“This agreement is a starting point for a new period in Spanish economic policy, which we think will result in a coalition government,” said Iglesias in statements to EL PAÍS.

Budget measures

Sánchez and Iglesias are proposing a 22% rise in the minimum wage, up to €900 a month. The CEOE employers’ association has already talked about “the negative effects” of such a move on collective bargaining, wages and the economy in general. If implemented, it would be the biggest rise in 40 years.

Both leaders are also pledging to raise pensions (at a cost of over €1 billion), to invest more in education and science (over €1.3 billion), and to spend more on unemployment and disability benefits (€850 million), on housing (over €600 million) and on increased paternity leaves (€300 million).

This agreement is a starting point for a new period in Spanish economic policy, which we think will result in a coalition government

Podemos leader Pablo Iglesias

The sum of all these additional expenses is in excess of €5 billion. Brussels will receive the blueprint on Monday, but sources at the European Commission are already talking about “a package of social measures that are surely valid and necessary, but lack the means to finance them.”

“A responsible government that wants to govern cannot sign off on a minimum wage raise of more than 20% when it has a 15% unemployment rate and a low-skilled workforce in general; the measures affecting businesses do not seem to be going in the right direction,” said a high-ranking EU official.

Doing the math

Spain has almost unmatched unemployment, the largest deficit in Europe, public debt of around 100% of GDP, and even higher private and external debt levels. Spain’s opposition parties say the math doesn’t add up, but Finance Minister María Jesús Montero has said that increased revenues from tax hikes and higher economic growth will compensate for the additional spending.

Meanwhile, on the political front, the 17 members of Congress representing the Catalan separatist parties ERC and PdeCAT have already refused to endorse the new budget plan unless they see progress in connection with their demands for self-determination. Their votes are critical, as the PP and Ciudadanos, which will vote against the plan, hold 166 seats. The PSOE, Podemos, the Basque Nationalist Party (PNV), the Valencia party Compromís and two parties from the Canary Islands together represent 161 votes, requiring at the very least support from one Catalan party and an abstention from the other.