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Spain Set for Government at Last as Separatists Back Sanchez

Charles Penty and Rodrigo Orihuela
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Spain Set for Government at Last as Separatists Back Sanchez

(Bloomberg) -- Spain is set to finally get a new government after the acting premier, Pedro Sanchez, persuaded a Catalan separatist party to help him take office for a second term.

Esquerra Republicana de Catalunya agreed to abstain in a confidence vote in parliament, giving Sanchez the numbers he needs to form a Socialist-led coalition, Pere Aragones, a senior ERC official, said Thursday. A final vote in the Spanish Parliament is expected Jan. 7.

Spain has been without a proper government since Sanchez dissolved parliament in March for the first of two elections last year.

With the parliament splintered between five major national parties and a host of smaller regional groups after a second ballot in November, Sanchez turned to Esquerra to help swing the numbers in his favor. A pact with the anti-austerity party Podemos got him closer to the line and upped the pressure on the Catalans.

The deal represents the latest attempt to get to grips with the political fragmentation that has dogged Spain since the conservative People’s Party lost its majority in 2015. Sanchez claimed his first term in 2018 by ousting the minority PP government of Mariano Rajoy following the Catalan crisis of 2017, but never managed to stitch together a stable majority.

The push by separatist groups, including Esquerra, to force Catalonia out of Spain opened a new schism between those calling for a crackdown and those wanting reconciliation. Despite striking a relatively hard line on Catalonia during the election campaign, Thursday’s deal leaves Sanchez committed to keeping Esquerra onside.

Spain’s benchmark IBEX 35 stock index fell as much as 1.1%. Spanish bonds rose as the yield on 10-year debt fell to 0.412% from 0.441% on Thursday.

As part of Thursday’s agreement, Sanchez agreed to hold talks with the Catalan regional government to address their differences.

The agreement “recognizes that this is fundamentally a political problem,” Aragones said. “It recognizes the legitimacy of all the Catalan institutions, that political channels must be opened and that the judicial and police channels must be avoided.”

Acting Public Works Minister Jose Luis Abalos said the agreement with Esquerra isn’t for a coalition government, but rather to “unblock the current situation.” For example, Esquerra hasn’t agreed to support the government’s budget, Abalos said, adding that those kinds of negotiations will come later.

Asked whether the pact meant Pedro Sanchez’s government would support a referendum on Catalonian independence, Abalos said the Socialists had been very clear that they’re not in favor of self-determination.

“We’re prepared to debate any idea on the table, but evidently that doesn’t mean we’ll agree to it,” Abalos said at a press conference in Madrid on Friday.

Slowing Economy

Among Sanchez’s other priorities will be an economy that is starting to lose momentum, despite outperforming most European peers.

The prospect of a left-wing government facilitated by Catalan and Basque nationalists is a risky gambit by Sanchez -- even though he says the political math left him with little option. In agreement with Podemos, he has pledged a program of tax increases for the highest earners and large companies, a higher minimum wage and tighter protection for workers, rolling back some of the labor reforms enacted in 2012 at the height of a financial crisis.

He’s likely to face more political turbulence all the same.

PP leader Pablo Casado has refused appeals to facilitate a Socialist-led government to avoid yet more elections because in his view, Sanchez has chosen to ally with enemies of the Spanish constitution. Esquerra’s leaders have said a deal with Sanchez is the best way for now for the independence movement to advance its aims.

Sanchez says he needs the Catalans to forge the progressive government that Spanish voters endorsed in November. His Socialists held off a surge in votes for the conservative PP and the far-right Vox party to emerge best-placed to form an administration in partnership with Podemos.

Esquerra is committed to striving for a Catalan republic -- its leader Oriol Junqueras was jailed for his part in the 2017 crisis -- and the rocky path to deal with the Socialists points to the potential for more trouble ahead.

Esquerra suspended the talks last month after Europe’s top court said Junqueras should have been given legal immunity after he won a European Parliament seat in May. Spanish state lawyers have recommended that Junqueras should be allowed to carry out his role as a European lawmaker, helping to smooth the path to a final agreement.

Sanchez has said any deal would comply with the terms of the Spanish constitution, meaning there’s no room for negotiation on Esquerra’s key demand for an official referendum on independence.

(Updates with Abalos comments from 10th paragraph.)

--With assistance from Charlie Devereux.

To contact the reporters on this story: Charles Penty in Madrid at cpenty@bloomberg.net;Rodrigo Orihuela in Madrid at rorihuela@bloomberg.net

To contact the editors responsible for this story: Ben Sills at bsills@bloomberg.net, Andrew Blackman, Benedikt Kammel

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