Spain - another government falls over eurozone crisis

Socialists in Spain were the latest political victims of the economic crisis in the eurozone yesterday after suffering a crushing defeat by the centre-right Popular Party - led by Mariano Rajoy. But voters will continue to face increased austerity as the country attempts to deal with debt of more than $640bn – or 67 per cent of gross domestic product – as well as a collapsed property market and an overstretched national reserve pension fund, which has 90 per cent of its money invested in rapidly devaluing Spanish government bonds.

The PP had spent eight years in opposition to ruling Socialist Prime Minister José Luis Rodríguez Zapatero, before winning 186 seats in Congress – with 176 being enough for a parliamentary majority. It amounted to 44 per cent of the vote, while the Socialists achieved just 28 per cent. Party officials claimed that the first objective of the new government would be to "overcome the crisis and unemployment". Last week, bond yields reached a worrying 6.9 per cent – the same level that forced Greece to go to the European Union and the International Monetary Fund for a bail-out package. Unemployment remains at 21.5 per cent with five million people out of work, while youth unemployment has hit 46 per cent. The "Indignados" movement had been enraged by the failures of the Socialist government and its street protests have triggered other similar demonstrations in London and New York.

Rajoy will start to implement a fiscal consolidation programme, including €21bn of public expenditure cuts in 2012 once his administration takes power in December – in an attempt to reduce the budget deficit to a more manageable 4.4 per cent of GDP. The PP already runs 11 out of 17 Spanish regions after winning many local government seats in May. The Socialists witnessed their worst election result ever on Sunday, winning just 111 seats – adding to the casualty list of other governments felled by the eurozone crisis in Ireland, Portugal, Greece, Slovakia and Italy. It was only the second time since the fall of the General Franco dictatorship, and the return to democracy in the 1970s, that a party won an outright parliamentary majority.

"We stand before one of those crossroads that will determine the future of our country," said 56-year-old Rajoy. "Difficult times are coming. We are going to govern in the most delicate situation Spain has faced in 30 years. For me - there will be no enemies but unemployment, the deficit, excessive debt, economic stagnation and anything else that keeps our country in these critical circumstances." Left-wing party the United Left won 11 seats while Basque separatist Amaiur scored seven seats - its first ever parliamentary breakthrough. The Catalonia Nationalist Party won 16 seats, while Party Unión Progreso y Democracia took five seats.

Markets are expected to experience a frenzied day of action as traders attempt to make sense of the implications of Rajoy's victory – and it remains to be seen whether the new leader will be able to act quickly enough to stem their concerns when he is sworn into office next month. Reacting to the election result, President of the European People's Party group in the European Parliament Wilfried Martens hailed the landslide victory. "After eight years of disastrous Socialist governance, the Spanish people have given again their trust to the PP," he said. "I am convinced that Mariano Rajoy will quickly implement the necessary changes and reforms that are urgently needed - in order for Spain to solve its economic, financial and unemployment problems and to become again a central player in the European project." And chairman of the EPP group Joseph Daul added: "This is the victory that Spain needs to become a country at the vanguard of the EU once again. I am convinced that the leadership will be strong and will lead the Spanish society to the path of economic growth, making the necessary and urgent measures to recover the confidence of the financial markets."

Welcoming the election result, European Commission President José Manuel Barroso said that Rajoy had received "clear and strong support from the Spanish people at an important time for both Spain and the European Union", and urged him to "actively contribute to the European project". He added: "We are confronted with one of the most demanding periods of recent decades and this will required important decisions to be taken." But executive director of the Centre for Social and Economic Rights think-tank, in Madrid, Ignacio Saiz warned that democracy without social rights risked the creation of a "dictatorship of the markets", adding: "The puncturing of Spain's massive housing bubble has left thousands unable to pay their mortgages and facing eviction from their homes. Drastic austerity measures pursued by central and regional governments in order to reduce the budget deficit have cut public sector salaries and frozen pensions. Healthcare budgets have been slashed to an extent described as 'borderline criminal'. Reforms to make the labour market more flexible and competitive have made employment protections more precarious, with a particularly harsh impact on working women.

"This backsliding in social rights has bred an increasing disaffection with democracy, at least in its current form. Neither the Socialists nor the Partido Popular offer an alternative to the unrelenting assault on social rights and the economic policies underlying it. Like their counterparts in New York's Liberty Plaza or Cairo's Tahrir Square, what has prompted millions of Indignados to take to the streets over the last six months is a sense that true democracy must include economic and social justice. Their indignation is fuelled by the fact that ordinary people have been made to bear the costs of an economic crisis prompted by speculative malfeasance in the financial sector, while those responsible – far from being held to account – continue to reap the benefits. Faith in democratic institutions is undermined when placating 'the market' takes precedence over protecting the rights of citizens. Widespread frustration at the austerity of choice indicates that democracy is the real deficit that needs addressing and that respect for social rights must be at the heart of a democratic renewal."