Partner Center Find a Broker

The Spanish Socialist (PSOE) party suffered its worst defeat in thirty years on Sunday at the conclusion of the regional and municipal elections. They only bagged over 27% of the vote, losing in every autonomous region to the Conservative opposition, Partido Popular, which polled over 37%.

Prime Minister Jose Luis Rodriguez Zapatero probably already saw this coming when he announced last April 2 that he won’t run for the general elections in March 2012. Señor Zapatero has impressed investors in the international arena with his commitment to reel in the country’s debt. However, with 4.3 million Spaniards out of work, he hasn’t exactly been feelin’ the love at home. Now, the Socialists will have to choose their next presidential candidate.

You might be wondering, “Wait a minute. Is this the right blog? Why am I reading about politics?”

Well, young padawan, remember that fundamental analysis isn’t only limited to economic data. It also involves political events, particularly those that could affect the country’s economic standing. I’ve cited a few instances how politics could affect currencies, such as the effect of a Conservative-led government on the Loonie and how the leadership change in Japan factored in the yen’s price action.

So, what exactly is going on in Spain? Que pasa?

See, my Spanish ain’t that rusty after all. Well, at least it’s not as rusty as the Spanish labor market. Spain is currently dealing with a jaw-dropping, eye-popping, mind-boggling 21% unemployment rate. That’s more than double the EU average! In fact, almost half of those in the age 18 to 25 group don’t even have jobs.

What’s worse is that the country just got slapped with severe budget tightening policies by Señor Zapatero himself. Sure, thanks to these austerity measures, Spain didn’t have to beg for a bailout last year. However, the government’s tightening plans which involves raising the retirement age, didn’t sit too well with the old Spanish folks.

Because of that, thousands of Spanish workers gathered in the streets of Madrid and forty other Spanish cities to protest. And don’t get me started on how the same plan got bashed by the trade unions too…

Ay caramba! So much tension!

The good news is that the most recent elections could be a turning point for Spain. Then again, I’m not keeping my hopes up that the transition away from a Socialist-led government will be as smooth as my Salsa dance moves. Why? See, there are some speculations that the government might have downplayed the deficits to avoid a bailout.

Incoming government officials in Spanish regions and communities will probably be surprised to see bigger-than-expected budget deficits. Consequently, this would add up to Spain’s debt levels. Heck! This could even lead to more budget cuts just at the time when the country badly needs to boost economic growth. Bear in mind that Spain is the euro zone‘s fourth largest economy, which means that a collapse could compromise the stability of the entire region.

What does this mean for the euro?

The euro is already being weighed down by pressing debt concerns and now Spain will add to its growing list of headaches. That doesn’t sound too good.

For now, EUR/USD is still safely above the 1.4000 major psychological support, which could hold amidst the increasing downward pressures on the euro. After all, Uncle Sam seems to be on shaky grounds as well, what with all the negative U.S. data we’ve been seeing lately.

However, I’d keep tabs on the developments in the euro zone, particularly in Spain, to see if any event could trigger a break of 1.4000. After all, the new government might not be ready to face the possibility of a debt contagion, especially if they decide to lift the Socialist government’s austerity measures. Heck, a bailout might even be in the cards. Don’t say I didn’t warn you!