If Sanchez choses to call an election, it would be a chance for him to rally the Socialists, other leftist parties and regional separatist groups around the idea of unity to prevent the far-right Vox entering government. It’s an argument Sanchez touched on in his announcement on Wednesday and was the cornerstone of his electoral campaign in 2023.

The PP is the largest group in Parliament while Vox is the third largest. The two have already formed alliances to jointly govern in regional and city administrations. The PP also controls the Senate — the first time the opposition has ever controlled the body.

Confidence vote:

Trying to secure support from enough lawmakers would require Sanchez to engage in the type of political horse-trading with separatists which has chipped away at his popularity in recent months. He agreed to pass an amnesty for hundreds of Catalan secessionists in exchange for their support for him to be prime minister.

On Wednesday, Carles Puigdemont, the self-exiled former Catalan president who is the main beneficiary of the amnesty, challenged Sanchez in a post on X to hold a confidence vote.

But Sanchez may be able to rely on lawmakers’ self interest in a confidence vote. After last year’s election, where the PP won the most seats, many may favor sticking with Sanchez rather than go through another bruising political fight where there would be even less certainty of victory.

The risks:

Sanchez’s announcement on Wednesday came as Spain nears a year of policy paralysis, which started when the prime minister called a surprise snap election in May following a big defeat in local elections. He spent the second half of 2023 trying to win over support from Catalan nationalists to allow his weak coalition to govern. The negotiations and tensions over the scope of the amnesty continued into 2024, while Sanchez also had to deal with backlash within his own party over the concessions.

If the political chaos holds up government legislation and reforms, that could have broader impact on the economy, which has enjoyed a boost since the pandemic from record tourism inflows.

The country needs to cut its deficit and pass labor reforms to access billions of euros of European Union recovery funds. Spain, the second biggest recipient of the funds, has been seeking the fourth payment since early 2023.

Markets haven’t reacted to Wednesday’s news, with the yield on the country’s 10-year bond slipping on Thursday, in line with broader decines.

This could change if there were “new general elections, which changed the parliamentary majority and involved fiscal and regulatory changes,” according to Roberto Scholtes, head of strategy at Singular Bank. “But in view of the lack of reaction today, it seems that it is a scenario that the markets give a low probability for now.”

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(With assistance from Macarena Muñoz.)

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