A Tale of Two Auctions
How an understanding of M&A can help us understand Spanish politics
"Auctioneers Hard at Work" by USFWS Mountain Prairie is licensed under CC BY 2.0.
From Monday to Friday, I write about mergers and acquisitions (M&A) for a living. People outside finance might be surprised to learn that M&A is normally arranged around auctions. If you want to sell a business, a competitive auction is normally the best way of maximizing the price. Investment banks specialize in organizing auctions for vendors and helping buyers place bids at the right level.
Private equity (PE) firms - experts in buying companies, helping them grow and selling them after a few years - routinely engage with auctions on both the sellside and the buyside. Typically speaking, vendors will want lots of interest in the early phases of an auction and maybe three to five serious bidders engaged in due diligence in the final phase. Meanwhile, buyers often try to enter exclusive talks as soon as possible to keep a cap on prices by limiting competition.
Thinking hard about M&A and PE makes me very sensitive to auctions when they show up in other areas. I think that the best way of understanding contemporary Spanish politics is to be aware of two auctions, one in 2018 and another ongoing.
First, though, let me backtrack and give readers some general background on Spanish politics. The country has been a constitutional democracy since 1978 and for most of this time it has been dominated by two mainstream parties, the Socialists and the conservatives, known as the Popular Party or PP.
The Socialists began the 1980s with a lot of goodwill from the public. Under Felipe González, the party hit 10.1m votes in 1982. However, the party never returned to such a high vote under his leadership. Many of its voters became increasingly disappointed by its poor handling of recessions and record on corruption and began to abstain or move to the right as the 1980s turned into the 1990s.
The late 1990s were dominated by the PP under José María Aznar. He gained power at the national level for the first time in 1996 with 9.7m votes, and then won again with 10.3m votes in 2000. His strategy was to unite all the votes to the right of the Socialists, with a coalition that was run by liberal conservatives, but included centrists, liberals, Christian democrats, social conservatives and members of the populist right. The emphasis was on economic growth, with the odd piece of red meat thrown to the more rabid members of the coalition.
Aznar’s biggest miscalculation was to support the invasion of Iraq in 2003 despite massive public opposition. Three days before the 2004 election, Al Qaeda set off ten bombs on four commuter trains in Madrid, killing 193 people and injuring around 2,000 more. Aznar’s ministers spread misinformation and conspiracy theories about the attack, trying to blame Basque separatists. The public reacted with disgust.
The Socialists, led by José Luis Rodríguez Zapatero, won a surprise victory, with 11.0m votes, while the PP, led by Mariano Rajoy, came second with 9.8m votes. Zapatero continued to benefit from the economic boom that had begun on Aznar’s watch, but with more of an emphasis on wealth distribution.
Zapatero won a second victory on 9 March 2008, with 11.3m votes against 10.3m for Rajoy’s PP. However, 2008 would prove to be a crucial year for the world economy. A credit crunch had already begun in 2007. Within days of the Spanish election, it would enter a new phase, with Bear Stearns needing to be rescued. Lehman Brothers would go bankrupt in September, sending shockwaves through the world economy.
Spain’s economic boom had been built on cheap credit as the country dropped the peseta and introduced the euro, which carried much lower interest rates. Construction was at the heart of the boom. A culture of under-declaring property prices to the tax authorities generated huge amounts of clandestine cash, which in turn became the source of sleaze and kickbacks.
The Financial Times, analysts and investors began warning that Spain’s whole economy was built on sand. Instead of taking their advice, Zapatero instead stuck his head in the sand. He famously refused to say the word “crisis” (which can be translated as crisis, recession or depression, depending on the context) until July 2008.
When the recession hit Spain and other countries in southern Europe, it hit hard. The crisis was so bad that there were serious concerns that it could bring down the euro. Zapatero’s government proved just as bad as González’s at getting the economy out of a hole. The Socialists worried more about protecting people who happened to still have a job rather than creating conditions for investors, entrepreneurs and business executives to create new jobs. The economy stagnated.
The current cycle began in November 2011, more than a decade ago. Rajoy’s PP won the election with 10.9m votes, while support to the Socialists, led by Alfredo Pérez Rubalcaba, plummeted to 7.0m. Rajoy appointed investment banker Luis de Guindos as economy minister. He successfully promoted a number of reforms to get the economy moving again, although too many of the new jobs came with temporary contracts.
The current cycle has been characterized by three large trends: Increasing awareness of corruption, combined with populism and fragmentation. Spanish justice is slow, but it eventually uncovered staggering amounts of corruption across the board, but particularly in the PP’s glory years of the late 1990s. Anger at sleazy elites and a disfunctional economy helped fuel a wave of populism. This in turn led to the creation of new political parties.
Establishment Catalan nationalists were among the first to turn to populism. Regional president Artur Mas became increasingly populist after a massive demonstration outside the Catalan parliament in 2011. We have discussed the populist tendencies in Catalan nationalism elsewhere.
Three major political movements have been born since the long recession. Podemos (“We Can,” now known as Unidas Podemos or “Together We Can”) was formed in 2014 with the aim of developing populist narratives that sit to the left of the Socialists. Ciudadanos (“Citizens” in English, but normally known as Cs) had been founded in 2006 in Catalonia to battle nationalism and regionalism. It moved to the national stage in 2015 with the aim of promoting deals with the PP and the Socialists so they didn’t need to enter coalitions with nationalists.
Cs had started off on the centre-left, but it started presenting itself as a liberal / centrist party soon after 2015. The party began flirting with Spanish nationalism from 2018. Meanwhile, Vox split off from the right of the PP in 2013 and has developed far-right and Spanish nationalist themes ever since. It gained significant ground after Cs started flirting with Spanish flags from 2018. It opposes Podemos and Catalan nationalism and likes to present the Socialists as traitors and the PP and Cs as being somewhat effete.
The era of auctions began in 2018. The elections in 2015 had led to a stalemate, with just 7.2m votes for the PP and 5.5m votes for the Socialists under new leader Pedro Sánchez (its worst-ever result at the time). Podemos came third with 5.5m votes and Cs won 3.5m votes. Spain went back to the polls in 2016. The result was similar, but Rajoy was able to govern thanks to an abstention by Cs.
The first auction began in May 2018. Luis Bárcenas, a former treasurer of the PP, was found guilty of corruption and kickbacks on a massive scale and sentenced to 33 years in prison. Rajoy’s fragile government appeared doomed.
Socialist leader Sánchez began to organize a vote of no confidence against Rajoy. Cs’ leader Albert Rivera (a man who started out as a moderate and then could never quite decide whether he was a centrist, a liberal-conservative or a Spanish nationalist) appeared to hold a good hand. Rivera told Sánchez that he would no longer support Rajoy, but that the vote should just be used to trigger snap elections. On the face of it, Rivera’s request seemed very reasonable. Bárcenas had used some of the money from kickbacks to gain an unfair advantage for the PP in elections, so a clean slate would have been a good way of returning confidence in Spanish institutions.
However, Sánchez is trained as an economist. He decided to turn the vote of no confidence into an auction, with himself as the auctioneer. He realized that a few months in power without a majority would help his public image and give him an advantage in the next election. He persuaded Podemos and various nationalist parties to put in a consortium bid, which would prove enough for him to govern, even though Rivera refused to play the auction game with an opposing bid for centrism and reformism.
When the election finally came in April 2019, voters punished the PP for its rampant corruption in the 1990s by giving it just 4.4m votes. The Socialists won with an unimpressive 7.5m, while Cs came third with 4.2m votes. The Socialists and Cs should have been able to form a centrist alliance, but Rivera was still angry about Sánchez turning the vote of no confidence into an auction and refused to do a deal.
Sánchez had to call a second election in November 2019. This time, voters punished Cs for abandoning its original culture of being a potential kingmaker. Its support dropped to 1.7m and it came sixth, with Vox leaping to third place. The PP recovered somewhat, with 5.0m votes. The Socialists dropped a little to 6.7m votes. However, Podemos - now branded UP after a merger with another left-wing party - brought in 3.1m votes.
Although Sánchez had said he wouldn’t form a coalition with UP during the campaign, he changed his mind after the election. The two parties formed a minority coalition. UP’s job was to keep other populist parties happy, including Catalan and Basque separatists who identify as left-wing, somewhat implausibly to outsiders. This can bring in a very fragile majority for budgets and other key pieces of legislation.
Since 2019, support for Cs has continued to implode. This has led to a second auction. This time, the PP is bidding hard for the votes of former supporters of Cs, with platforms that emphasise economic liberal themes like cutting taxes, nurturing economic growth and reformism.
Instead of placing a bid, though, Sánchez has tracked to the left and is trying to take votes from UP by adopting populist themes while warning of the risks of a PP deal with Vox. A resurgent PP has managed to thump the left in a string of regional elections, which makes it the frontrunner to form a national government in 2023.
Looking at Spanish elections through the prism of auctions shows us that Sánchez is much happier as a vendor than as a bidder. He probably gave exclusivity to the left and the nationalists too easily in 2018. If he wants to win again in 2023, he should think much harder about how to attract votes from people who used to support Cs.
Sánchez’s policy of warning voters that the PP might do deals with Vox rings hollow with voters after his own deals with radical secessionists. At the same time, it creates a perverse incentive for moderate Socialists. Many of them have begun to realize that switching to the PP or abstaining could be the best way of keeping Vox out of government.
There is a best-case scenario where both the PP and the Socialists compete in the liberal centre. If this happened, floating voters would be able to tip the balance one way or another, depending on which mainstream party presents the most liberal, reformist and institutionalist case. Sadly, though, this scenario appears unlikely. Sánchez is much more likely to continue to move the Socialists to the left, despite regular warnings from the electorate that his approach to deals is unpopular.
In my experience, Catalan nationalists, Vox supporters and Podemos supporters are all equally as prickly as each other on the internet. I have switched off the comments for the week. See you next week!
Further Reading
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