Spain's conservative opposition won a sweeping electoral victory on Sunday, in the latest sign that Europe's financial crisis is remaking the political map.
Spain became the third ailing euro-zone economy to see a change of government in recent weeks, as the Popular Party won a strong mandate to overhaul one of the currency bloc's largest ailing economies, after administrations in Italy and Greece collapsed over their inability to push through economic overhauls demanded by the European Union and financial markets.
This political turmoil has triggered a dangerous new phase of the region's sovereign-debt crisis, sending borrowing costs soaring for even the most highly rated countries like the Netherlands and France.
The Popular Party captured 44.6%, according to official results, giving it 186 seats in Spain's 350-seat Parliament. Following a sweeping victory in May regional and municipal elections, Spain's conservatives have a near lock on power at all levels of government in highly decentralized Spain.
The Socialists, on the other hand, captured 28.7% of the vote, their worst result since Spain's transition to democracy.
Formerly a solid growth engine for the region's economy, Spain today is grappling with a burst housing bubble, a 21% unemployment rate and borrowing costs near levels that triggered the international bailouts of several fiscally frail euro-zone peers.
Analysts said the election of Mariano Rajoy, the conservative leader who has committed to austerity and economic overhauls, could help improve investor sentiment toward Spain, but won't fundamentally change perceptions that Spain and other peripheral nations are risky investments. For that, they said, European Union institutions will have to extend more support, possibly by converting the European Central Bank into a lender of last resort.
"While Mr. Rajoy's victory is a step in the right direction, a more important one in the short term is the erection of a credible and durable firewall around Spain and Italy," said Nicholas Spiro, head of London-based consultancy Spiro Sovereign Strategy. "This means a stronger role for the ECB."
At an auction on Thursday, the Spanish Treasury paid a 7% yield to sell a new 10-year government bond, a level that marked the point where Greece, Portugal and Ireland started to lose access to financial markets. Soon after, they were forced to seek international bailouts.
Spanish government officials have ruled out the need for external assistance, saying their auctions continue to be well-bid.
In his victory speech, Mr. Rajoy emphasized the importance of European unity. "Today, more than ever, our destiny is in Europe," he said. "The Spanish voice needs to regain respect in Brussels and Frankfurt."
Nonetheless, Socialist leader Alfredo Pérez Rubalcaba pledged an active opposition to the new government.
"We will fight with all our strength to make sure the crisis doesn't bring the loss of basic rights and protections," he said.
This opposition could tap into a simmering social discontent.
As the polls closed, hundreds of demonstrators gathered in Madrid's Puerta del Sol to protest what they call an unjust domination of the country's electoral politics by the two major parties and to warn of continued agitation against government austerity measures.
"They call it democracy, but it's not," they chanted.
Many of those present in the square, youthful veterans of a resistance movement that emerged in Spanish cities this year, said they had stayed away from Sunday's polls, cast blank ballots or voted for minor parties that generally oppose the economic prescriptions of Mr. Rajoy and his Socialist rival.
"The message of the people gathered here, to whoever controls the government, is that you don't represent us," said Julio Garrido, a 49-year-old job-training specialist at the Spanish Labor Ministry. "We're not in agreement with your politics, your economic policies or your social policies."
The crowd was modest compared with previous rallies of the so-called indignados movement. Organizers said weekend rain and a late autumn chill may have kept many activists away.
The groundswell of support for Mr. Rajoy is chiefly the result of a deep economic crisis that has forced Socialist Prime Minister José Luis Rodríguez Zapatero to make unpopular budget cuts and economic overhauls. Earlier this year, Mr. Zapatero said he wouldn't seek re-election and his party chose the veteran Mr. Pérez Rubalcaba to succeed him.
Analysts said the fact that change in Spain was coming via the ballot box was another sign of a better track record on governance, which has helped to keep Spanish borrowing costs below those of its fiscally frail peers.
Although Mr. Zapatero lacked a parliamentary majority, he was able to deliver all the measures he promised last year, including a public-sector wage cut, a pension freeze and a labor-market overhaul.
As a result, a clear victory for Mr. Rajoy, who has promised to take overhauls much further than his Socialist rivals, is widely expected to shore up confidence in the Spanish economy inside and outside the country.
Many recall the Popular Party-led governments of José María Aznar of 1996-2004 for their far-reaching moves that helped set the stage for a lengthy economic boom. Mr. Rajoy headed various ministries during that time.
At a polling station in Madrid's Chamberí district, 18-year-old engineering student Diego Cubero said he had voted for the first time and chosen the Popular Party.
"From one day to the next, nothing will change…but [the Popular Party] will instill confidence and I'm sure the stock market will rally tomorrow," he said.
With evidence mounting that the Spanish economy could tip back into recession in coming months and that the country will fail to meet its deficit target of 6% of gross domestic product this year, the new government will face a mammoth challenge to meet the 4.4%-of-GDP target Spain committed itself to with EU authorities for 2012. If this year's deficit comes in at around 7%, as many analysts predict, that would require nearly €30 billion ($40.6 billion) of cuts.
In comparison, the public-sector wage cuts, pension freeze and other measures Mr. Zapatero took in 2009 saved the Spanish state around €15 billion.
Mr. Rajoy has vowed to meet Spain's deficit-reduction commitments if he wins, but hasn't specified what budget cuts he will make. He hasn't given much detail on economic overhauls, either, though he has promised to overhaul labor laws to, among other things, allow companies to more easily adapt national or sector-wide wage deals with unions to their own needs.
He also wants to accelerate the cleanup of a banking sector laboring under a load of around €180 billion of souring real-estate assets.
Nonetheless, even if the Popular Party delivers ambitious changes, it might not be enough to shore up investor confidence in Spanish debt.
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