Refugees Fleeing to Spain Surpass Italy and Greece

As official action seeks to address the flood of refugees into Greece and Italy bite, the pressure has been deflected to Spain.  According to the UN High Commission on Refugees, 24k undocumented refugees have entered Spain this year.  There were 28.4k all of last year.  Refugees going to  Italy, by contrast, have fallen to about 18.3k this year from 119.4k in 2017.  Last month, 6k refugees entered Spain, mostly from North Africa.  

Public opinion in Spain is not as antagonistic toward immigrants as seen in other parts of Europe.  A June poll found that only 3.5% saw immigration as one of the top three problems the country faced.  Unemployment was cited by nearly 62.5%.  

Casado, the newly elected head of the center-right Popular Party is trying to make immigration a bigger issue as he prepares to lead the party into next year's regional elections before the 2020 national contest.  Casado faces a more immediate problem.  A judge in Madrid has referred the case of how Casado acquired his Master's degree to the Supreme Court.   It is up to the high court whether to take up the probe, which is the only place to investigate a parliamentary member.  

Meanwhile, the minority Socialist government is struggling to cope with the influx.  At the end of July, emergency measures to approved to set up more processing centers.  In addition to the PP, other parties, including the centrist Ciudadanos, is probing to see if they can get traction from the issue.   The center-left government in Italy had maintained a more liberal policy, but the (Northern) League insists on a harder stance.  The Socialist government in Madrid appeared to take up the mantel.   Prime Minister Sanchez surprised everyone when he offered to take Aquarius (the ship that had previously been turned away by Italy and Malta).  

Greece and EU had to strike a deal with Turkey.  Italy negotiated with Libya.  Spain needs to work with Morocco.   EU border protection agency Frontex data suggest human smuggling operations are being facilitated by Morocco's laxity.  Morocco is apparently pressing for more assistance.  Turkey, for example, received 6 bln euros.  Morocco was given 100 mln euros.   Morocco used to be a transit country, but it has granted residence to 52k people. 

The Socialist Party has about a quarter of the seats in Spain's Parliament.  It governs with the support of Catalan separatists and the left-of-center Podemos.   The parties abstained last month of a Socialist proposal to boost spending.  The bill was likely to have been defeated in the Senate where the PP enjoys a majority.   It allowed the Catalan independence supporters to remind the Socialists that it cannot be pushed aside and it must allow a referendum.  The Socialists have some time to devise a strategy.  Catalan President Torra says his government will not accept the separatist leaders imprisoned (could be for up to 30 years).  The court decision is expected in the fall and the one-year anniversary of the illegal referendum is October 1.  

The Socialist government proposed increasing but would exceed the 1.3% budget deficit target negotiated with the EC.   At around 2.7% growth this year, the increased spending would boost the deficit to about 1.8% of GDP.  Prime Minister Sanchez will resubmit a budget plan to parliament next month.  There is some speculation that it could seek to do away with Senate approval, which would no doubt be contested,  Sanchez has helped lift the Socialist Party standing in the opinion polls, but he needs to deliver.  

S&P and Fitch assign A- rating to Spain.  The former has a positive outlook while the latter is stable as of March and January this year respectively.  Moody's, by contrast, raised Spain's rating to Baa1 which is a notch below the other two main rating agencies this past April, maintaining a stable outlook. 

Over the past three months, investors have been significantly more concerned about Italy than Spain.  Italy's 10-year benchmark yield has risen by 111 bp, while the yield of Spain's benchmark has risen 11 bp.  In comparison, Germany's similar yield has fallen by 15 bp.  Similarly, Spain shares have fared considerably better than Italian equities (-4% vs. -11.7%).  While more of the same can be expected over the next several weeks, Spain is among the fastest growing EMU economies, and the EC may have rightly expected more fiscal progress from it.  Note that Italy's budget deficit has averaged 2.66% over the past five years.  Spain's deficit has averaged twice as much (5.18%).  Few observers recognize this is their narratives of why Spain has outperformed Italy.  Spain has averaged 1.9% GDP over the last five years, while Italy has averaged a miserable 0.36%.  

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