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Week in review (6 January)

New Spanish Government formed

Pedro Sanchez, leader of PSOE, was successful at the second attempt on Tuesday when he was confirmed as Prime Minister in the first Spanish coalition government since the fall of Franco. The coalition consists of PSOE and the left-wing Podemos, and passed in parliament thanks to the abstention of the ERC, the pro-Catalan independence party, with which a deal was struck ensuring that the Government would engage in a public consultation exercise on the future of Catalonia with only Catalan input.

The coalition's agreed programme for government proposes measures to increase public spending and increase taxes on wealthy individuals. Economic measures to be taken include a strengthening of workers' rights, increases in tax for those earning €130,000 or more, and a programme to encourage ex-pats to return to Spain. Sanchez has committed to trying to strike a deal on public pensions which have been depleted over the last decade as successive governments tapped into the national fund to cover EU deficit targets.

Criticism of the government's plan focused on perceived pandering to Catalan interests, and the potential for the plans to push Spanish deficit over the EU mandated limited of 3% of GDP. While the government has a mandate for four years, given its reliance on volatile actors in the shape of the ERC and Podemos, it is difficult to see how Sanchez and the PSOE can balance competing demands and meet its deficit obligations. However, recent Spanish governments have survived with slimmer majorities, and the coalition may provide an example to Europe of how the centre left and more radical left wing parties can co-operate in power.

Discussions on ending French Digital Tax dispute continue

Efforts to resolve the dispute between France and the US on a proposed digital tax intensified this week, with both sides agreeing to set a two-week deadline in which to work towards an agreement. The US, unhappy with proposals from France which would see many multinational tech companies heavily taxed on transactions taking place in French territory, has threatened to impose 100% tariffs on French goods such as champagne and cheese, up to a value of €2.4 billion.

Both sides appear to have entrenched positions: the EU Trade Commissioner, Phil Hogan, said this week that the EU will stand together with France should any tariffs be imposed, while tech companies such as Google and Amazon have supported the American government's position and urged the implementation of tit-for-tat tariffs. The row may yet escalate further; other European countries, including Spain, Austria and the UK, are considering implementing similar taxation regimes. The current spat may make negotiations for a deal on digital taxation at OECD level more difficult.

Economic Sentiment Indicator survey finds confidence rising in services sector

The Economic Sentiment Indicator survey results for December were released by the European Commission on Wednesday, showing a significant increase in confidence among service companies in Europe. The results for the services sector stand in sharp contrast to the continuing decline in confidence in the industrial sector.

There has been an expectation for some time that the decline of industrial confidence would have a drag effect on the services sector, but that has not proven to be the case so far. A mooted trade agreement between the US and China might be the prompt for the return of industrial confidence, but other factors, including the prospect of a trade war between the US and the EU, may dilute its effect.

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