Crisis gives way to new battles for PM

Rajoy's nomination has been formalised by a royal decree of King Felipe VI after he won a confidence vote in parliament on Saturday -- only possible because Spain's socialists (PSOE) decided to abstain and not vote against him.

The 61-year-old prime minister has been at the helm of a provisional government without full powers for the last 11 months following inconclusive elections in December 2015 in which his Popular Party (PP) lost its absolute majority despite coming first. New elections in June once again failed to hand him an absolute majority.

He is expected to name his new cabinet Thursday after which he will need to submit a budget to parliament for approval after a delay of several months -- a difficult task given that he commands the votes of just 137 of Spain's 350 lawmakers in the lower house.

If Rajoy is able to persuade enough parliamentarians to back -- or not oppose -- his taxation and spending plans, he will still face the scrutiny of the European Union which will want to know how the country will reduce its structural deficit to below three percent of GDP for 2017.

But it may prove impossible for Rajoy to secure enough parliamentary support while meeting the terms laid down by Brussels.

To slash the deficit Rajoy will be faced with the thankless task of either cutting spending by 5.5 billion euros ($6 billion), angering the left on whose support he may depend to get the budget passed, or hiking taxes, a move that could draw the ire of business and jeopardise investment.

The country has the second highest unemployment rate in the EU -- second only to Greece -- at 18.9 percent, which coupled with a pensions crisis exacerbated by an ageing population, threaten Spain's fragile green shoots of growth.

His best hope would be to appeal to parliament's 32 centrist Ciudadanos members.

Alongside the economy, Rajoy will be forced to grasp the thorny issue of Catalonia, Spain's wealthy northeastern region where an independence movement has gathered pace since Rajoy first came to power in 2011, according to constitutional law professor Javier Perez Royo.

One columnist has argued in the right-wing daily La Razon that on the pressing, non-economic issues facing Spain -- like Catalonia -- an "agreement between the PSOE and the PP is necessary".

Catalan regional president Carles Puigdemont has vowed to press ahead with an independence referendum next year if Madrid refuses to negotiate.

'Work to do'

"As long as the Catalan question is not resolved, we will have a knotty issue," said Royo who added that the issue has divided the left so seriously that it has been unable to unite to take power from Rajoy.

Far-left party Podemos has said that it supports a referendum on Catalan independence while the PSOE does not.

"The nationalists are going to be key to governing," according to sociologist Narcisco Michavila who was formerly an adviser to Rajoy. Nationalist parties, along with the independents, control 30 seats in parliament -- enough to block laws in the event of razor-thin margins.

To resolve the Catalan issue, the PSOE has called for reform to the country's constitution to adopt a more federal system.

But changing the country's basic law could prove to be an uphill battle -- the document has only been tweaked twice since it was adopted in 1978, and alterations require support from two-thirds of lawmakers.

"Given the situation, nothing will happen," said legal expert Royo.

On these major issues confronting Spain as it emerges from years of economic and political uncertainty, Rajoy will need a reliable opposite-number in the PSOE party to negotiate compromises and secure their support, one bill at a time.

But the party, which has 85 seats in parliament, was thrown into disarray at the start of October when its leader Pedro Sanchez was ousted in a rebellion. He also stood down from parliament, but will be replaced soon.

Rajoy does have one ace up his sleeve however -- the power to dissolve parliament.

The PSOE opted to let their arch-rival govern rather than risk an electoral drubbing in the third elections in a year in a country tired of going to the polls.

Several PSOE members, who spoke on condition of anonymity, said the party would be willing to avoid an election at all costs to avoid an electoral wipeout.

Rajoy captured the mood when he tweeted following parliament's vote on Saturday evening: "We have a lot of work to do."