Debt crisis and austerity policies in Europe. A point of view from Spain.

Javier Navascués. PCE.

Debt crisis in Spain. From private to public debt.
Spain is one of the members of the infamous PIIGS. Consequently Spanish sovereign debt is being charged with a ‘risk’ premium in capital markets. As we are taught in elementary finance, a risk premium is the consequence of the volatility of the asset involved. In short, ’markets’ suspect that there is a certain probability of default by Spanish government. Nevertheless, Spanish government remains as one of the less indebted in the EU. The ratio of public debt to GDP not only ranks below the Greek, Italian, Irish or Portuguese ones but it is even under Germany or Austria. How come, then, that Spanish public debt is so badly rated? The problem in Spain began with private debt. It is well known that Spain has gone through a real estate bubble lasting since the late nineties to early 2007, before the international financial crisis exploded. This real estate bubble was fuelled by German and other European countries’ savings which were invested in assets issued by Spanish banks who, in turn, lent these funds to Spanish developers and, ultimately, to households. These flows have accumulated in a fantastic pile of debts which are now being recycled into public debt through two perverse circuits. The first one, which is inevitable in the short term, is the circuit running from economic activity to public earnings. As the collapse of the real estate bubble unfolded, economic activity stagnated and unemployment rose almost immediately to the current 20%. Tax collections plunged while unemployment benefits and other social expenses rose. This brought a deficit gap which replaced the previous positive balance of public accounts. Expenditures by the government in 2009 to sustain economic activity, such as subsidizing (German) car sales and public works by local Councils, only made the gap worse. Deficit financed expenditure is standard anti-cyclical policy to overcome a slump in economic activity. It is hoped that when growth resumes the fiscal income will soak the accumulated deficit. But this ignores some structural characteristics over which we will come back later. The second circuit through which private debt becomes public liability is less evident. Spanish government has not explicitly rescued banks as other European governments have done, at least not to a significant scale. But the huge indebtedness of Spanish banks with foreign investors, large French and German banks among them, is backed by very frail collateral: hundreds of thousands of unsold flats and millions of square meters of vacant land plots and unfinished developments. Sooner o later, the Spanish government is expected to come out and meet these obligations. Some 360,000 million euro lent to developers fall under this account. How much of these will be

defaulted remains to be known, but some estimates point to 50%.The Bank of Spain overlooked and even encouraged this financial engineering for some time letting banks disguise the current lack of value of this collateral. But this cannot go on forever. These expectations gravitate heavily over the prospects of an otherwise improbable Spanish default.

Austerity policies or structural reforms?
The measures put in place by the Spanish government are similar to those adopted in other parts. Public workers payroll has been cut, investment projects have been cancelled and so on. The target is the 3% deficit threshold. It is well understood that this response can be counterproductive. Downsizing public expenditure may delay recovery because the private part of Spanish economy is busy deleveraging. Banks are collecting cash to meet the instalments of the loans they got abroad, so currently there is no lending to the ‘real’ economy. But even in case banks were willing to lend, demand for credit is below sea level. And if economic activity does not resume tax collections will remain low and the imbalance will be much more difficult to curve. So this provides the excuse for further cuts in an unending race to the bottom. This is not radical thinking. Not only the ETUC but even people such as Paul Krugman, for example, are pointing this out. The recent hikes in oil prices will only make things worse. In the meanwhile ´structural reforms’ are being made for the sake of competitiveness. The first came out last summer. It was the labour market reform which caused the general strike on September, 29th. Basically it consisted in reducing the cost of dismissal. Public pension schemes reforms followed, the retirement age was risen and benefits reduced. This time there was not a general strike which by the way shows the lack of stamina of the unions in Spain. This pension system reform is remarkably insulting. Following the ‘Ageing Europe’ report by the EC, the Spanish public system is supposed to be in risk of bankruptcy … in thirty years from now! The current fact is that it runs a surplus even as the number of contributors has diminished in almost two million. No problem, if it is not bankrupt yet it will soon be: Spanish government has recently launched a scheme for part-time jobs which are exempted from Social Security contributions. Next came the scarce remains of the Public Sector (Airports, the National Lottery,… ) which were not sold out to meet Maastricht criteria in the nineties, now they are on the way to privatization. The harshest measure is the privatization of the ‘Crown jewels’, the Savings Banks. Amounting to half the retail banking market, these institutions remained in a kind of socialproperty status under the control of local and regional authorities. A very longed for object of desire for the Spanish private banks who have historically dreamt of setting their hands on these uncomfortable competitors. Of course Saving Banks management and boards have been

accomplices to the real estate bubble, but not more than private banks, Government or the Bank of Spain for that sake. On the other hand, Government has enthusiastically joined the race to the bottom in corporate income tax. Some days ago we learnt that Exxon Mobile, Vodafone, Hewlett Packard, American Express, General Mills and Eli Lilly use Spain as a tax haven. They don’t pay a cent in taxes thanks to a scheme called ETVE, a holding company statute protected by EU regulations. Anyway there is no risk of unfair competition for nationals: recently corporations have been allowed to depreciate freely and to deduct from taxes full depreciation1. Of course this is more or less what is going on in other places so Spain is no exception. The problem is that these measures are not only socially unfair but nonsensical because no recovery at all will come out from them. In fact we can only expect more difficulties in the future as public wealth and would-be useful instruments as the Savings Banks are privatised. Spain’s past development model is not feasible anymore but the sacrifices we are now suffering will not bring us another growth model. In fact they will make recovery even more difficult. Our scant expectations now lay in the opportunities brought in by the unrest in Northern Africa which hopefully will fill our sea resorts with European tourists next summer.

The real obstacles to recovery: structural imbalances and the role of Spanish elites.
Which are the possibilities for Spain now? From a macroeconomic point of view, Spain, as Greece, Portugal and other countries, runs a structural current account deficit. This deficit has been covered by private debt during the past years. Actually these private loans financed not only the external deficit but also the public surplus boasted by Spanish governments until 2008. When the crisis burst the private sector stopped borrowing and even began to reduce debt in relative and absolute terms. But the external deficit did not evaporate. The public sector had to take the place of the private one. Why did it not evaporate? Spanish economy is in a very bad position in the global economy. We suffer a structural trade deficit. Since foreign loans took the place of foreign direct investment, these trade deficit has become a current account deficit also. There is little we can do in the short term about the trade deficit. We cannot compete in salaries less we reduce them to a ‘Chinese’ level; we cannot provide enough economies of scale so as to become an attractive location for greenfield investment, and we do not specialize in technological niches or special equipment as Germany, Austria, Sweden or certain parts of Italy do (or used to). Now it has become commonplace to speak about the ‘need to change the model’, but this does

In fact, the 35 companies listed in Spanish Stock Exchange index (IBEX 35) earned 22% more net profits in 2010 that the year before. Meanwhile GDP fell by 0.1% and unemployment rose 8.5%.

not come out of the blue. A feasible alternative requires a long term social effort, investment, education, technological upgrading, environmental and energy reform,… And there are some very serious obstacles in the way. The major obstacle is the standpoint of the Spanish elites and ruling classes. They have shown great ability to pass successfully across all the changes that have taken place along this last 35-40 years. Coming out from a closed economy in which financial capital was at the top of the pyramid of Spanish vintage capitalism they have managed to survive and flourish as global champions. Not only Santander and BBVA but some major construction companies are among the most profitable companies in the world. First they got rid of their old industrial commitments and then concentrated in all kinds of public utilities and services. Stern protection of banks against foreign competition (Barclay’s, BNP, Deutsch Bank, all of them failed in their attempts to gain a share in the Spanish market) and public enterprises privatization made this possible. The big companies, formerly involved in building highways and dams for Franco, diversified into refusal collection, street cleaning and even social care while retaining their traditional business. Their ‘core competencies’ built for decades are used to work at arms’ length with Ministers, Regional and Local authorities. They are a good example of ‘lean management’ retaining only their intermediary role. The rest is all subcontracted. Some new entrepreneurs have joined these elites such as Amancio Ortega, from Inditex (Zara, Massimo Dutti, …) and Isak Andic (from Mango). These are industrialists without an industry. They boast large franchises all over the world and they do not own a single factory but employ hundreds of sweatshops, first in Spain and Portugal, now in Morocco, India or China. Thus real existing capitalists in Spain are mere intermediaries. The biggest construction and public works corporations have less staff than a village contractor. In fact, most probably the village contractor is subcontracted by ACS (Florentino Pérez, the owner of Real Madrid) or some of his peers. The flip side of the coin is the role played by foreign transnational corporations in manufacturing, energy and other related sectors. Since Spanish economy opened in the 60’s, Spain became a land strip for American TNCs. But it was during the 80’s and 90’s when Spain joined the EEC that foreign companies both American and European took over Spanish major manufacturing firms. These takeovers resulted in Spanish factories turned into pawns in the global game of delocalization. The decision core of these companies is out of Spain. I am not a nationalist but I reckon that whenever there is a move in the world game of chess some hundreds of Spanish workers are laid off and we get an extra fraction of GDP in trade deficit.

The European curse
This degradation of Spanish economic fabric has been favoured by the so called construction of Europe at least in three ways.

First come the single market and competition policies which have provided the legal and political background needed to prevent any sensible effort in industrial policy (except for the very remarkable case of the Basque Country). There is a long record of decisions by all sorts of European institutions penalizing or directly forbidding public intervention in textiles, coal mining, steel milling, automotive industry, even public television! The downgrading of Spanish productive systems has been favoured by the neoliberal dogmas based on the ideology of free markets and comparative advantages. As Bellofiore and Halevi put it, it is raw mercantilism. Recently the EU has ‘rediscovered’ industrial policy but late enough and in any case in a particularly biased way. On the other side the supposed compensations for the effects of European integration such as structural funds, target 1 regions, ESF and all the rest have financed the large public investment projects out of which the traditional elites have extracted their profits with questionable results in terms of territorial cohesion not to speak of environmental sustainability. Of course the trickle down effects have supported the means of living for Spanish people for a series of year. But these funds should be held responsible for triggering off the wave of ‘popular real-estate capitalism’ of the last fifteen years. The same that happened with the flows of FDI in the eighties which supported what has been appropriately termed as ‘financialized welfare state’ by Armando Fernández Steinko. Last but not least the single currency project has provided the rope for the gallows. To begin with, it was born with an undervalued German Mark and, consequently, with an overvalued Peseta. The interest rates policies of the ECB aimed at easing the recovery of the German economy from the indigestion after swallowing the DDR have proved lethal for the financial balance of Spanish economy. Not to speak of the exchange rate of the euro which obviously damages countries whose exports exhibit high price elasticity and whose imports, on the contrary, are very sensible to income changes so that any increase in income easily filtrates outwards. You just need to take a look at the large number of Mercedes, BMW and Audi which have been bought with the loans provided indirectly by German banks.

What’s next? New developments in the world crisis and the prospects for Spain.
These days Spanish public opinion is being shaken by a new scandal. Members of the Socialist Party were discovered pretending to be workers in firms where they had never worked before and which were being closed down. This way they became eligible to receive pension benefits from the State within a scheme of early retirements. All this has been happening with the cooperation of Labour Authorities. This is extremely insulting and demoralising for working people in Spain. Currently we have had a pension reform because pensions are supposed to be unsustainable. And this people are looting the pension system!

Polls are forecasting a landslide defeat of the Socialist Party in May administrative elections only to precede the conquest of power by the Popular Party in the future general elections in 2012. The United Left will probably get a better result than before which is not too much, but it seems quite sure that the political right will win absolute majority. In the outer world the global crisis continues without any clear sign of faltering. Recent developments in Libya point to a constant in the history of Capitalism, the need of wars to settle down affairs after a crisis. The most immediate consequence for Spain is an aggravation of the trade deficit due to soaring oil prices. Whatever other turmoil will this new situation release in the Mediterranean remains in the dark but it will most probably impact on Spain and other Mediterranean countries. Meanwhile Mr Sarkozy and Frau Merkel have proposed their ‘competitiveness pact’ which appears to be the condition posed by Germany to enlarge the European Rescue Fund2. And the EC intends to submit a package of no less than six new laws to European Parliament under the common heading of ‘economic governance’ in which the Stability and Growth Pact is reinforced and the Commission gives itself the power to monitor and eventually fine macroeconomic imbalances in member states3. So long for Democracy! Nevertheless behind these discourses lays the necessity to implement some kind of other of economic coordination. The suicidal rhetoric of competitiveness is maintained and not a hint of self-criticism shows but the fact is that some of the proposals that were denied a couple of years ago are making their way. And here come some of them placed by the critics of current European policies. As an example I will take the position paper by the DGB called ‘Setting a new course for Europe’. In this paper the German Unions propose the following: 1. Sharing the liabilities among all the member States extending the rescue funds and eventually issuing Eurobonds 2. Decoupling deficit financing from financial markets which means some sort of monetization 3. Collective control and coordination of imbalances 4. A pan-European investment programme

When Angela Merkel came to Spain in February she made her proposal of ‘linking salaries to productivity’ instead of inflation. Neither Spanish employers nor Government wanted to hear none of this: in 2010 productivity grew by 2% and salaries fell by 0.25%. CPI only climbed 1.8%!

Surprisingly enough some Green MEPs have stated that these measures ‘pointed in the right direction’. It is not yet clear for me which sense of the word ‘right’ they use.

5. More financial regulation and wealth taxes The point I want to make is that although well-meant this measures are not enough. Even worse, they can be counterproductive. Leaving apart the fifth point which I obviously endorse, the rest of the measures are either already implemented or in the way4. To begin with, let us take collective control and coordination. This is the core of the proposal by the EC. Sovereign parliaments have to leave place to the supervision of a not so democratic mix of commissioners and foreign governments. The role of the European Parliament is that of the cheerleader. The Rescue Fund is going to be expanded. In fact Eurobonds will come, one way or another. This is precisely what is being discussed now. But the real problem is who is going to be rescued, people or banks? The consequences for the Greek or Irish people are in front of us. The same goes for monetizing debt. In fact when the ECB accepts all sort of dubious assets as collateral to provide liquidity it is monetizing debt in a perverse way, carry trade included. In the event that a sort of Marshall Plan was launched, what can we expect? I have already explained what the structural and cohesion funds meant for Spain in the last decades. They deepened territorial imbalances and made our environment even more fragile while the usual suspects filled their pockets with the proceeds. In the meanwhile a large part of Spain’s productive structure rot down. It is difficult to see why this time it would be different except for the fact that there is very little productive structure left.

What is to be done? For a democratic alternative.
A new economic model based on a more sustainable employment of energy and natural resources and more centred in personal services to provide for social needs is absolutely necessary. But the same think capitalists. If you take a look to the proposals which are being made by the think-tanks of capital in terms of productive orientation you will notice they are speaking of renewable energies and environmental services. What is behind of the push towards privatization of health and care points in the same direction. Exchange value needs use vale in any case. The - so to call it - sector orientation of the new model does not make a difference. I sympathize with Lapavitsas proposal of stepping out of the euro. My good comrade Pedro Montes in Spain has always defended that we should not have joined this European Monetary Union. He used to work as an economist for the Bank of Spain so he knows well what he is saying. But in my opinion, in the current balance of power, stepping out of the euro would not bring more degrees of freedom in this moment. And there is also something worse, the possibility of being expelled from the euro.

Although it should be remarked that ‘better financial regulation’ is the pretext for privatizing Spanish Savings Banks.

If we, the radical left, were able to win government in one country that would mean a very substantial change in the balance of forces. In that case we would be able to do much more things. But it is not the case. Now what we need is to build more strength and this strength must be built with other sectors who are not the radical left. I have already explained that the proposals coming from the moderates are full of risks. Of course Eurofunds, a Eurobudget, central bank financing of public debt, a large investment programme focused on sustainability and environment recovery, more welfare, are all useful measures and should form part of the toolbox of a progressive and more democratic Europe. But we need something more. So how can we work? I think that what we have learnt since the beginning of this crisis is that everything that is sacred and immovable in European Treaties can be changed and moved. Sometimes I think that if we could just convince the unions and the social-democrats of this it would be a major step. Warmongering must be denounced. It is needless to say any cuts in welfare and worker’s rights should be fought back energetically. Any privatization should be opposed with determination. But bearing in mind that public sector in the hands of neoliberal governments are neoliberal tools. So we must move forward. From my point of view we need to curve the concrete power of the dominant classes in the current situation. That is we need a democratic impulse. We need people moving and something capable of moving people. This is the lesson of Tahrir Square. In Spain I would propose: 1. Fight for the right to a job. Public employment for everybody who is unemployed now and as he or she is. We should not accept any nonsense about adaptation to labour markets, employability or training. Neither should we endorse any scheme of subsidized private employment. I am thinking some kind of Employer of Last Resort scheme in the sense Hyman Minsky proposed long time ago, under democratic control. 2. Economic democracy. At the factory level of course, as much as possible, but that is for the unions to gain. I mean direct participation in the public economic management at all levels. Starting with the aforementioned public employment scheme and following with budgets, tax collection and control, etc. Some experiences were developed in Argentina in this sense during the big crisis in 2002. Other things should be invented. The key is: ‘reclaim the public for the people!’ 3. More and better taxes. We must reverse the tendency to de-taxation of the last decades. In particular in countries with low direct taxation as in Spain.

4. And control of movements of capital, of course. Both this and the former point have been elaborated to a large extent by many other people so I do not need to extend myself on them. The challenge is to be able to cooperate with the more moderate sectors without losing sight of the need for these stronger proposals. And to push forward these proposals in the hope that the march of events will show them as necessary. Just to prevent being misunderstood I will reiterate that of course we need Eurobonds and a real European Budget, that a large publicly financed plan of investment towards sustainability and social needs should be launched. But what we need more is democracy. A last remark; when the EL came out with the proposal of a Citizen’s Initiative I had mixed feelings. On one side I felt as I have said above that it was a well intentioned measure but without capability to make a real change. But now I think it can be an opportunity if we see it as a democratizing proposal, as a means to give plain people the occasion to intrude into the halls of power. I am indebted to Armando Fernandez Steinko and Albert Recio whose valuable analyses provide much of the background to this paper. Of course any misinterpretation and the proposals remain of my own responsibility. References 1. Bellofiore Riccardo and Halevi Joseph (2007) 'You Can't Always Get What You Want: Why Europe is not Keynesianable While the US New Economy is Driven by Financial Keynesianism', Euroland and the World Economy. Global Player or Global Drag?, Jorg Bibow and Andrea Terzi (eds.), UK: Palgrave Macmillan, pp. 215-32 2. DGB Office of Economic, Financial and Fiscal Policy (2011) ‘Setting a new course for Europe Promoting growth, securing employment, stabilising the Euro’. Position paper on the Eurozone crisis for the meeting of the DGB Federal Presidium on 1 February 2011. 3. Fernández Steinko, Armando (2010) Izquierda y Republicanismo: el Salto a la Refundación, Akal, Madrid. 4. Lapavitsas, Costas et al (2010) ‘Eurozone: between austerity and default’. Research on Money and Finance. 5. Montes Fernández, Pedro (2001) La Historia Inacabada del Euro, Trotta, Madrid. 6. Recio Andreu, Albert (2010) ‘Capitalismo Español: La inevitable crisis de un modelo insostenible’, Revista de Economía Crítica, 9, primer semestre 2010.