J. Navasques - Debt Crisis and Austerity Policies in Europe

8/7/2019 J. Navasques - Debt Crisis and Austerity Policies in Europe

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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 millioneuro 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 nolending 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 itconsisted 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 social-

property 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 EliLilly 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 tookthe 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

1

In fact, the 35 companies listed in Spanish Stock Exchange index (IBEX 35) earned22% 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 changesthat 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 overthe 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! Thedowngrading 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 interms 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 andthe 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 agoare 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

2 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%!

3

Surprisingly enough some Green MEPs have stated that these measures ‘pointedin 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 formonetizing 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 bedifferent 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.

4 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 thelesson 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 aspossible, 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.



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J. Navasques - Debt Crisis and Austerity Policies in Europe