Spain in limbo but has not rejected austerity

On the Sunday before last (December 20, 2015), Spain conducted a general election, which has left the nation in limbo. Alex Tsipris, the Greek Prime Minister, still trying to hang on to the image that he is a progressive leader in some way, tweeted once the results were known that “Austerity has now been politically defeated in #Spain, as well. Parties seeking to serve society made a strong showing #20D”. I wonder who he is trying to kid … “as well” – as well as where? Certainly not in Greece, which was the implication of his tweet. And, to be clear, certainly not in Spain. While the conservative Popular Party (PP), which has overseen the most recent imposition of austerity and is firmly pro-EU and pro-euro, did not gain an absolute majority, they did win the most seats (123 in the Spanish parliament) and were well ahead of the other major austerity party, yes, the Spanish Socialist Party (PSOE), which won 90 seats). Even the left-wing We Can party (Podemos), who won 69 seats is not planning to exit the common currency. There is no hope of an anti-austerity coalition forming.

The Eurozone is biased, by design, towards austerity. I say that because the fiscal rules embedded in the Stability and Growth Pact (SGP) and its extensions (the six-pack, two-pack, and the fiscal compact) are so restrictive that in a crisis, the Member States’ fiscal balances will too easily breach the allowable ceilings and trigger the Excessive Deficit Mechanism.

In other words, in many cases, the cyclical responses alone (the so-called automatic stabilisers) will likely push the fiscal balances beyond the permitted threshold and force the governments to introduce pro-cyclical fiscal contraction – that is, discretionary cuts to the net government spending at a time when the non-government spending cycle is also contracting – which is the anathema of responsible fiscal management.

That bias is integral to the design of the common currency and means that in bad times, the governments cannot respond in a reasonable manner and protect their domestic economies from meltdown.

The austerity bias that a Member State faces is thus intrinsic to membership of the monetary union and cannot be easily avoided.

Once the European Commission deems that a nation is in violation of its commitments within the union then not only does that particular government have to start a policy cycle that worsens the state of their economies but it also begins to face increased scrutiny by the from the private bond markets, which inevitably forces its yields up (certainly relatively to the safer, but not risk-free German bund).

At that point, not only is the domestic economy facing a real crisis with rising unemployment and collapsing incomes, but the fiscal affairs of the government become fragile (given it uses a foreign currency – the euro).

The situation can then spiral into a full-blown crisis. Whether it does or not depends but what is not in doubt is that elevated levels of mass unemployment, falling incomes and rising poverty rates are assured.

That is what the crisis in the Eurozone has demonstrated without any doubt at all.

So when a political party claims to be anti-austerity but then supports the nation remaining within the monetary union with all the pernicious and unworkable rules that go with that, then we know the political leaders are lying and trying to pretend to be progressive rather than neo-liberal (lite or otherwise).

This is the case in Spain after the elections. No likely coalition will adopt a policy platform that works towards exit.

It is true that the election has demonstrated that either of the two major political parties, each one dominant at one period or another for the last 30 years, will be prevented from holding office in their own right. It is also true that the sentiment of the electorate expressed was disdain for these ruling elites that have overseen such damage to the nation.

How much of the slide in the PP vote (down to 29 per cent of the total from 44 in 20

But the Spanish people did not reject membership of the Eurozone and hence there is no new start for the nation still belaugured with the damage that comes with that membership.

With unemployment, which peaked around 27 per cent in early 2013 is still around 21 per cent and remains the second-highest unemployment rate in the Eurozone behind the hapless Greece.

The dip in the rate in the September-quarter 2015 (a drop of 1.2 per cent from 22.4 per cent) was the result of 182,200 net new jobs being created as part of the seasonal boost related with Summer – they are most temporary jobs on low pay.

The Spanish labour market has bifurcated with older workers, who managed to keep their jobs in the crisis still enjoying relatively secure employment, and younger workers in casualised, precarious, low-paid jobs.

The labour market policy shifts associated with the imposition of austerity exacerbated this segmentation.

There is no sign that the much-touted ‘recovery’ is reducing that segmentation. It is no wonder that political sentiment among the younger voters is at odds with the choices made by their parents.

There is another sense that this election cannot be seen as a victory against austerity.

The fact is that the PP-government relaxed the austerity over the last year that it had been applying since 2012 to help improve its electoral standing and offset the rise of Podemos.

It allowed the discretionary fiscal deficit to rise and it is now getting closer to the 3 per cent threshold.

The Financial Times article (October 5, 2015) – Spain faces Brussels rebuke over 2016 budget – was already beating the drum that the European Commission was about to deliver a “stinging rebuke” to Spain for violating the fiscal discipline that the Commission expects.

The Commission believed:

… that the Spanish budget would lead to a deficit of 3.5 per cent of economic output next year, significantly above the EU’s 3 per cent ceiling and the 2.8 per cent target Madrid had agreed last year.

It also said that Spain’s pursuit of so-called “structural reform efforts” were “well below what was recommended”. The plan was to “have implemented reforms equalling 1.2 per cent of gross domestic product; instead, Tuesday’s decision will credit Madrid with 0 per cent.”

Even with this slight relaxation in the austerity mania in Spain, real GDP is still 4.6 per cent below the June-quarter 2008 peak. On the current growth path, Spain would not exceed the June-quarter 2008 level before the March-quarter 2017.

There are other points to make about the National Accounts performance.

1. Household consumption expenditure is still 8.5 per cent below the June-quarter 2008 peak.

2. Government consumption expenditure is 1.3 per cent above the 2008 real GDP peak.

3. Total investment (capital formation), which increases productive capacity and therefore potential real GDP, is 28.5 per cent below the June-quarter 2008 real GDP peak.

4. Exports have grown significantly on the back of shifting European production in search of lower costs (mostly car production shifting from France) but the real story is that imports remain 9.3 per cent below the June 2008 real GDP peak.

Net exports have growth because imports have been significantly suppressed by the reduction in domestic incomes.

None of that is sustainable nor a demonstration of a viable adjustment to a path to prosperity.

The sectoral GDP results are also interesting:

1. Agriculture, forestry and fishing is 4.4 per cent larger than the peak in the June-quarter 2008. A modest improvement.

2. Industry (Manufacturing and Construction) is still 12.8 per cent smaller than in the June-quarter 2008 and has only just started to expand.

3. Construction (a sub-sector) is 45.7 per cent smaller – seemingly a necessary adjustment, given the ridiculous, speculation-induced expansion in real estate prior to the crisis.

4. Services is 5.1 per cent larger – mostly in Information and Communication, Real estate activities, and Artistic, recreational and other services.

5. The accelerating overall growth in the recent quarters has been spread across the sectors – Industry contributed 0.5 percentage points in the September-quarter 2015 to the 0.8 per cent overall growth in real GDP, while services contributed 0.9 percentage points. Only financial services shrank and detracted from growth.

However, the European Commission wants to spin the story – 8 years of suffering cannot be considered a policy success.

The psephologists are in heaven at the moment stitching up all sorts of coalition permutations:

1. PP (centre-right, pro-austerity ruling party – 29 per cent of total vote and 123 seats out of a parliament of 350 seats) and Ciudadanos (the pro-business, anti-Catalan independence Citizens Party party – 13.9 per cent of total vote and 40 seats).

2. PSOE (Socialist party, but austerity stooges to the European Commission – 22 per cent of the vote and 90 seats) with Podemos (20.7 per cent of total vote and 69 seats) and Ciudadanos.

This option is not likely given the disputes between Podemos and Ciudadanos over Catalonia. The former supports the right of the Catalans to vote on the question of independence while the latter clearly does not want a vote nor does it support independence.

3. PP and PSOE – which would unite the major parties – both neo-liberal although the latter would claim otherwise. This is being touted as a ‘grand coalition’. The two parties have compromised themselves together before – to ward of Basque nationalist party ambitions.

The ‘Left’ does not have a viable solution along the lines of the recent coalition in Portugal.

One suspects after all the talks there will have to be new elections to break the impasse.

Podemos has become ‘pragmatic’ since the brutalisation of Syriza in Greece and their own falling electoral support in the opinion polls leading up to the election.

They had previously said they would restore the welfare state that the austerity policies has progressively undermined. That won them five seats in the European Parliament in 2014 and in January 2015, the polls suggested it might command up to 28 per cent of the total vote.

It appeared the political expression of the so-called Indignados movement that rose up in May 2011 was set to dominate Spanish politics on the back of a firm anti-privatisation, increased public spending, debt relief and other anti-austerity policy initiatives.

However, by October 2014, the polls were predicting it would win around 14 per cent of the vote as it lost ground in various regional and municipal elections and proceeded to modify its more extreme anti-austerity policies back towards centrist-type positions (austerity in disguise).

It also began to abandon its close links to the grass roots supporters who had created its popularity in the first place. Some commentators characterised Podemos as pursuing a strategy of winning rather than changing the policy debate.

So its 20.7 per cent at the December elections could be seen as a failure or as a comeback. But it is hard to see it as a victory for the anti-austerity forces.

Above all, Podemos no longer advocates an exit of from the Eurozone nor the introduction of income guarantees.

When they released their modelling on their basic income proposal it was clear that the policy overall was not compatible with remaining in the Eurozone. It was the same inconsistency that Syriza presented the Greek people – we will abandon austerity and reverse the damage but stay in the Eurozone which prevents a nation from abandoning austerity.

In the article (September 24, 2014) – Pablo Iglesias: “Los españoles van a ganar lo que decida el Parlamento” – we learned that the expenditure necessary to sustain the basic income proposal would be equivalent of 14.5 per cent of GDP and would push the fiscal deficit well beyond the SGP criteria.

While I do not support a basic income, it is clear that the Spanish government should be pushing the fiscal deficit well beyond the SGP criteria to eliminate the mass unemployment that the country endures.

Conclusion

I am happy that the Spanish election seems to have broken the hold that the two corrupt major parties have had on Spanish politics since democracy was restored after the dictatorship ended.

It is also a positive sign that grass roots movements can gain traction via social media and project support into the mainstream political processes.

But it is disappointing that parties like Podemos replace their strong commitment to change with a desire to win votes immediately before they have had a chance to fully educate the voters on the need for and advantages of change.

The failure to educate (and thus lead) means it has compromised a number of key policy areas, which reduce its anti-austerity status.

Even though it claimed that as the Eurozone’s fourth largest economy, any reform government would have much more traction against Brussels and Germany, than Syriza had in the earlier part of this year, the fact remains that with a growing majority of Spaniards still convinced that Euro membership is in their best interests, the room to truly negotiate with the Commission is limited.

Syriza didn’t crumble because Greece is too small. It abandoned its anti-austerity because it refused to countenance and exit from the Eurozone and once the Commission knew that they had all the power.

It would be the same if Podemos had have won more votes and more seats. The public must be educated first as to how damaging the Euro membership is.

How it is equivalent to austerity.

A nation cannot have the euro and pursue and anti-austerity stance.

And, Alexis Tsipris was wrong – again. Austerity was not defeated in the Spanish national election on December 20, 2015.

That is enough for today!

(c) Copyright 2015 William Mitchell. All Rights Reserved.