Friday, January 10, 2014

The Spanish Austerity Disaster

Spain is in a dire economic situation. If you look at the economic data and especially at the unemployment figures you would think such a conclusion is beyond doubt. All of which makes it so strange to read frequent media reports, from inside and outside the country, which present a radically different picture. These reports talk of a country which has turned the corner and faces a bright future following a difficult period of implementing much needed structural reforms. It's bullshit. Bullshit based on highly selective cherry picking of data and misrepresenting the history of the crisis.  

A few weeks ago, with the publication of Zapatero's book, we finally got to see the content of the letter that was sent by the European Central Bank to ZP back in 2011 when the spectre of the dreaded 'rescue' seemed like a daily prospect. In that strange sort of proprietary attitude that Spain's prime ministers have towards government documents (see Aznar and the documentation about the Madrid bombings), Zapatero seems to have treated the letter as personal correspondence and taken it with him. What is striking about the letter is how little most of the demands contained within it had to do with addressing the immediate economic distress of the country. Instead, it amounts to a (hidden from public view) set of measures that more or less accurately represent the agenda of those who have championed the austerity approach that has now been implemented in Spain.

With the bond markets apparently so content, the stock market rising and the Spanish government busily (desperately?) trying to push an optimistic feelgood factor it seems like a good time to take a look at the results of the experiment. The bullshit really starts with the Rajoy government's bombastic claims about how they have taken the difficult measures necessary to avert the rescue. The extraordinary result of Rajoy's wise and determined leadership, if you have the tunnel vision necessary to believe in it, is that he hasn't just saved Spain from collapse but all the other countries affected by the Euro crisis too! Now there are some who would say that it was Mario Draghi's game ending we'll do what it takes to save the Euro statement that changed things, but that risks undermining the pro-austerity argument. We'll let the data do that.

It's worth remembering that Spain back in 2011 was also at the point of exiting recession. The second recession of the crisis, which covers the last two years, was deliberately provoked by the adoption of those austerity measures that some would now like to credit with bringing about the exit from that same recession. Not just the recession, but the addition of close to another million people to Spain's already enormous unemployment total together with the destruction of productive economic activity that this represents. Companies which had weathered the storm of the first recession without realising (why would they?) that the country would then be pushed into a second one couldn't last any more and closed their doors. It's a terrible price to pay, even more so when you look at the meagre results.

All these measures have been adopted in the name of reducing Spain's budget deficit, the dogma insisting that huge cuts in public spending had to be implemented and ignoring all warnings of the consequences. Assuming Spain has hit its deficit target for 2013, and leaving to one side our generous assistance to the banking sector that counts as deficit, the country has managed a reduction of something under 3%. Not bad is it, 350-400000 jobs lost for each point of deficit reduction? Some might say it hasn't been worth it. Indeed, those insisting on recession as the route to deficit reduction eventually had to recognise it wasn't working, not openly of course but the relaxation of deficit targets was nothing less than an admission that it wasn't working and what ultimately prevented Spain from tipping into the catastrophic state that Greece finds itself in. Nevertheless, Spain's public debt burden is now massively higher than it was before the medicine was administered.

None of this matters to the spinners and the cherry pickers. Look at the exports, they say. The balance of payments is positive, proof that the medicine works. I admire the shallowness of this argument, people who write about economics as a profession but don't apparently understand that throwing hundreds of thousands of people out of work depresses consumer demand and reduces imports. Hey, make another million unemployed and it will get even better! If economic depression reduces petrol consumption to the level of the 1990's then marvel at the success for Spain's import bill! On the export side it is of course completely true that Spain's exports have been the success story of the crisis, the only success story to be told apart from the ability of the financial sector to suck us dry. The problem comes when the spinners try to attribute this success either to austerity or to the accompanying 'reforms'. The improvement in Spain's exports predates all of the austerity measures adopted, and the much vaunted labour market changes. We have to give credit though to austerity for finally putting an end to that export improvement, squeezing the economy of the entire Eurozone means that Spain's major export markets aren't in the mood for buying either. 

It's odd, because according to the destructive dogma Spain couldn't possibly be a successful exporter in the last few years. We've been told all along that the fundamental problem for Spain is that it has become uncompetitive, and the austerity programme has been a clumsy attempt to force through the internal devaluation (read reduced wages) that would restore the economic balance with its competitors. Ironic then that it should end up damaging the sector of the economy that dared to contradict the sacred theory. This disastrous strategy of destroying broad sectors of the economy in the belief that a dynamic new model will magically emerge from the wreckage hasn't worked anywhere it has been tried. The destruction of so many low productivity unskilled jobs doesn't mean they get replaced by better ones. Just look at the few new jobs being created. 

This is where we get to the grim reality. Spain's economy has changed as a result of the crisis but it has gone backwards rather than forwards. For all the talk of reforms, and it is mostly talk, the objective of Rajoy and company has been to weather the storm with as little fundamental change as possible. I laugh when I read articles in the press about the wide ranging reforms Spain is supposed to have undertaken, wondering about the use of the plural. If you disagree try to make a list of them without thinking too hard and see what number you get to. The main change is in the labour market and because people don't buy those nasty imports if they have no money we should of course be pleased that the move towards more precarious low-paid employment is showing signs of success. Just as we should be pleased that many of the better educated young people are leaving the country. The government is certainly pleased with this, it's one way of reducing the unemployment total short of a serious epidemic. PP supporters gleefully proclaim the benefits of a period abroad. Character building.

This is not to say that Spain hasn't touched bottom on job destruction, just that reaching that point still leaves it far away from anything resembling sustained job creation. The labour market now requires detailed attention to see what is really happening. It is clear from the difference between social security figures and drops in the unemployment total that many people have simply dropped out of the labour force for one reason or another. It's also clear that many of the (overwhelmingly temporary) jobs created in 2013 were due to an unexpectedly good tourism season. Emigration, seasonal work in tourism and agriculture. Remind you of anything? Yes! A bonus point to the person at the back who said the 1960's. We've done the 1930's revival in terms of economic 'theory', so its time to move forward through the rest of the last century. Shame the construction leg has been blown off, let's hobble forward on tourism, good harvests and the distant hope of ridiculously oversold pelotazos like the Olympics and Eurovegas just to show how things have changed. 

Things get grimmer. Any Spanish emigrant who finds a good job overseas should hold onto it for at least 10 years and just enjoy the holidays back in the old country. No serious prediction can be found showing promising economic growth for Spain in the next decade. Next year the official prediction is currently (these things change almost monthly) for 0.7% growth. It doesn't get much better for the following years and the 2% growth that might indicate conditions for making a serious dent in that unemployment total looks far away. 2020 is the year I see quoted commonly for Spain's GDP to reach pre-crisis levels, but don't even imagine pre-crisis employment levels for that date. 12 years of crisis is some, cough, business cycle. Stagnation is the outcome for the next few years, sluggish growth at best. If you think or hope otherwise then ask yourself about the attention paid to pensions. Spain's public pensions are sustainable with high employment, so why so much attention focused on reducing their value (apart from the obvious commercial interests of the contracted experts)?

The markets and the banking sector seem very happy with this prospect, who wouldn't be after the vast sums of public money pushed their way. Hedge funds picking over the few bits of flesh left from the construction boom are presented as if they were investments in the future of the country. The electricity companies can raise energy bills 10% a year and still have the government claim that we owe those same companies ever greater sums of money. Seats on the board await the valiant ministers who indulge them. That thick layer of 'comisionistas' - notaries, registrars and other 18th century leftovers who are extremely well represented in the government not only remains intact but will be given extra sources of income for hitting a piece of paper with a stamp. No need to wonder why Spain has such low salaries for a high cost of living. A brutally unfair tax system remains fundamentally untouched, rewarding fraudsters and the wealthy whilst those with low to medium incomes bear the brunt of the tax burden.

Managing expectations and declining living standards for the majority of the population is the challenge. Spain's government has it hard in this respect, they have a spectacularly greedy and corrupt elite and little chance for the next few years of keeping the masses content with an asset bubble like the last one. I remember those on the right who used the ridiculous taunt that the left just wanted to redistribute wealth instead of creating it. How things have come full circle, this is effectively now how many European governments are working with the tiny detail that redistribution goes from the poorest sectors to the wealthy. There's no money to pay for anything you see, unless you represent part of that elite. Nobody travels down the toll roads built by your company, we'll sort that out with compensation which we can add to the deficit. You have this expensive and useless arms contract to pay for? We'll just slip a special provision into the budget to pay for that. You need a new hospital! Didn't you hear us when we said there's no money!

Spain never had a significant welfare safety net, but austerity has bitten a big chunk in what existed. Payments to dependent people, so they can be properly looked after, have been almost killed off. The PP always hated a measure that did so much to help some of the most vulnerable who should be shivering in the cold outside churches anyway. Pensions are declining, their real value undermined in a typically underhand manner, just at a time when unemployment means many households are dependent on the income of their retired members. Hundreds of thousands of people have been left without any guarantee of health care, with all the consequences for public health that this entails. Who knows how many habitable homes are kept empty whilst families lose their home because of mortgage evictions. Anything linking incomes to prices is being removed, a link never needed by those who can award themselves huge bonuses for each successive year of failure.

The pro-austerity party have got everything they asked for, although you sense it will never be quite enough. There will always be something lacking that stands in the way of the coming Spanish economic miracle. That final labour market change perhaps, although I did see a job advert on Twitter yesterday that advised anyone expecting payment not to apply. The gloomy economic predictions don't come from the anti-austerity side, they are produced by the same organisations and companies that championed the austerity process. Even their own economists don't believe the propaganda when it comes down to it. What began as a private financial crisis is still a private financial crisis and the critics of austerity have been been right about everything they said would happen. The real austerity disaster is that the people who got it wrong are still in charge. Determined to learn no fundamental lessons from the failures that caused the longest economic crisis since the 1930's, the only route they offer leads towards the next one.


Bill said...

It is good to see you blogging again, after so many months fallow :).

As you may perhaps surmise, I do not entirely share (polite way of putting it) your acerbic views about the current government, although truth be told my own views of it aren't much better although perhaps for somewhat different reasons.

On the fundamentals, however, I agree with your view that Spain's recession is not going to end any time soon, nor is unemployment likely to lower significantly or at all.

Frankly I don't see anything changing much until Spain and some of the other less-performing economies ditch the Euro as a currency and resurrect their 'legacy' currencies, or perhaps form their own joint currency union with other similar countries. The pity is that even today the majority of citizens of the most badly-affected countries are determined to retain the Euro at almost any cost, because they value having the same currency, and the 'stability' [of a kind] it brings, as northern European countries such as Germany, Holland and France. Like most addicts they are unable to wean themselves away from the dangerous dead-end that the Euro currency union has led them into. Mario Draghi's determination to 'do whatever it takes' to support the Euro is perhaps explainable in political terms (in support of the federalist aim of the EU 'machine'), but economically it is untenable, without continuing money-creation in the form of QE and the dubious financing arrangements largely funded by a 'duped' German electorate. Obviously both the UK and US have also indulged in this idiotic sleight of hand, but at least they [nominally] control a few more levers of their own economies.

I hope Latvia, the most recent country to adopt the Euro, does not live to regret joining up to this flawed currency project.

Finally, apart from being glad to see you blogging again, may I wish you a very Happy New Year, even if a little belatedly.

Kind regards

Anonymous said...

Hi Graeme,

Good to see you are still writing.

I have always supported the Euro and the EU. And I still do, to the hilt.

The radical left wants the end of free markets and open trade. Some are hoping for revolution. Others, those from the right, would prefer to pull up the draw the bridges and, see te Euro destroyed.

Perhaps, Spain should not have entered the Euro before making big changes to its economy, but once it went in there was no time left for lamenting.

For those like me who argue that the Euro is a good thing there was always the hope that being inside would force change. But I always also argued change was more likely to come force-fed from outside or from above in the midst of a crisis. And so it was.

I have always disliked the PP. I can't stand the Spanish right.
All the industrial warehouses from Getafe to Alcobendas are not enough to contain my vomit caused by the Gallardon law. But I disagree with you when you say that the government has done nothing or little so far. The government has done all the work Zapatero (who I personally like as a politician and a human being) did not do. And the results will show up although it will take time (4-8 years).

That is too late for >50 year unemployed people and it is a shame that social policies to help them are inadequate. I want the PP to get the dirty the job done and bow out asap. But this had to be done, otherwise we would have had to say goodbye to the Euro.

I can see the beggars in the streets of Valencia, and the filth accumulating due to cuts in the services budget. Things in Spain are bad, bad, bad. But they are hardly any better in France, Holland or the UK. The international press - including the BBC - churns out propaganda without the slightest indication of any sort of shame.

Spain will get through this, and it will be a much better place after the crisis than it was before. It is easy to feel despair but things have changed since the Fall of the Wall. Europe is just a bit-player now. We better stay together and adapt to a changing world. I am afraid change is not what nationalists like UKIP, Le Pen, De Wilders, Golden Dawn, Jobbik, ERC or Bildu want.


Graeme said...

Thanks for the comments Bill and Moscow.

Bill, I don't really think that Spain's problems are going to be solved by ditching the Euro - I think its a problem of the model of economy and the ability to devalue independently doesn't remove that problem. Nor do I accept the narrative, common though it is, of feckless southern Europeans being rescued by northern European taxpayers. Spain paid its part of the other so called rescues and in the absence of any default has to pay a tremendously high price to fund itself. Germany, meanwhile, has been able to treat the Euro crisis as an interest rate holiday on its debt. If taxpayers have been fleeced for anything its for the money going to the banks which will never be returned. In Spain they lied to us about that.

The other problem with exiting the Euro, to which I feel no special attachment of any kind, is that in our wonderfully liberalised world there is effectively no way to exit a currency union without chaos and an Argentinian style corralito which would probably wipe out whatever savings those of us who have managed to conserve some money still hold. Back to square one with an economy that's already been knocked back years is not an appealing prospect for anyone who doesn't have other means of survival. In the Greek case I think it's an arguable question, an early Euro exit would have probably left them better off. Too late now. As for quantitative easing, it may be far from a perfect solution but I find it hard to believe the UK or the US with the tea party running the show would have been better off without it. The UK has nothing to boast about for being outside of the Euro, the triple recession was avoided by a whisker and the government is clearly still betting on the illusion of growth through property dealing to compensate the effects of those zero hours contracts. Still, if it goes wrong they can blame the poor and the immigrants....again. When things go badly in Spain I can always read about my home country to deter me from packing my things and getting on the Metro to the airport.

Graeme said...

Moscow, you obviously have reasons to be happy. If your main focus is the survival of the Euro then things are going well but you'll have to point me to these changes in the Spanish economy that I'm unable to detect. Labour market reform aside, which will give us the same rubbish flexible hours, flexible wages temporary contracts that you say you dislike in the UK - what else is there? A transparency law that offers silence as a valid response to an information request? The model of the economy is exactly the same, that cosy network of politicians, bankers, energy companies and construction giants turned into 'providers' of public services that the same politicians hire out to them in return for the usual consideration. Some change. Apart from this the economy is significantly weaker in almost all sectors. The PP is happy with any situation that keeps them 1% ahead of the PSOE as the biggest party.

It's simply not true anyway to say that Rajoy has done what Zapatero didn't do. ZP introduced a whole range of austerity measures - under pressure - and with the frontal opposition of the PP. Destroyed the PSOE's electoral prospects in the process. The problem is that you have already been kicking the can of 'give the reforms time' down the road for 2-3 years and now saying that it might take another 8 is just avoiding any examination of what is going on. Find me that serious estimate of sustainable growth in the next few years for Spain, not even those who believe in the dogma are predicting it. It takes a lot more than this voluntaristic "Spain will get through this", that's not really the issue. The country will still be there, the issue is how many people will have decent jobs and some kind of future.

The odd thing about the Euro crisis supposedly being over is that all the reasons they gave for it existing are still in place, except that the gap between the better performers and the worst performers is much, much bigger after another enforced recession. It's going to be like the financial crisis, nothing has been done to solve th fundamental causes of that either and here we are, still rolling downhill. Your view strikes me as that of the European elite, untouched by the crisis they regard those who have borne the consequences as ungrateful. If people are turning to nationalist alternatives its because they feel let down, lied to and ripped off - you can't force hardship on people via secret letters and then complain if they don't thank you for it.

Anonymous said...


I am no elite, me. I work in the cut-throat private business sector.

I have been living in Russia for the last 15 years, and out of Spain since 1987. Yes, I am untouched by the crisis (well sort of) in Spain and so far, I manage to keep me head above water - we'll see for how long, though.

You see, I cannot but agree with you when you say that the policies pursued are not useful to get you out of a recession and I agree structural reforms and austerity measures make matters actually worse in the short-term. The real pitty is they are not implemented when things are on the up.

ZP did nothing for 6 years - then went on to do swingeing custs under pressure but no real structural reforms. His labour reform like all of his so called last minute reforms was rendered useless by the small-print. The PP then went on and removed the small print opening the flood gates. I am not going to list all the structural reforms the PP has decreed, enacted, passed into law or is about to write and get through parliament, but the list is long indeed. I do not include the so called transparency law among them.

I want to modernise the economy. I am afraid all I want is to open up and make more transparent and efficient the existing system. I am no revolutionary.


Graeme said...

Moscow, I'm not suggesting that you form part of the European elite and I'm aware of where you live (in the broad sense, not the gangster threatening sense). It's just that the way you expressed your satisfaction at the way in which the Euro crisis had turned out reflected a detachment from the crude realities of how things really are here. If you are going to argue that its a price worth paying then your starting point must be to recognise what that price has been.

I'm not going to ask you to list all of the reforms you say Rajoy has made, but I think its reasonable that you can give me five that will make a real difference to Spain's future. I'll help by by exclusion, an energy reform which punished individuals and companies who produce their own energy (unique in Europe I think?) and reinforces the power of the energy cartel is not one of them. The change which allows autonomos and companies to pay some of their VAT a little bit later isn't one of them either.

You see I would expect, as someone living and working in Spain with my own company, that in a context of economic modernisation and reform my gestor would have been bombarding me with legislative updates. Instead all I've had is the VAT thing, which is so complicated to implement that he advised me not to bother. What else is there? An education reform based around religion and language of instruction? I'm involved in Madrid with a group of people of shared professional interests, its not that big a group but two of them have left to work overseas in the last few months and I've discussed London rental prices with another. Highly skilled people who are not finding opportunities in Spain, like them many more. Modernisation would mean that they would surely be key workers for the future, yet the government is happy to set up web pages giving them advice on leaving.

There's nothing wrong with not being a revolutionary if there's something to show for such restraint. The transparency, efficiency and modernisation of which you talk is not visible to my eyes - which as the late Peter Cook said - is all I'm equipped with.

Anonymous said...

I will be the coward this time.

I am bowing out of this debate because I can see it could drag on......and on....and honestly, I don't have that much time.... I have to continue helping Spain with those crucial exports.


ejh said...

You know, I think anybody who ever uses the term "structural reform" should automatically lose the discussion in a Godwin's-Law kind of way. Or anybody who uses the term "modernise". If people want to say what they mean, then they might have something to say. Instead they resort to these euphemisms.

Of course, these "structural reforms" don't just mean making working life harder, nastier and more badly-paid for millions of people, where indeed they still have work at all. They also mean hacking back at health and educational provision and making people pay for it personally as much as is possible. This of course as nothing to do with "competitiveness" (would you cut an education service to ribbons and force the younder generation into emigration if you were seeking to become more competitive?) and everything to do with enriching wealthy people at the experience of the poorer and weaker sections of the population. It's not economics, it's ideology - not that it's particularly easy to tell these creatures apart in the present age.

Incidentally, if there's one thing that annoys me more than the term "structural reform" it's people who hurrah the PP's economics policy while deploring their social policy. Because amazingly enough, real-life conservatives are like the PP. They're not internet free-market enthusiasts. But they do at least have to take some responsiblity for the consequences of what they do. Internet free-market enthusiasts, on the other hand, do not.