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.