Spain’s government and European authorities bent on dismantling welfare state
from Mark Weisbrot
MADRID — I have argued for some time now that the recurring crisis in the eurozone is not driven by financial markets’ demands for austerity in a time of recession – as is commonly asserted. Rather, the primary cause of the crisis and its prolongation is the political agenda of the European authorities – led by the European Central Bank and European Commission. These authorities — which if we included the IMF constitute the so-called “Troika” that runs economic policy in the eurozone — want to force political changes, and particularly in the weaker economies, that people in these countries would never vote for.
This is becoming more obvious here in Spain, where the government – run by the right-wing Popular Party (PP) – shares the political agenda of the European authorities, perhaps even more than the IMF does.
The PP government has taken advantage of the crisis to impose labor law changes that will make it easier for employers to get out of industry-wide collective bargaining agreements. They have also taken away rights that workers had to challenge unfair firings. The goal is to weaken labor as part of a longer term strategy to dismantle the welfare state; these changes have nothing to do with resolving the current crisis, or even reducing the budget deficit.
The government has also mandated huge cuts in health care spending, at 7 billion euros. This is comparable to cutting 25 percent of Medicaid spending in the U.S., something that would be devastating to the poor and also politically impossible there. Another 3 billion euros will be cut from education.
Of course the deficit reduction is making Spain’s current recession worse, and the Spanish government has estimated that this years’ budget tightening will by itself reduce GDP by 2.6 percent. In a country that has about 25 percent unemployment and more than half its youth unemployed, this will push hundreds of thousands more people out of work.
The financial markets do have a role in this mess, and they are pushing up Spain’s borrowing costs as investors and speculators sell (or short-sell) Spanish bonds. The yield on 10-year bonds reached 6.69 percent yesterday.
But even these rates pose no immediate crisis, and the markets are vastly exaggerating the risks of a Spanish default. Spain has to roll over about 85 billion euros of its debt this year, and even if it had to borrow all of that at current rates or higher – which is extremely unlikely – it would not make much difference in Spain’s overall debt sustainability or debt service. Spain’s projected interest payments on its debt for this year are still at 2.4 percent of GDP, which is quite moderate.
Much more importantly, the European Central Bank could easily intervene in the Spanish bond market and drive these rates down, as it did last November and at other times last year. This would come at no cost to European taxpayers, and would require relatively little intervention, since private investors and speculators would immediately respond by buying Spanish bonds as their price began to rise and yields fell.
The ECB won’t do this because they are using the crisis to force right-wing “reforms” throughout the eurozone – not only in Greece, Portugal, Ireland, Spain, and Italy – but even in the richer countries, which in December committed themselves to budget balancing that would be politically impossible in the United States.
Meanwhile, the Obama administration has once again sent its Under Secretary of the Treasury Lael Brainard to Europe. After giving Greece the back of her hand, she will to try to persuade the European authorities to at least lower the risk of a more serious financial meltdown. The crisis in Europe, with the world’s largest banking system, has been roiling financial markets and once again threatening to derail Obama’s re-election. Sadly, at this moment the Obama administration probably has more influence on eurozone economic policy than the hundreds of millions of European voters whose economic future has been hijacked by dangerous ideologues. That speaks volumes about what the structure of the eurozone, and the people running it, have done to what was not long ago a group of relatively democratic countries with rising incomes.
Those who forget the past are condemned to repeat it. In order to prevent worse, i.e, socialism, the Right in Europe accepted the welfare state after WWII. The resulting social pact fostered a European harmony that was unprecedented. To break that pact will plunge us back into social chaos similar to the first half of the 20th century. Send members of today’s governments on crash courses to learn about “the Dark Continent” — 20th Century Europe — as one of the texbooks characterizes Europe because of the enormity of the crimes against humanity perpetrated there, 1900-1945..
The welfare state is not sustainable without tax reform. With the right tax reforms, it is arguably, not necessary, and certainly not on the scale it grew to at its peak. This is true even in Scandinavia where there is a wider concensus on the value of the welfare state.
The Beveridge settlement never addressed the underlying issues that brought about the need for the welfare state in the first instance. Now the thing is falling apart, it is time to address the causes so as to get things right next time round.
I hesitate to answer but will just one more time. We can easily afford a welfare state. Eliminate defense spending; it not welfare is the American excess. But the poiint of my post was not economic, it is about social cohension and moral order. Without that you cannot have a successful country. You certainly won’t by abandoning the poor to their fate as the gap between the rich and the poor widens and lawlessness and social hate intensifies. Try to run a country under those conditions and see what economics will add up to. Learn some history.
True – social cohesion is essential to a healthy society, which means that the gap between rich and poor cannot be too great. But when this is investigated it is invariably the case that the tax system is a major cause. What is taxed should not be taxed, and what should be taxed is not. It is useless having a tax system which MAKES PEOPLE POOR and than trying to deal with the problem with heavy duty welfare which would not be necessary in the first place if the tax system was not so defective.
Economists cite several reasons to endorse ‘austerity’. Let’s look at these for the Eurozone:
1. High government deficits. But the consolidated Eurozone deficit is not high. It’s less than half the USA/Japan/UK level. And it’s a full 3% of GDP lower than 2 years ago.
2. Runaway deficits on the current account. But the Eurzone has no deficit on the current account to speak of, contrary to the UK and the USA.
3. Debt financed consumption or investment bubbles. There have been bubbles, but these have exploded or are deflating. Construction output in Ireland is down 75%, in Spain it’s down about 60% (57,4% in March, to be overly precise) and house prices are falling (in the Netherlands total real decline of house prices, including the change in the sales tax of 6% to 2%, is at the moment for instance about 20% and the rate of decline is increasing)
4. Extremely low unemployment. Hmmm. 11% and rising. (Eurostat states 10,9, but the ECB states 11% which on closer inspection turned out to be 10,95%).
5. A change for the worse of the terms of trade (oil prices…). Oil prices are high and might increase futher – but they are not higher than they were in 2008 or 2011. And the real solution to these high prices are more investments in technology and less subsidies on using energy.
6. High interest rates. Many countries are, instead, hitting record lows… (and in my opinion financial institutions are really craving for Eurobonds, but that’s another matter)
7. High and/or rising inflation. Eurostat data of today show that headline inflation went down from 2,6% to 2,4%, 0,6% lower than in november and december 2011 when the ECB lowered interest rates with 0,5% (real interest rates increased with 0,1%…).
8. Very high taxes. Hmmm. Tax levels show large differences between countries and in my opinion the countries with the higher tax levels did weather the 2008 storm better than countries with lower tax levels. Anyway – the Eurzone tax level was about flat, between 2008-2011 (range: 44,7 – 45,2).
At first I did not believe Paul Krugman when he stated again and again than many economists expected inflation to surge in a situation where the output gap increased and money growth went down (which is what happened despite QE: M-3 money growth was and is very, very low, especially in the Eurozone). By now, I think he was right (by the way – the ECB did consistently predict lower inflation!). These economists had – and have, as they are still stating this – no idea what’s happening. I mean – Italy has by far the largest micro-economic problems of the Eurozone when we look at its extremely sluggish productivity increase. But at the same time it has the smallest macro-economic problems of the GIPSI countries. “It’s the macro-economy, stupids”. And stating that macro economic problems will disappear by fixing the micro economy… that’s soooo 1935. You do not solve a bank run by cutting the wage of the employees of the bank. Or these economists indeed have an ideological agenda. And/or they do not have a clue about what’s happening. And/or they do not look at the data. Take your pick.
Required reading: http://www.eurointelligence.com/eurointelligence-news/home/singleview/article/a-self-inflicted-crisis.html
I’ve commented pretty harshly in support of your “required reading”, Merijn. But what’s happened to the discussion of “money created out of thin air”?
I pick all three merjin plus a fourth – they are really bad economists.
The PP will soon bring pack the droit du seigneur.., . as God sends of course.