Today, Spanish banks depend almost entirely on the vital support of the European Central Bank as they no longer receive money from international investors. The financial markets are also keeping a close eye on the Spanish government: the risk premium is above 400 points compared to German bonds and the interest from the bonds has increased to 6% above the critical threshold. Many observers believe that Spain is no longer capable of confronting this situation without specific support from European funds.
How did it get to this point? The responsibility lies with European leaders and the two main Spanish political parties whose policies have not only failed to slow down Spain’s debt but also created more doubt as regards the strength of Spanish fiscal policy.
The current rise will only surprise those who believed the discourse of economists and politicians who repeatedly claimed that the problem in Europe is irresponsible public spending in countries in crisis and, as a result, the markets’ confidence could only be restored by reducing the debt, in compliance with the German model. The current situation clearly shows that this evaluation and the policies of Angela Merkel and Nicolas Sarkozy in view of the crisis were profoundly mistaken.
At the beginning of the crisis in 2007, Spain had a national debt of only 42% of GDP. The hypothesis of the government’s irresponsible indebtedness being the source of Spain’s problems is unsustainable. Cuts in education and health are sorting out Spain’s problems as effectively as chemotherapy is to an indirect hernia. The policies applied have increased public debt, initially to 60%, currently almost 80%. Even then, Spain does not exceed Germany’s debt ratio, which is more than 81% of its GDP. Why then is Spain is suffering and Germany isn’t? The main reason is the high level of private debt of households, companies and Spanish financial entities. This debt was accrued – encouraged by the two biggest parties – in the context of a large real estate bubble. Banks and savings banks have gone with the support of the authorities covering most of its losses, putting them off until the future. However, it is still unclear how substantial future losses will be and how they will influence the government’s budget. If the example is what happened with Irish banks, who successfully passed the European Banking Authority’s ‘stress test’ only to be rescued a few months later by billions of euros from the Irish government, it is understandable that market actors and do not trust official figures. They fear that the Spanish authorities may have to contribute billions of euros in order to overcome the banking crisis. This prevents investors from buying Spanish bonds and leads to higher interest rates.
The second reason is economic output. The debt ratio is the relationship between the debt and the volume of economic activity. Due to rigid austerity policy, economic performance is falling sharply and the debt ratio is increasing. Herein also lays the cause of the high budget deficit of recent years. Therefore, it is not only incorrect to argue that the debt was created by excessive spending by the Spanish government, when in reality it stems from a real estate bubble, but rather that the neo-liberal solution of drastically reducing public spending has dangerous side effects: aggravating the crisis and increasing its social and economic costs. Unemployment – which is extremely high in Spain – has reached 23%; among young people this rate is higher than 50%. Due to austerity policies, this could increase by a further 800,000 and reach the 6 million mark in 2012. This will have dangerous effects on society.
Rescue the Rotten Banking System
Spain does not need to be ‘rescued’ nor does it need to support unfair social cuts that would further increase with a bailout. We have different proposals that would bring about a real solution for Spain:
The debt burden in the private sector must be transparent so that it can be overcome. Banks, in particular savings banks, must be made to quickly disclose the total debt burden in the banking sector and enable real estate prices to be adjusted downwards. Severely indebted households must be supported by an adequate regulatory system of insolvency. There is no point in continuously putting off the problem. The real economy will not be able to bear the interest burden of the total debt for much longer; this is why taking action soon is politically appropriate and also in the interest of creditors. If nothing is done, when problems of capital shortage plague Spanish banks in all their bareness, the Spanish government’s debt would increase in the short term. Spain cannot allow this to happen.
What Spain needs is not to be rescued as a country but rather a European bank bailout fund to rescue its banks. The example to follow is the United States. Unlike Europe, in the States it isn’t the taxpayers of the individual member states that are responsible for rescuing the banks but rather the FDIC, a fund under the federal government’s supervision which is funded through a bank levy. With the European banking bailout fund that we are proposing, the additional banking charges would not end up in the Spanish budget, instead they would be supported by a European bailout fund, funded by its taxpayers – that is to say by the banks themselves. This is the exact opposite of using the European Financial Stability Facility for recapitalisation, as a last resort; again it is only a loan to Spain, with the consequent increase of the Spanish government’s debt burden and the corresponding hostility of investors. A European bank bailout fund will separate banking risk from government risk, which would enable the Spanish government to reduce the control of Spanish banks and pressure on the markets.
Furthermore, Spain must be safeguarded from new interest rate increases. Each debtor can, if interest rates go high enough, be pushed to bankruptcy. As a result, the states in a monetary union are more vulnerable to the incertitude of the financial market. In such as situation, the Spanish government is pressured into a very damaging policy of austerity both in the medium and long-term. This prevents Spain from getting out of the crisis and protecting healthy sectors from a continuous collapse of the economy. It would be better if European countries protected each other against this risk of an increase in interest rates. The instrument for this is the fund for old debt – according to the proposal of the German expert council -, which would be funded by common Eurobonds until the debt is reduced in each state.
Why are these proposals not put into action? Angela Merkel is blocking them, with the support of Sarkozy and other European leaders. One of the reasons for this is the conservative ideology that always identifies public spending as the root of all evil and spends time trying to weaken social Europe. Now, these times of crisis are being used for privatising and reducing social costs, which they always wanted to do. Furthermore, with this pressure on peripheral European countries they apparently expect to protect the interests of national taxpayers in the central countries, which is very popular. This, however, is deceitful. The increase in the interest rate in Spain means lower interest rates in Germany, both phenomena result in a capital leak that is not productive in the peripheral countries in crisis toward Germany; however this contributes to a financial bubble in Germany, which must be avoided as a matter of urgency. On the other hand, Germany’s strong exporting sector depends on the success of neighbouring countries. For this, the real interest for German citizens could not be anything other than to quickly resolve Europe’s common problems. The conservative policy in this crisis is particularly protecting the interests of large banks and funds in each of its countries, to the detriment of millions of unemployed people and those people who, due to cuts, do not receive the necessary public services in health and education, without citizens of any of the countries being favoured and with increasing risks for all.
In order for them to listen to us: high debt, created by the crisis, must be reduced. However, there are better alternatives to applying cuts to those who are most in need: instead of prioritising action against public debt, taking action against the private debt of financial entities, which is more substantial. Instead of social cuts and reducing public investment as a form of tackling public debt, increasing estate tax and introducing green taxes in order to stimulate a change in the production model towards a greener economy, we can find a way out of this maze which real estate and financial speculation and the neoliberal policies of traditional parties have led us into.