Why Spain Won't Quit the Eurozone
March 1, 2016
Mar 1, 2016
12 Min read time
Weaker European economies chafe against an anti-democratic euro.
Podemos supporters after the Spanish elections in December 2015. Photo: Adolfo Lujan
The Spanish elections in December provided proof, if anyone needed it, that the fight over the economic and social future of Europe is far from over.
For the first time in three decades, each of two major parties that had ruled Spain since its incomplete transition to democracy was unable to form a governing coalition. The incumbent right-wing Popular Party (PP)—with roots in Francisco Franco’s fascist dictatorship—remained the largest party in the parliament but saw its representation shrink by a third. The center-left Socialist Workers Party (PSOE), which had lost its majority to the PP in 2011 due to its support for austerity, fared even worse. Their defecting voters went mostly to Podemos (“We can”), a new left party, less than two years old, which grew out of the mass protests against austerity. Podemos surprised pollsters and most of the media by winning 20.7 percent of the vote, just 1.3 points behind the PSOE. The PP won 28.7 percent, and a new party called Ciudadanos (Citizens), which some have called “the Podemos of the right,” got 13.9 percent.
The political upheaval that broke up the two-party system in Spain is part of an ongoing process that has beleaguered European governments since the world recession of 2009. GDP for the nineteen countries of the Eurozone is estimated to have grown by 1.5 percent in 2015; some may have thought that such feeble economic recovery and the capitulation of the Greek government to European demands last July marked the beginning of a solution to Europe’s economic malaise. This would still leave a host of other problems, both real and exaggerated: the migration crisis, terrorism, the UK’s proposed referendum on EU membership. But the economic problem is at the core of most of the others, and it can make them considerably more difficult to resolve. The influx of even a million immigrants into a European population of more than 503 million would not be as politically volatile if the region were not also facing long-term mass unemployment and economic insecurity.
The economic problem faces two major obstacles to its resolution: first, the loss of national economic sovereignty and democracy, which would allow, and in some cases force, governments to change course in the face of long-term economic failure, and second, the false narratives through which the European economy is generally presented to the public, and thereby widely misunderstood.
The loss of economic sovereignty is the main reason that the Euro area has more than twice the unemployment rate of the United States. Even if American voters had elected Mitt Romney in 2012, he would not have dared to do what Eurozone governments—especially those of the more vulnerable countries—have done, because he would have wanted to be re-elected. The countries of the Eurozone gave up control over their most important macroeconomic policies: monetary policy (including interest rates), exchange rate policy (by adopting the euro), and when they ran into trouble they discovered that their fiscal policy (taxing and spending) could also be commandeered by an alien elite.
Without national economic sovereignty, there is little room for democracy in economic policy making. This should have been the lesson that everyone drew from the past seven years. Eurozone nations handed their sovereignty to a group of people with a political agenda quite hostile to the interests of most Europeans—one that they would never vote for. Yanis Varoufakis, finance minister under Greek Prime Minister Alexis Tsipras from January to July last year, has noted that the Eurogroup of finance ministers—with whom he was trying to negotiate the future of Greece—was “unelected and unaccountable” and had no legal status. But the so-called "troika" that has made many of Greece’s economic decisions in the last six years of depression—the European Central Bank (ECB), European Commission, and the IMF—is not much different.
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There is a paper trail that details the economic agenda of the troika and the Eurogroup. Article IV of the IMF’s Articles of Agreement requires that member countries have regular consultations with the IMF, and the result of these meetings is a report that describes the current state of the economy and makes policy recommendations. A look at sixty-seven of these Article IV consultations, as they are called, for the twenty-seven EU countries during the four years 2008–11 shows a strikingly consistent pattern.
There are recommendations for reducing public sector employment and wages; cutting spending on pensions and health care; tightening eligibility for unemployment insurance, and other measures to increase labor supply; legal changes that reduce the bargaining power of labor; and other changes that would tend to increase inequality. Since these papers are a product of negotiation between finance ministry officials and IMF staff—headed by European directors—they represent an elite consensus of sorts that can be far removed from what the citizens of these countries would want or vote for. Not surprisingly, these are also the policies that have often been implemented, especially under pressure in the more vulnerable Eurozone countries, since 2010.
Without national economic sovereignty, there is little room for democracy in economic policy making.
The ongoing struggle is therefore much more than the usual conflict between creditors and debtors, or even creditor versus debtor nations (despite the obvious leadership of Germany on the side of austerity). In fact, Greece’s private creditors took a 50 percent reduction in the principal of their bonds in early 2012, most of which they could have avoided if the ECB had simply backed Greek bonds when they first ran into trouble in 2009. This is what a central bank is supposed to do, and what the ECB eventually did for Spanish and Italian bonds in July 2012, when ECB President Mario Draghi announced that he would do “whatever it takes” to ensure the stability of the euro. These three words put an end to the financial part of Europe’s crisis; the tipping point was evident in the yields on Spanish and Italian government bonds, which fell from unsustainable peaks of 6 and even 7 percent to about 1.6 percent today (Italian 10-year bonds).
The question that went unasked is: Why didn’t the ECB do this two years earlier, and thereby avoid the repeated crises of 2011 and 2012? The answer can be found in the IMF Article IV papers and statements of European officials.
A 2009 Article IV consultation with France reads, “Historical experience indicates that successful fiscal consolidations were often launched in the midst of economic downturns or the early stages of recovery.” In other words, European authorities saw the financial crisis as an opportunity to force Eurozone governments to accept their terms and conditions. It is important to understand this because it shows the depth of their commitment to this elite consensus for remaking Europe. They were willing to put the Eurozone through an additional two years of crisis and recession—a downturn that the United States, whose Great Recession ended in June 2009 (eighteen months after it started) didn’t experience.
This commitment was manifest in the brutality with which the European authorities treated Greece when its voters, after more than six years of austerity-induced recession, elected the leftist Syriza party on January 25, 2015. Within nine days of Syriza’s taking office, the ECB cut off its primary and cheapest line of credit. It then restricted the amount of credit that Greek banks could provide to the government, something that it had not done for the previous, conservative government. This tightened the financial noose around Greece’s neck and contributed to the capital flight that helped push the Greek economy back into recession. Between December 2014 and the following April, more than 24 billion euros (about 13 percent of Greek GDP) fled from Greek bank deposits.
But this was just the beginning. It soon became clear that European authorities, led by the ECB, were pursuing a strategy of regime change in Greece. They were undermining the economy partly in the hope that the damage would erode support the government. There were divisions among the European authorities; German Finance Minister Wolfgang Schäuble most outspokenly favored pushing Greece out of the euro. But as Varoufakis confirmed with high-level European negotiators, it seemed clear that German chancellor Angela Merkel preferred to keep Greece in the euro, with Syriza out. The Obama administration appeared to be on the same page, for geopolitical reasons.
In hindsight it is clear that there were no real negotiations taking place. Once the European authorities realized that Greece was never going to leave the euro—no matter the outcome of negotiations—they had no reason to make concessions. It was all stick and no carrot. When Prime Minister Alexis Tsipras announced that there would be a referendum on July 5 regarding the Eurogroup’s austerity package, the full fury of the overlords was unleashed. The ECB did something that no central bank has ever done to a government under its jurisdiction: it cut off enough credit to force a shutdown of the Greek banking system, creating a serious financial crisis in Greece and necessitating capital controls that are still hurting the economy today. European officials, who tried to influence the result by publicly stating that a “No” vote would mean Greece’s exit from the euro, made it clear that this assault on the financial system was meant to beat Greece into submission.
Amazingly, Greek voters overwhelmingly rejected the austerity package. This defiance in the face of a mass media onslaught and the shutdown of their banking system is quite remarkable. However, Tsipras and most of the Syriza leadership decided they had no choice but to accept the authorities’ demands, despite their long campaign against these and austerity in general. Perhaps even more remarkably, despite some defections from the left wing of the party, they were re-elected in September. Although Syriza lost its crucial battle over economic policy, the regime change strategy also failed because enough Greek voters realized that the government was not to blame for the economic damage that the ECB had inflicted.
Syriza’s re-election is evidence not only of the remarkable political skills of Tsipras, but also of the strength of the straitjacket the Greek people believed themselves to be caught in. I have argued for years that Greece would have recovered a long time ago if it had left the euro rather than signing the first IMF agreement in 2010, which set them on a downward spiral that would erase 25 percent of the Greek economy and push a quarter of the labor force and the majority of Greek youth into unemployment. Many economists share this view. Former IMF economist Arvind Subramanian even wrote in 2012 that Greece might recover so successfully outside the euro that most other Eurozone countries would also want to leave.
None of the financial crises and recessions associated with devaluations over the past two decades, some of them quite severe, comes close to the prolonged depression that Greece has suffered. And the country is by no means out of the woods: its economy is projected to return to growth in 2017 after shrinking this year, but IMF forecasts for Greece have been over-optimistic almost every year since 2010, and the country’s unsustainable debt makes further crises quite likely.
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Where does this leave Spain? The right-wing narrative is that the country is recovering thanks to the government’s policies, and voters should not derail the progress by causing political instability—that is, by voting for a left alternative. A somewhat more widely believed narrative draws a simple lesson from Greece: challenging European authorities is self-defeating, and there are no alternatives to the current economic program and mass unemployment.
These narratives are wrong. While the Spanish economy grew by 3.2 percent in 2015, little if any of this growth was due to the success of the government’s austerity policies. The government has pursued a policy of “internal devaluation”: since Spain cannot directly devalue the euro, it can make it effectively cheaper by lowering Spain’s internal prices and wages. This is done through policies that cause increased unemployment and recession, in the hope that exports will revive the economy. However, most of the recent growth has come not from net exports but from the government’s lightening up on budget austerity as well as from falling oil prices (which gives consumers more money to spend) and the ECB’s quantitative easing (which lowers interest rates).
Spain is the fourth largest economy in the Eurozone. It is not operating under an IMF or European loan agreement that obligates it to sabotage its own economy. It would be significantly riskier, both financially and politically, for the ECB to try to shut down Spain’s banking system, as it did in Greece. And there are paths to full employment and social progress that a determined Spanish government can embark upon even while remaining in the euro. Some of these can be seen in Podemos’s economic program.
For these reasons Podemos has made it clear that it will pursue its economic program within the Eurozone. This makes sense, given the serious political difficulties at present for any government that even proposes to leave the euro. Nevertheless, from a purely economic point of view, leaving the euro would be the faster path to full employment and a return to rising living standards for the majority.
Europe’s neoliberal leadership is offering a dismal future, especially for Europe’s youth. In Spain, a fifth of the labor force is unemployed, including half of young people, and 60 percent of the unemployed are out of work for more than a year. The IMF estimates that unemployment will still be 16-17 percent when Spain reaches its potential output several years from now. In other words, this is as good as it is going to get. Even for the whole Eurozone, unemployment is forecast at more than 9 percent in 2020, when the economy is projected to be at its full potential output.
European authorities are trying to create a new image of mass unemployment, a reduced welfare state, and a worsening income distribution as the new normal for Europe, just as stagnant wages and sharply rising inequality became the norm in the post-1980 U.S. economy. In their narrative, the electoral gains of right-wing, anti-immigrant, and racist parties are due to “anti-European” sentiment; in this one term they lump valid criticisms—from across the political spectrum—of their neoliberal straitjacket. But it is their own policies and the resulting damage that has moved, for example, French workers to vote for the National Front.
There is no economic reason for Europeans to surrender to a political agenda that has already subjected them to long-term economic failure. But to reject such a program, they will need progressive governments that are strong enough to implement practical alternatives at the national level. It will be a race against time to see if these efforts can succeed before more structural damage is done.
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March 01, 2016
12 Min read time