Hit by the crisis, Spain moves into recession

2 July 2010 by Jérôme Duval


Profoundly affected by the financial crisis, the Spanish economy has moved into recession. Madrid has been compelled, or has deemed it necessary, to genuflect before the International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
which has saddled it with a harsh austerity plan. The Zapatero government caved in even before the Spaniards had been given an opportunity to discuss other options.


Dominique Strauss-Kahn (Managing Director of the IMF), lays down his conditions to José-Luis Zapatero.

Lashed by the bursting of the housing bubble, Spain slipped into recession at the end of 2008. In the first quarter of 2010, the Gross Domestic Product GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
(GDP) has increased painfully at 0.1% and this is the first rise in this indicator (itself contested for good reasons [1].), after seven consecutive quarters of contraction or stagnation. Since the onset of the economic crisis, Spain, fourth largest economy of the euro zone, has seen its official unemployment rate double to almost 20% of the workforce, going from 1.76 million unemployed in the second quarter 2007 to 4.6 million in the first quarter of 2010.

Impatient, the IMF and the markets dictate an austerity remedy

Under pressure from the financial markets, Spain decided in Spring 2010 to go on the front foot and announce its intention to save €50 billion in three years in order to reduce the budget deficit from 11.2% of GDP in 2009 to 3% in 2013, in line with European Commission desiderata. The Zapatero government then put in place a far-reaching plan to rein in public finances: a hiring freeze in the public sector, postponement of retirement pension eligibility from 65 to 67, raising of the VAT from 16% to 18%, effective from July 2010. At the same time, taking advantage of this offensive, it has proposed some reforms of the labour market – in particular, a lowering of redundancy payouts which will benefit capital and delight the financial markets. This plan hits a population already severely tried by the crisis like a bombshell.

On May 12, the government announced a first stage of the implementation, but the IMF, growing more impatient, on May 24 demanded from Madrid structural reforms as a matter of urgency. Under pressure, Parliament approved, three days later, by a single voice (169 votes for, 168 against, and 13 abstentions), a sweeping austerity program seeking to save more than €15 billion over two years. This government decree includes a salary reduction for public servants (the first since the return to democracy after Franco) of 5% on average after this June and a freezing for 2011; the abolition of the €2500 childbirth allowance from 2011; the reduction of €600 million for development aid in 2010-2011; finally, the reduction of public investment by €6 billion between now and 2011 with the government demanding from the regions and municipalities an additional €1.2 billion in savings.

Even if Parliament Members are to have their salaries lowered by 15%, and that, exceptionally, the reductions will be implemented by instalments, the savings will be made principally on the backs of public servants and of retirees, and not on the capitalist elite who proceeded to take advantage of the crisis after having caused it – in particular, the banking sector which has recovered with its exhorbitant profits (in 2009, Santander realised a profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. of almost €9 billion, BBVA €4.2 billion, etc.). In addition, Luxembourg being no longer designated a tax haven Tax haven A territory characterized by the following five independent criteria:
(a) opacity (via bank secrecy or another mechanism such as trusts);
(b) low taxes, sometimes as low as zero for non-residents;
(c) easy regulations permitting the creation of front companies and no necessity for these companies to have a real activity on the territory;
(d) lack of cooperation with the inland revenue, customs and/or judicial departments of other countries;
(e) weak or non-existent financial regulation. Switzerland, the City of London and Luxembourg receive the majority of the capital placed in tax havens. Others exist, of course, such as the Cayman Islands, the Channel Islands, Hong Kong and other exotic locations.
, the government has authorised Spanish firms to invest after July in Luxembourg-based managed funds so as to pay only a derisory subscription tax (in lieu of company tax), of the order of 0.01% [2].

Faced with the markets, the Zapatero government has abdicated and sees no way out of the capitalist crisis other than to embrace the neoliberal dogma. “These measures are painful but indispensible”, declared Elena Salgrado, Minister for Economy and Finance, before a Parliament in turmoil but for once well attended. The European Commission has also expressed its satisfaction with these austerity measures that it judges ‘necessary’ and going ‘in the right direction’ [3]. Likewise, Angel Gurria, OECD OECD
Organisation for Economic Co-operation and Development
OECD: the Organisation for Economic Co-operation and Development, created in 1960. It includes the major industrialized countries and has 34 members as of January 2016.

http://www.oecd.org/about/membersandpartners/
Secretary-General, supports the Spanish program. “What Spain has done in the last couple of weeks proves that there is a political will in Spain” [4], a will that the OECD does not seem to disapprove of, on the contrary!

The rating agencies Rating agency
Rating agencies
Rating agencies, or credit-rating agencies, evaluate creditworthiness. This includes the creditworthiness of corporations, nonprofit organizations and governments, as well as ‘securitized assets’ – which are assets that are bundled together and sold, to investors, as security. Rating agencies assign a letter grade to each bond, which represents an opinion as to the likelihood that the organization will be able to repay both the principal and interest as they become due. Ratings are made on a descending scale: AAA is the highest, then AA, A, BBB, BB, B, etc. A rating of BB or below is considered a ‘junk bond’ because it is likely to default. Many factors go into the assignment of ratings, including the profitability of the organization and its total indebtedness. The three largest credit rating agencies are Moody’s, Standard & Poor’s and Fitch Ratings (FT).

Moody’s : https://www.fitchratings.com/
, guard dogs of neoliberalism

One month after Standard & Poor’s had downgraded Spain’s credit rating on April 28 (from AA+ to AA), Fitch followed suit and brought down its rating of Spanish debt a notch (to AA+). In effect, if public sector debt at 53% of GDP is lower than that of numerous eurozone countries, the private sector debt at 178% of GDP according to Standard & Poor’s is cause for anxiety. In addition, judging insufficient the austerity measures barely approved by Parliament, Fitch sends a strong signal demanding more labour market flexibility. “Fitch cited the inflexibility of the labor market and the cost of restructuring Spain’s network of unlisted savings banks as hurdles to recovery” [5]. In the same vein, the IMF hopes to see the reform implemented and its Managing Director, Dominique Strauss-Kahn, in an interview published May 31 in the Spanish daily ABC, declared: “The measures taken by the government are strong and should permit a return to confidence in the future. The main thing is to know how these measures will be implemented, above all those relating to the labour market”.

These warnings have been heard and Mr. Zapatero canceled his trip to Brazil while pressing the ‘social partners’ (employer and employee representatives) for a rapid agreement on labour market reform which provides, amongst other things, for the reduction in redundancy payouts, giving at the same time the opportunity for management to implement redundancies cheaply.

After having adopted the reform, Zapatero must submit it to Strauss-Kahn at the IMF who demands a change in the Spanish labour market that is ‘radical, ambitious and profound’ [6]. Such reform is evidently of interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. to the World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

since it classifies countries according to their business climate to assist businesses in choosing the best place to make maximum profits on the worker’s back [7].

And France?

Moreover, Fitch looks favourably on developments in retirement policy reform in France which proposes the postponement of the official retirement age from 60 to 62 or 63, and the objective of a 10% reduction in government expenditures over the period 2011-13. Maria Malas-Mroueh, associate director in Fitch Ratings’ Sovereign Group, announced that “Although downside risks to France’s fiscal consolidation plans still exist, Fitch senses a notable shift in the government’s attitude toward the importance and urgency of fiscal consolidation” [8]. France thus retains its ‘AAA’ rating. Of course, if the retirement reform turns out to fail because of social mobilisation, one could expect a downgrading of France’s credit rating and, as a result, an increase in ‘sovereign risk’ of debt-holders. The reforms to the capitalist system foreshadowed at the peak of the crisis are moved to the distant future and it is the victims of this crisis who, yet again, pay the price.


José-Luis Zapatero, Herman van Rompuy and José Manuel Durão Barroso.

No alternatives?

Some ready alternatives exist, money is not lacking and if they have not been chosen, it is clearly the sign of political intent. In the first place, the deployment of an independent audit during which a moratorium would suspend debt repayment. This process could allow the repudiation of illegal debts and would free up capital currently dedicated to the service of debt. Moreover, a tax on high income assets could liberate substantial capital that could be utilised for the disadvantaged. In Spain, some economists contacted by the daily Público have outlined some other possible options [9]:

- Instead of freezing retirement pensions in 2011, the state should recover the €1.5 billion budgeted in withdrawing troops from Afghanistan, Lebanon and Somalia (€750 million savings) and in eliminating investment in research and development on military-based industry earmarked for 2010 (€950 million). If one adds the €1.4 billion earmarked for military spending for 2010, one arrives at €3.1 billion in savings. Recall that the military budget exceeds €18 billion for 2010 [10]., or €50 million a day, that is to say, five times the budget for education and science.

- If one does away with the salaries of religious studies instructors in public institutions (€650 million per year) in harmony with the principle of a secular state, one should be able to safeguard the €600 million of development aid.

- Another idea advanced to recover €785 million in two years is to proportion the contents of medicaments to the standard length of treatment and to stimulate single dose medicaments.

- Otherwise, a possible track which doesn’t figure in the alternative suggestions by the economists cited in Público would be to leave the IMF and recover some €9.63 million recently paid into the IMF’s Poverty Reduction and Growth Facility.

Finally, some €600,000 (figure put out by the Catalonia police union) allocated to provide security for the meeting of the very secret Bilderberg Group at Sitges in a hotel transformed into a bunker for the occasion in June 2010 could be better employed to serve taxpayers’ interests. The bankers, businesspeople, personnel of NATO NATO
North Atlantic Treaty Organization
NATO ensures US military protection for the Europeans in case of aggression, but above all it gives the USA supremacy over the Western Bloc. Western European countries agreed to place their armed forces within a defence system under US command, and thus recognize the preponderance of the USA. NATO was founded in 1949 in Washington, but became less prominent after the end of the Cold War. In 2002, it had 19 members: Belgium, Canada, Denmark, France, Iceland, Italy, Luxembourg, the Netherlands, Norway, Portugal, the UK, the USA, to which were added Greece and Turkey in 1952, the Federal Republic of Germany in 1955 (replaced by Unified Germany in 1990), Spain in 1982, Hungary, Poland and the Czech Republic in 1999.
or of the European Commission who participate there are the conductors of a capitalist economy in ruins, but who attempt no matter what to pursue this oppressive endeavour. In this luxury hotel, in front of an audience of multimillionaires and of decision-makers at their service, Mr. Zapatero has outlined a defence of his economic policies that are supposed to reconcile Spaniards with the economic growth on the false belief that it will trickle down to the lower classes. History is teeming with examples contrary to this theory [11].

Translated by Evan Jones and Delphine Rabet



Footnotes

[1Gross Domestic Product (GDP) is among other things challenged as a supposed measurement of economic wellbeing. It doesn’t measure women’s work in the home nor informal work and does not take account of ecological degradation caused by this economic ‘growth’. Thus the GDP indicator includes the effect of a tsunami or of a road accident as a positive contribution to growth because of the transactions that they induce

[3“Our first impression is that the measures are going in the right direction, that the supplementary efforts regarding budget consolidation were necessary and, in this sense, there is of course satisfaction that they should be ratified”, Amadeu Altafaj, spokesperson for the EU’s Economic and Monetary Affairs Commissioner.

[5Fitch downgraded Spain because of its poor prospects for growth, AFP, 28 May 2010. The regional savings banks greatly affected by the housing crisis are being pressed into urgent merger talks.

[7See the World Bank’s report Doing Business.

[10This figure is separate from the budget allocated to the police forces

[11Trickle down’ theory is based on the proposition that strong economic growth automatically benefits the less privileged sectors of the population.

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Jérôme Duval

member of CADTM network and member of the Spanish Citizen’s Debt Audit Platform (PACD) in Spain (http://auditoriaciudadana.net/). He is the author, with Fátima Martín, of the book Construcción europea al servicio de los mercados financieros (Icaria editorial, Barcelona 2016) and he also co-authored La Dette ou la Vie (Aden-CADTM, 2011), which received the award for best political book in Liège (Belgium) in 2011.

Translation(s)

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