July 09, 2010
The Guardian Unlimited, July 9, 2010
One thing should be made clear about the situation in the Eurozone economies that is not clear at all if we rely on most of the news reports. This is not a situation where countries face a “dilemma” because they have overspent and piled up too much public debt. They do not face “tough choices” that will force them to cut spending and raise taxes while the economy is weak or in recession, in order to “satisfy financial markets.”
What is really going on is that powerful interests within these countries – including Spain, Greece, Ireland and Portugal – are taking advantage of the situation to make the changes that they want. Perhaps even more importantly the European authorities – including the European Commission, the European Central Bank and the IMF – who are holding the purse strings of any bailout funds are even more committed than the national governments to right-wing policy changes. And they are further removed from any accountability to any electorate.
In “Thirteen Bankers,” by Simon Johnson (former chief economist at the IMF) and James Kwak, the authors describe the emerging market crises of the 1990s and note that Washington used them to promote changes that it wanted: “when an existing economic elite has led a country into a deep crisis, it is time for a change. And the crisis itself presents a unique, but short-lived opportunity for change.” Naomi Klein (“The Shock Doctrine”) provides an excellent history of how crises have been used to introduce or consolidate regressive and unpopular economic “reforms.”
This is what is happening in the Eurozone economies right now; although the “crisis” is considerably exaggerated in most of them. Spain is a good example. The story that Spain got into a mess because of government overspending is not supported by the data. Spain reduced its gross debt-to-GDP ratio sharply as the economy grew from 2000-2007, from 59 to 36 percent of GDP, and was running budget surpluses in the three years prior to the 2008 crash. The crash was triggered by the collapse of a large housing bubble in Spain, as well as the bursting of a big stock market bubble: The value of stocks plunged from 125 percent of GDP in November 2007 to 54 percent of GDP a year later. The collapse of each of these bubbles had a huge impact in reducing private spending. The world recession added more external shocks to the Spanish economy.
Spain now has just 61 billion euros of debt coming due this year; the European authorities could cover this very easily if they wanted to avoid the potential for rising interest rates on Spain’s debt. Without a sharp rise in interest rates, Spain’s debt is quite manageable, since they started with a net debt of just 45.8 percent of GDP in 2009, and interest payments of just 1.8 percent of GDP. (Most news reports use the country’s gross debt, but net debt is a better measure. The gross debt includes debt that is held by the government itself, so the interest payments on this debt accrue to the government and therefore do not add to the country’s debt burden.)
Of course, Spain is running a large central government budget deficit of about 9 percent of GDP this year, and this cannot go on indefinitely. But it won’t. The deficit will mostly shrink through the reverse process of how it got there: As the economy grows, tax revenues will rise, spending on “automatic stabilizers” such as unemployment compensation will decrease, and the debt will fall relative to the economy, which is what matters. It makes no sense to cut spending and raise taxes now, while the economy is still very weak, inflation is negative, and there is serious risk of lapsing back into recession.
Unless the goal is to reduce wages and benefits in the public sector, weaken labor, re-distribute income upward and reduce the size of government, then there is no time like the present to push these things through. We have a similar, although not yet as severe political problem, in the United States: Deficit hawks are mounting a campaign to cut Social Security, even though it can make all promised payments for the next 33 years.
Ironically, the people who want to take advantage of the “crisis” in Spain are actually increasing the risk of more serious debt problems, since the debt burden will rise if the economy lapses into recession or years of stagnation because of their fiscal tightening measures. But they are willing to take these risks in order to accomplish their political objectives.