May 30, 2012
The Guardian Unlimited, May 30, 2012
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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.