Carlos García Hernández – Kafka-Bonds

It is no secret that the Southern European nations have once again let themselves in for a bad deal with the EU.

Carlos García Hernández is managing director of the publishing house Lola Books

Originally published in Spanish in

Translated and Edited by BRAVE NEW EUROPE

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“But then she seemed to become aware of who she was talking to and asked in amazement what K was doing there, why he hadn’t left a long time ago.” – The Castle, Franz Kafka

One of the main characteristics of Franz Kafka’s stories is the dreamlike atmosphere typical of the nightmares that surround them. On many occasions, the protagonist finds himself entangled in bureaucratic problems that he does not know how to identify, but which he has voluntarily entered and from which he does not know how to get extricate himself, despite the fact that the solution is very simple: to leave. However, the protagonist does not leave, although there is almost always a moment of lucidity when this solution is openly considered, and the plot usually ends in tragedy.

I am convinced that if Franz Kafka had witnessed the economic measures taken by the European Union to deal with the coronavirus crisis it would have provided him with material for a masterpiece of horror literature.

When the 3% public deficit limit imposed by the Stability and Growth Pact (SGP) was suspended on 20 March 2020, an opportunity opened up to the Spanish government to incur all the necessary deficit spending to tackle the current crisis. This is the recipe that all countries apply whenever they have been faced with exceptionally serious situations such as a pandemic or a war. The United States, for example, had a deficit of 26.9% of GDP in 1943 to meet the costs of the Second World War. A similar level of deficit would be appropriate at this time, as the coronavirus crisis will lead to economic damage comparable to that of a war. That is why Pedro Sánchez, President of the Spanish Government, called for the implementation of a European Marshall Plan.

However, both the Spanish Government and the other governments of southern Europe missed this opportunity. Instead they engaged in a Kafkaesque fight against the governments of northern Europe, and the situation led to a confrontation that the Spanish economist Stuart Medina described in his book El Leviatán desencadado as PIIGS versus HÖGS (Portugal, Italy, Ireland, Greece, Spain vs Holland, Österreich, Germany, Suomi).

The reason for the dispute was southern Europe’s efforts to secure the issuance of Coronabonds, also known as Eurobonds, as well as unconditional access to funds from the European Stability Mechanism (ESM).

The scene was set for the Kafkaesque narrative that is the European Union.

The obvious and correct solution, deficit spending by the countries of southern Europe, has been dismissed. Exceeding the 3% deficit limit will happen anyway, but the main reasons will be the collapse of tax revenues due to the recession and the increase in public spending brought about by automatic stabilizers such as the payment of unemployment benefits. The absurd spending rules imposed by the EU make deficit spending very unattractive in the eyes of southern European governments, firstly because everything indicates that the 3% deficit limit, as well as debt limitations, will be reinstated immediately after the pandemic is over and secondly because the EU’s spending rules make it difficult to incur large deficits, as Article 123 of the Treaty on the Functioning of the European Union states

“Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as “national central banks”) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.”

This article, the epitome of neoliberalism in its purest form, prevents central banks from doing the job they were created to do, namely to finance governments. Until 1992, when this article came into force, the governments of the current Euro Zone had an account at their respective central banks corresponding to the public treasuries through which they spent. This spending was done in the national currency and without concern for overdrafts, since national central banks allowed such overdrafts in the event that they did not have sufficient funds in the Treasury account. This is called overt monetary financing. In this way, monetary sovereignty made it impossible for countries to become insolvent in their own currency, as any debt incurred in national currency was always repayable. The euro made the Eurozone states potentially insolvent, hence the problems with the risk premium of a few years ago. Moreover, in order to be able to spend now, states are forced to issue debt that must be bought by private banks. Central banks are deprived of their ability to create money and this ability is granted exclusively to private banks. The difference is that the money created by the private banks is accompanied by debt in the form of interest rates that governments have to pay back to the private banks. The ban on overt monetary financing is therefore merely a mechanism for private banks to profit from public spending. Moreover, and this is currently a major problem for governments in southern Europe, debt securities issued by governments are not easily sold to private banks, as the latter require increasingly higher risk premiums when they perceive that the probability of default by governments increases. For these reasons, spending via government deficits is greatly hampered.

To avoid these problems arising from the European Union’s neoliberal mechanisms, the PIIGS governments chose to defend the Kafkaesque solution, i.e. the issuance by the European Central Bank (ECB) of Corona Bonds, which could well be called Kafka-Bonds, so that the debt incurred by spending for the fight against the coronavirus is mutualised (i.e. shared out) among all EU member states. The HÖGS, of course, were strongly opposed. They were not going to finance the debt that the PIIGS have to incur to fight a pandemic that is killing tens of thousands of people. So the nightmare of this story had to take yet another dramatic turn, and that is how the ESM and the triple safety net came into being.

Pedro Sánchez’s proposal to launch a European Marshall Plan was not even discussed because Germany had it taken off the agenda before negotiations even started. However, the final agreement between PIIGS and HÖGS states that: the European Investment Bank will create a guarantee fund for loans to companies of 200 billion euros, the states will be able to access 100 billion euros more in the form of loans to protect jobs, and ESM aid will be granted to states up to a total of 2% of their GDP.

This means that the only effective spending measure is the third, the other two being lines of loan and guarantees to reinforce initiatives that the Spanish Government has already put into practice and which have led the self-employed and small businesses to immerse themselves in extremely complex bureaucratic tangles required to access loans on unreasonable terms. For its part, the third measure, instead of reflecting figures such as those reached in the wars of between 20% and 30% of GDP, provides for aid that will be a maximum of 2% of GDP. This figure is absolutely ridiculous as it is insufficient. However, access to ESM funds will only be unconditional for as long as the health crisis lasts. After that, any use of these funds will entail a debt payment obligation similar to that of the rescue of the Spanish economy by means of ESM funds in 2012. It should be remembered that the 2012 ESM rescue, which we have not yet finished repaying, was the cause of a large part of the cuts in the Spanish health care system, amounting to 100 billion euros. This time the ESM funds will be a maximum of only 24 billion euros, which indicates that for the EU rescuing the financial sector is much more important than saving lives affected by the coronavirus. There is also a fact that makes this story truly shocking because, where do the ESM funds that the PIIGS are going to receive coming from? From the PIIGS themselves. It is true that 26.94% comes from Germany, but 17.78% comes from Italy and 11.82% from Spain. The Netherlands and Austria, the two HÖGS countries that were most opposed to issuing Corona Bonds, only contribute 5.67% and 2.76% respectively.

This means no more and no less than that the aid funds received by southern Europe are going to be absolutely insufficient to avoid recession, and furthermore come from southern Europe itself, and that despite this the PIIGS are going to have to incur debt at very unfavourable conditions in order to use them. However, the Spanish Minister for the Economy, Nadia Calviño, declared that she was excited because this was a great agreement. This nightmare could not produce more Kafkaesque twists.

Now, as we said at the beginning, in Kafka’s stories there is always a flash of lucidity amidst the chaos, and in this story there was also one. That lucidity comes from the United Kingdom. There the government has decided to use overt monetary financing to meet the costs of fighting the coronavirus. This means that the Bank of England will finance the British Treasury through direct money transfers not associated with the issuance of any kind of debt and will also allow all overdrafts in the Treasury account.

This is only one ray of hope, somewhat revised when the British Government declared that the measure is temporary and will be restricted to only those expenses arising from the fight against the coronavirus, but this does not detract from the fact that it is an extraordinarily positive measure, especially compared with the pathetic and decadent pan-germanic neo-liberalism of the dying European Union. Direct monetary funding and the democratic control over public spending that goes with it is a fundamental part of Modern Monetary Theory (MMT). The European Union holds this school of thought in profound contempt, yet Modern Monetary Theory appears to be making inroads in the United Kingdom.

Based on the British flash of lucidity I will end this article by listing the measures that I think the Spanish government should initiate instead of waiting for the economic recession to deepen and for the inevitable next clash with the HÖGS.

Spain should:

– Immediately abandon the euro and the European Union.

– Adopt overt monetary financing on a permanent basis.

– Increase health spending as much as necessary to minimize the number      of deaths from coronavirus.

– Ban redundancies during the coronavirus health crisis.

– Declare a tax holiday for all Spanish companies during the coronavirus crisis so that companies are exempt from paying taxes.

– Pay the salary of all workers in companies that have had to suspend their activities due to the coronavirus up to a maximum of the equivalent of 2,000 euros in the new national currency per month.

– Grant immediate and unconditional aid to self-employed workers and companies with less than 10 workers who have been affected in their activities by the coronavirus, equivalent to 5,000 euros in the new national currency.

These measures would enable the Spanish economy to recover as quickly as possible from the economic crisis generated by the coronavirus. Public deficits would then approach war-like values. In this way, the Kafkaesque story of the pandemic would not end in tragedy.

Euro delendus est.

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