Spain is undoubtedly the EU nation that will be hardest hit economically by the Covid-19 due to its dependence on sectors such as tourism and the virulence of the pandemic.
Juan Carlos Barba is an Economic journalist at the Spanish newspaper El Confidencial and has a podcast “Economía Directa”, the main
economic podcast in Spanish language.
Juan Laborda teaches Financial Economics at the University of Carlos III and Money and Banking, Syracuse University (Madrid)
Stuart Medina Miltimore is an economist. He is a founder of the Spanish Association Red MMT and has contributed to the dissemination of Modern Money Theory in Spain by publishing two books, La Moneda del Pueblo and El Leviatán desencadenado. Siete propuestas para el pleno empleo y la estabilidad de precios. Veintiuna razones para salir del euro.
All three are members of the Spanish MMT Network
Initially published in Spanish on April 14 2020 on Juan Carlos Barba’s blog Gráfico de la Semana
Translated and edited by BRAVE NEW EUROPE
The Covid-19 pandemic and its economic consequences are serious, it would seem that the Spanish public administrations – state and regional – are making them worse with their haste and nervousness. Spain is undoubtedly the country that economically is going to be hit hardest by the Covid-19, due to its dependence on sectors such as tourism and the virulence of the pandemic. But the result of the government’s action is confusion and anger among the most harmed population: self-employed without business and without aid; unemployed who neither access benefits nor can look for a job; small businessmen who watch in astonishment how their applications for state aid are blocked while their business figures sink.
The Government’s policy could not be otherwise. They are bound by institutional and ideological shackles. First of all, there are the ideological blinkers. In the face of such an exceptional circumstance as the one facing the world economy, in which there has been a drastic and sudden halt in the economy, it is very surprising that those responsible for economic policies are still holding on to a rotten orthodoxy. They are reminiscent of the ‘liquidationist’ policies of the Great Depression of the last century, when leaders refused to use the tools provided by central banks to prevent the collapse of the financial system and maintained the gold standard far beyond reason, causing enormous human suffering. On the other hand, the Spanish rulers are immobilized by the lack of monetary sovereignty.
The nations that enjoy monetary sovereignty show us an alternative path. Last week, the Bank of England announced that it would be prepared to finance the UK Government directly. Unlike Spain, which under the EU Treaties has had to incorporate into its legislation the independence of the central bank and the prohibition on the central bank financing the government, the United Kingdom is able to resort to direct monetary financing.
But the prevailing neo-liberal ideology had made this option taboo. It is now being abandoned, temporarily, and conditionally of course, but it is still the breaking of a precedent. As the United Kingdom assumed that the expenditure of the Coronavirus would be monetized, various media began referring to Zimbabwe, Venezuela or the Weimar Republic. Neither Zimbabwe, Venezuela, nor the Weimar Republic are examples of the full use of monetary sovereignty, and furthermore these are cases of countries that were operating in environments where the productive fabric had been destroyed.
Modern Monetary Theory (MMT) teaches us the fiscal capacity of the currency monopolist.
Understanding the monetary environment is vital. The monetary regime under which a country operates matters. Any country that issues debt only in its own currency and has a floating exchange rate is monetarily sovereign. This means that it cannot be insolvent. This is the case for the United States, Japan, the United Kingdom, Sweden, Switzerland, Denmark, Canada, New Zealand, Iceland… but not for the Eurozone or most emerging markets.
After the break-up of Bretton Woods in 1971, governments that issue their own currencies, under floating exchange rates and sovereign debt in local currency, no longer have to finance their spending, as governments issuing currency can never run out of money. Taxpayers, in a monetarily sovereign state, do not finance anything. Money is a creation of the state, in reality a simple promissory note. Anyone can issue money; the problem is getting it accepted. The ability of the state to impose taxes accomplishes that goal.
An operational description of the monetary system is vital. Understanding that loans create deposits is a much more realistic starting point than the myth that deposits create loans. Similarly, government spending creates reserves in the interbank system and lowers interest rates. There is no reason to fear that an increase in the public deficit could displace the private sector from a limited pool of loanable funds.
Macro accounting shows us that one sector’s debt is another sector’s asset. Therefore, government debt is the asset of the private sector. Understanding how one sector relates to another using a sectoral balance framework is very useful. Private debt matters even in a monetarily sovereign state. The private sector cannot issue money to pay its debts. As such, it has the potential to create systemic vulnerability. That is why the private sector should not be the one to lead the response to the crisis caused by the pandemic. Their balance sheets have been damaged and, however much collateral and how many guarantees European nations provide, they will hardly be able to lead the recovery.
On the other hand, for the currency monopolist, the limits facing its budget are real: resources and ecology. If any sector of the economy pushes it beyond the limits of that real capacity, then inflation will occur. Inflation is not a monetary phenomenon. The limits that matter are real – people, machines, factories – not ‘financing’ restrictions.
Ministers like Nadia Calviño (Spanish Minister of Economy and Business) and María Jesús Montero (Spanish Minister of Finance) continue to be anchored in a dying paradigm, obsessed with maintaining budgetary balances. Perhaps they recognize that they are in a prison that the abandonment of our monetary sovereignty led to. But even within the prison of the euro, the fear of inflation, in circumstances like the present, seems a bad joke. Demand is collapsing on top of previous deflationary and structural pressures caused by a combination of austerity, globalisation, and demographics.
Now is the time to shore up that demand with massive recourse to the central bank to sustain the incomes, both of workers and of companies, that have vanished due to the paralysis of economic activity that has resulted from the implementation of the necessary measures to prevent the uncontrolled expansion of the epidemic. This is clearly necessary to avoid a humanitarian catastrophe.
It is obvious to anyone with minimal democratic values that, faced with a collective problem such as the one we are confronted with, we cannot leave part of the population in the lurch, such as the hundreds of thousands of workers, especially young and temporary ones, who are going to find themselves without income of any kind after the lockdown is lifted. This also applies to self-employed workers who have already seen the total or partial loss of their income.
Less obvious for many people is the need to sustain business income, especially with regard to the fragile fabric of small businesses that are responsible for most of our country’s employment and production. We must be aware that not only is it unfair that hundreds of thousands of these small entrepreneurs are seeing their incomes completely or partially disappear because of a collective problem, but that, even worse, a good proportion of these businesses will not be able to survive, because of the aforementioned fragility. This situation will result in general impoverishment of our society, an increase in unemployment, and consequently a new and more serious drop in demand.
The government should forget about deficit limits and spending rules, and pay an unconditional income to each household by transfer, without questions, without the need to provide documentation. This amount would be added to the personal income tax payable and returned in 2021, except for those households that do not reach a taxable income threshold. Operationally, it could be implemented very simply by opening an electronic account for each citizen and each company at the Bank of Spain, accounts into which the corresponding income differentials would be entered. We must be aware that if this is not done, it is simply for ideological reasons.
This would mean an immediate injection of liquidity that could be accompanied by a reduction in the personal income tax withholding rates applicable to the salaries of the months remaining to be paid this year. The aim is to prevent income from collapsing.
After the pandemic, the government will have to focus on rebuilding our economy. As a matter of urgency, it would have to put in place a guaranteed work plan that would put to work all those people who have not found a job and want one. These people who are willing to work and produce could initially engage in all sorts of tasks necessary to get back to normal: dismantling field hospitals; reopening schools and universities; supporting our public health system; supporting and comforting those most affected by the epidemic; mobilizing actors, singers, artists who were out of work during the pandemic to provide entertainment to a population traumatized by more than two months of confinement; and so on. This programme should remain a permanent legacy of the management of the pandemic as a powerful counter-cyclical tool.
The Spanish Government clutched to the illusion of European solidarity. But it is in tatters. With the complicity of the Italians they thought it would be possible to convince northern Europeans to accept the worn out demand for the mutualisation of public debt this time. But this weekend Nadia Calviño returned from the Ecofin meeting without Coronabonds and in return received a small bailout of 25 billion euros from the European Stability Mechanism to cover health expenses and guarantee and loan lines that are not adequate to deal with the magnitude of the impending disaster. The hand that gives is always above the hand that receives. Only the lack of self-esteem – well built up from the elites – of the Spanish people explains why a wave of anger and indignation does not erupt on the balconies.
In a recent opinion piece published in El País, the president of the government called for a Marshall Plan for the economies of the Eurozone. The term suggests a complex of subordination of our elites to the European ones. Our rulers believe that the solution to our problems lies in the handouts from Northern Europe when they only have to look back to see that there are more than five million Spaniards willing to be mobilized and work to build a better country. These are inexhaustible resources to tackle a powerful industrial policy promoted by a public investment bank. Neither the ESM, nor Coronabonds are the solutions. What we need is a central bank to finance a development plan.
A Green New Deal, a green economic package that would transform our economy, could mobilize this almost inexhaustible resource. The creation of hundreds of thousands of new jobs linked to the transformation of the energy sector; the improvement of the quality and sustainability of the housing stock, especially public housing; the improvement of our railway system to reduce the use of road transport; the recovery of degraded natural landscapes; the protection of environments threatened by climate change; or ensuring a sustainable water system are just some of the many tasks that could improve our quality of life and ensure our future as a species on Earth.
It is a much better plan than Ursula von der Leyen’s Green Deal (without the adjective New) which only proposes the closing-down certain activities and the permanent erosion of the standard of living of the popular classes with taxes that make their access to energy and transport more expensive while entrusting leadership to the private initiative with lines of guarantees and endorsements.
Modern Monetary Theory teaches us the fiscal capacity of the State when it fully exercises its monetary sovereignty. Only countries with monetary sovereignty, floating exchange rates and sovereign debt issuance in local currency can fully exploit their fiscal capacity. Perhaps this is also the occasion to claim it.
We leave you with a spectacular graph in which we can see the size of the Central Bank of Japan’s (BoJ) balance sheet as a percentage of GDP in relation to the ECB, the Federal Reserve and the Bank of England. Japan has taught us that it can be done, that there are no negative consequences, but quite the opposite and that if it is not done it is for purely ideological reasons. The ECB, according to this, could expand its balance sheet by almost 8 trillion euros without exceeding the BoJ’s levels, which would give more than enough to finance a true Green New Deal for Europe.
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