The Spanish Social Democrats and the leftist party Podemos are struggling to agree to a coalition. Juan Laborda on what Spain needs.
Juan Laborda teaches Financial Economics at the University of Carlos III and Money and Banking, Syracuse University (Madrid)
Originally published in Spanish at vozpopuli
It is unheard of that at this point in time there is still no sign of the formation of a new government, obviously around Pedro Sánchez, leader of the Spanish Social Democrats (PSOE) who won the most votes, but far from a majority, in the Spanish general election at the end of April this year. The problems that are daily plaguing Spain are serious enough for the political class to roll up its sleeves and start doing something for its citizenry, which is completely fed up. The formation of the new government currently depends on a programmatic agreement between the PSOE and Podemos, which undoubtedly will not to the liking of all those who wish to maintain the current status quo, and who try to promote a rapprochement between the PSOE and the rightist, radical neo-liberal Ciudadanos party. There is something however that every democrat should not overlook, the pressures of certain interest groups – former national monopolies and the financial sector – aided by the mainstream media that knows only too well who butters its bread.
But to my surprise the negotiations between PSOE and Podemos, or at least what is leaked to the national media, are revolving around insubstantial aspects. The PSOE is back in best sooial democratic form, showing once again its neo-liberal soul, that which it hides in electoral campaigns and which it always promises to change. Podemos apparently is more concerned about minister posts than about a disruptive programmatic agreement to improve the economic and social conditions of our nation. Precious time is being wasted in a unique environment, where that which is socially just, is also economically undoubtedly more efficient. The urgent goal is to reach an ambitious programmatic agreement, because what is agreed now will affect Spain for the next two decades. But let us analyse this step by step.
First, PSOE and Podemos must accept the obvious: Neoliberalism has failed.
The agreement between PSOE and Podemos must first address the failure of the economic consensus that has governed Spain’s economy since the early 1980s. Some time ago I introduced in an article the analysis of the chief strategist of one of the best fund managers in the world, GMO, the radical and extraordinary James Montier, working in collaboration with Philip Pilkington of Kingston University, both postkeynesians. They wrote two fundamental works, key to understanding what is currently happening from a different perspective. On the one hand, “Six Impossible Things Before Breakfast” and, on the other and most importantly, “The Deep Causes of Secular Stagnation and the Rise of Populism”.
Montier and Pilkington consider that we are confronted with a broken system of economic governance called “neoliberalism”, which emerged in the mid-1970s and was characterized by four significant economic policies based on false hypotheses, all of which have since collapsed. Full employment was abandoned as a desirable policy objective, and replaced by inflation targets. It promoted an increase in the globalisation of flows of people, capital, and trade that has ended up destroying the labour sector, and favouring the accumulation of income and wealth in very few hands. The entrepreneurial approach was based on maximizing shareholder value, rather than reinvestment and economic growth. And, finally, the labour sector was treated as if it were simply another good, which is false, with the ultimate aim of making it cheaper and impoverishing the majority of the population, seeking flexible labour markets with the disruption of trade unions and workers.
The policies followed under the neoliberal paradigm have led to the observed “stylized facts” of the current secular stagnation. The neoliberal regime has led to lower rates of economic growth; falls in rates of tangible and intangible capital investment; lower productivity growth; increased inequality of income and wealth; reduced job security; and serious deflation. In addition, the world economy is temporarily “obstructed” by high levels of debt, should the prices of the collateral that feeds it collapse. These are long-term trends, which have been visible for decades, but were severely exacerbated by the collapse of the global debt bubble in 2008-2009.
As Montier and Pilkington make explicit, neoliberalism is a project that has been a disaster, which could not be worse for politics or the economy. The policies they prescribe are deeply unpopular and dysfunctional. Citizens are reeling as they lose their jobs, as their stability disappears – resulting in fear and discipline – and their incomes vanish, while the economy leans towards instability and stagnation. It is a project that benefits a few at the expense of the majority. This is reflected in a pampered class of high-income individuals, with the invaluable help of certain technocrats who support through economic theories those policies that drive the economy into chaos. Such theories are simply not corroborated by reality.
Second, PSOE and Podemos must understand where the Spanish economy is now
The Spanish productive model is based on labour-intensive activities – tourism, bubbles, income extraction, low value-added services…. The Ibex 35 companies (the benchmark stock market index of Spain) generates very little added value. But, in addition, surprisingly, it coexists with an extraordinary Spanish manufacturing sector, whose exports have not stopped growing since 1994 – which, faced with the inaction of our governments, begins to be assaulted by foreign capital. As a consequence, investment, personnel and salary decisions are beginning to be fixed beyond our borders. This productive model generated a massive indebtedness, initially private, in the middle of a real estate bubble. After the bursting of the real estate bubble, as the banking sector was not restructured at the expense of foreign creditors with the correspondent hair cut in private debt, Spain entered a systemic crisis of private debt, that is a balance-sheet recession. The obvious counterpart was greater sovereign indebtedness – some economists and the chattering classes still do not understand the sectoral balances. First private debt grew rapidly (in 2008 of Spain’s 4 trillion euros of debt, 3.5 trillion were private), but are now mixed (2.5 trillion of private debt and 1.5 trillion of sovereign debt).
But, what a surprise, in a global economy in deceleration, a European Union almost in recession, the Spanish GDP presents an enormous resistance to decline. The keys are budgetary loosening; the role of the European Central Bank in applying some of the principles of Modern Monetary Theory; and wage increases, which are not affecting the productivity of companies. The labour reform implemented by Rajoy’s (the former prime minister during the previous government of the conservative Peoples Party) only served to modify the distribution of the pie in favour of the capital sector, without this even translating into an improvement in the country’s productivity. The internal devaluation was used by the aggregate of the companies not to improve their theoretical price-competitiveness, but to increase their unit profit margin (what we post-keynesians define as mark-up). That is why the rise in the minimum wage does not and will not affect employment. But it is still insufficient for Spanish citizens to solve their basic need (e.g. housing problems). But let us not deceive ourselves, the day the ECB returns to its old ways and re-germanises, we will enter into a deep and systemic recession. On the contrary, if the European governments and the ECB applied the methods of Modern Monetary Theory definitively, we could avoid the coming systemic crisis.
In the following blog I shall explain those minimum policies of the economic and social programme that should be agreed by PSOE and Podemos.