“In essence, the Eurozone has proved to be a clumsy experiment in monetary-fiscal schizophrenia that has undermined democratic control“
“The pandemic and its economic aftermath will expose in all its harshness the loss of democratic sovereignty and response capacity of our State”
“A central bank of our own, an ambitious development plan, and the determination to carry it out would be enough to make Spain one of the most prosperous countries”
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.
Manolo Monereo is a political scientist and was a deputy of Unidos Podemos (UP) for Córdoba
Originally posted in Spanish at Cuartopoder
Translated and Edited by BRAVE NEW EUROPE
Monetary policy cannot be separated from fiscal policy. When it is attempted, the motivations are often not naive and the consequences can be disastrous. This monetary-fiscal schizophrenia is often a ploy to limit the power of the state by subjecting it to undemocratic constraints.
Money is an integral element of power relations within a state but also in the hierarchy of states. The design of the mechanisms for creating and destroying currency has an effect on access to it and, therefore, on its distribution in society.
In the capitalist state, banks, often private, are licensed to operate another monetary circuit that leverages state money. This begins with the granting of credit, which implies the creation of deposits or bank money in the same act, and ends with the repayment of the loans. This mechanism gives an immense power to the capitalist class because it allows it to decide which resources are mobilized and which economic activities are carried out. But at the same time, the capitalist financial system generates instability because it creates speculative cycles followed by prolonged periods of depression. The capitalist state establishes privileged groups with better access to currency to facilitate the process of accumulation.
The State, with its monetary sovereignty, can compensate for the instability of the financial system with strict banking supervision and by acting counter-cyclically thanks to its unlimited money issuing capacity which allows it to foot the bill when a bubble bursts. As Warren Mosler says, there is no financial crisis deep enough that cannot be solved by a large enough deficit. Without the support of the monetary and fiscal institutions of the capitalist state, the banking money circuit would be much more unstable and perhaps unworkable. Breaking up the monetary-fiscal circuit serves to weaken democratic control over the financial system and accentuate financial instability.
Only those who ignore this dual nature of our monetary and fiscal system could have designed the European monetary union. In essence, the Eurozone has proved to be an extremely clumsy experiment in monetary-fiscal schizophrenia that has undermined democratic control and rendered us incapable of responding to financial and economic crises. We need only look at the African continent where the oldest monetary union, that of the CFA franc, has subjugated the former French colonies, condemning their people to seek a future in Europe risking injury at the Ceuta and Melilla concertina wire fences or drowning in the Mediterranean before they make it there.
The covid-19 pandemic and its economic aftermath will expose in all its harshness the loss of democratic sovereignty and response capacity of our nations. The euro will make us more like those failed states anchored in underdevelopment and less like those northern European states we longed to be.
The global pandemic has been like a slap in the face for all of society. We shall all remember the experience of living under lockdown for two months; the loss of loved ones; or the trauma of losing jobs and businesses. The pandemic leaves us a grim legacy economically. As in the myth of Sisyphus, just when we thought we would be able to overcome the unemployment rate before the 2008 crisis, the stone has rolled back to the bottom of the hill. We will have to start pushing the stone with an unemployment rate that will easily go over 20%. In Spain it is probable that one out of every three persons of working age today is unemployed.
The pandemic has reinfected the poorly healed wound left by the 2008 crisis. It is true that other countries are going to experience a major recession that may turn into a great depression. But few will be as hard hit as the large economies of Southern Europe. The three southern peninsulas have become the sick men of Europe. Since the previous economic crisis, their economic growth has had little lustre. Policies of austerity and internal devaluation have eroded their social cohesion, weakened the capacity of their states to act, and blinded any route of industrial or economic development other than the mere repetition of old tropes of an obsolete economic fabric, producing diminishing added value. High rates of unemployment and emigration are the prices that young people, in particular, are paying.
We are not victims of any biblical plague or genetic disorder. We have simply joined a dysfunctional monetary union. Our sin was to give up our central banks and our currency. We thus compromised the ability to control the financial system as we lacked the issuer that could have rescued our banks during the global financial crisis. In the wake of the pandemic, we will again see how the lack of monetary sovereignty makes us powerless to provide an adequate response.
The crisis is thus structural and is best understood as part of a long-term process of concentration of economic power in Northern Europe. We are doomed to become an increasingly irrelevant periphery. The pandemic is only one factor accelerating this irreversible process of decline.
Our elites, feeble and subservient to the European hegemon, feel unable to find within themselves the solutions to galvanise a response. The European institutional framework is a straitjacket that offers no alternatives. Article 135 of the Spanish Constitution requires our public accounts to meet a structural deficit fiscal balance equivalent to 0.40% of GDP. It is a bizarre legal requirement that subjects an accounting balance of public accounts to an imaginary figure because that structural deficit corresponds to what our economy would theoretically have in a situation of full employment. The problem is that, in order to calculate this structural deficit, another equally incomprehensible concept, called the natural’ unemployment rate, is used. The Byzantine design of European fiscal rules has exchanged real objectives for imaginary ones: the aim is no longer full employment or economic development but to balance the books. This year the European authorities will allow a short walk in the prison yard but we will soon have to return to the cell.
Our Prime Minister, Pedro Sánchez, and his ministers cannot ignore that their electoral success depends on good management of the post-pandemic crisis. They also know that they need more funds to manage the social security shields and reconstruction programmes that would prevent the ruin of our nation. But without monetary sovereignty we cannot create them, we have to get them from some external source and that reduces us to the position of the beggar. One option is to appease the “god of the market ” but it will be impossible to present “sound” accounts that would make our public debt issues attractive. Hence the interest in resurrecting Eurobonds, recently renamed ‘coronabonds’, which consist of mutualised debt issuances of Southern countries, perceived as less solvent, and the debt of the countries of the North with sounder public accounts. The countries of the North have refused to please Conte and Sánchez. It seems even more unlikely that such a proposal will succeed if we take into account the recent ruling of the German Constitutional Court on debt purchase operations by the European central bank system. The North wants our markets but does not want to create redistributive mechanisms that would make the trade imbalance sustainable.
The northern nations, which are less affected by Covid-19, have offered us a pittance: loans from the European Stability Mechanism (ESM). It should be made clear that all the countries of the Eurozone contribute to the funds lent out, including Italy and Spain, according to a distribution key. The fund that will be dedicated to covering healthcare spending amounts to EUR 240 billion, to which Spain contributes in proportion to the weighting of its GDP within the euro area. It is estimated that it could request up to the equivalent of 2% of its GDP or some 24 billion euros. Bearing in mind that we provide 11.9% of the funds, I cannot see where the deal is for Spain, especially if we take into account the conditionality that will be imposed in the future.
It is true that we have been told that there would be no conditionality this year, but let us not forget that a memorandum of understanding will have to be signed with foreign powers. It is likely that the Spanish Government will accept this rescue offer which will undermine our sovereignty to the detriment of Parliament, which should be the only body in which our public spending limits are agreed. Let us remember that, in the event that conditions had to be renegotiated with the creditors of the Spanish public debt, the ESM could surrogate the Spanish Government before the creditors. In any case, this instrument does not begin to cover the financial needs of a genuine economic reconstruction plan.
The most convenient option, within the framework of the Eurozone, would be to resort to the facility offered this year by the European Central Bank (ECB), which has announced that it would buy up to EUR 750 billion of public debt securities. This programme would allow Spanish public debt issues to be placed in the primary market without much difficulty, since operators would know that the following day the ECB would be prepared to buy a large part of it.
However, our democracy is also put on hold if we accept this offer. In essence, we are told that our levels of public spending and debt may be higher or lower depending on the opinion or mood of those in charge of the Eurozone issure, an entity independent of the States. This is not a trivial issue. Last week the Constitutional Court in Germany, in a ruling on the ECB’s powers initiated by German Conservatives, required the ECB to justify its asset purchase programme. The German Constitutional Court considers that the answer that it received two years ago by the European Court of Justice (ECJ) was not clear and has therefore challenged the ECB directly. They have also ordered the Bundesbank to unwind its positions in public debt securities acquired under the ECB’s asset purchase programmes. These are over 500 billion euros whose sudden exit to the market would raise yield spreads and disrupt the debt markets. The case highlights the subordinate position of countries such as Spain. The conflicts of competence that are being settled between the ECJ and the German court expose us to a financial crisis that threatens the viability of our rescue plans.
Coming out of the post-pandemic crisis will require mobilising all those resources that the private sector, at this moment, is unwilling or unable to mobilise. When the pandemic ends, there will surely be more than 5 million unemployed. Undoubtedly, the State could mobilize a portion of them with projects that would allow us a rapid return to normalcy. It could also generate the predictable demand required by the private sector by inviting it to participate in projects aimed at achieving a transformation of our energy and production model. To do this, it is enough to create money, something that can be done with a computer. The problem is that the Spanish Government does not have the keyboard.
The three solutions to the challenge of financing a reconstruction plan – coronabonds, EAM, the ECB’s pandemic emergency purchase programme – require the approval of bodies that are not subject to the democratic sovereignty of the Spanish people. All of them require the approval of the financial markets, of foreign powers, or of a body governed by supposedly independent technocrats.
All it would take is a central bank of our own, an ambitious development plan, and the determination to carry it out to make Spain one of the most prosperous countries on the planet. But such audacity is not in the plans of our government or the political parties.
Decades ago, the elites of this country decided to renounce governing us and preferred to hand over sovereignty to others. It was convenient for them to dismantle the public business sector and begin a process of ‘modernisation’, the euphemism for a set of structural reforms that liberalise markets and suppress workers’ rights. The European project served as a goal and justification for what the elites wanted for this country. That meant submitting our economic policy to the will of higher powers and settling for accepting a subordinate role in Europe, integrating our companies into European value chains at intermediate or lower levels. The loss of sovereignty was compounded by the surrender of our currency and the renunciation of a central bank of our own, and was disguised by the election of Members of a European Parliament that acts merely as a sanction for decisions taken by the hegemonic States.
Spanish society has paid a very high price in terms of welfare, professional opportunities, and economic development. The European institutions do not govern for the benefit of the Spanish people but for the interests of the capitalist oligarchies. The first great recession of this century, with the turn to austerity imposed in 2010 from Brussels, Frankfurt, Paris, and Berlin, should have made this reality abundantly clear.
The Spanish elites have become the farm managers of the Germanic estate called Spain. They are not capable of conceiving any solution that does not come from their hierarchical superiors. For Spanish politicians, the solutions to our problems can only come from a foreign power. The pleading attitude, the appeals to solidarity between countries that share a European project, ended with the humiliating comments of the Dutch whose Prime Minister prefers to please a people in search of a scapegoat for the damage caused by neoliberalism.
The German court has shown that Germany is capable of pressing the trigger for the dissolution of the euro if it is in the interests of its elites. A battle is being waged in Germany between ultra-conservatives who are hostile to the euro, with erroneous beliefs about the role of monetary policy and archaic myths about saving, and exporting oligarchs, who know that their commercial success depends on continuing to exploit the markets of the South for which they need the common currency. The battle will undoubtedly be won by he latter, for now, and the common currency will last as long as these markets can be further exploited. But what the German elites will never allow is the development of a competitor in the South.
The Red MMT Association of Spain has issued a Manifesto with five proposals that would be effective in getting us out of the morass of tax rules. Implementing them requires an exercise of sovereignty. All that is missing is the will to stand up for the Spanish people and, above all, that her leaders do likewise.