Stuart Medina Miltimore – Spain: Pablo Iglesias Enters into a Faustian Bargain

Podemos has persistently lost political  ground over the years. It has tried to form a government with the social democratic PSOE, but this has not succeeded in the past. Following the recent general election the PSOE and Podemos agreed to try again. Stuart Medina asks if this is the correct political course for Podemos.

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.

Image result for wikimedia common sanchez iglesias
Picture from Forbes

Spain held a snap election this month. The elections were called by Pedro Sánchez Perez-Castejón, the nominally Socialist (PSOE) but, in fact, Neoliberal interim prime minister of Spain. The elections achieved the opposite of what Pedro Sánchez intended. The previous elections, held last April, produced a fragmented parliament but the arithmetic suggested that a coalition with left wing Unidas Podemos (UP) was feasible.

But there is no love between Pedro Sánchez and Pablo Iglesias, the leader of Podemos. Sánchez would have preferred a coalition with the center right Ciudadanos but their front-runner, Albert Rivera, shunned the opportunity to enter into a PSOE led government at a time when he was trying to wrest domination among right-wing voters away from the conservative Partido Popular, which has become discredited due to massive corruption scandals.

Sánchez gave Iglesias the brush-off repeatedly. He thought new general elections would give him a majority. The Spanish people grudgingly went back to the polls in November and dealt even worse cards for Pedro Sánchez. Before the elections PSOE had 123 seats and Podemos 42. Now PSOE and Podemos have 120 and 32 seats respectively. Ciudadanos have seen their electoral support evaporate as their increasingly Spanish nationalist constituency, irked by riots in Barcelona following harsh court sentences handed out to the Catalan independence leaders, turned to the far right Vox.

Pedro Sánchez had to concede that a coalition with Podemos was inevitable. So last week Pablo Iglesias and Pedro Sánchez signed an agreement for a coalition government. The significance of this event cannot be underscored enough. If a cabinet is formed this will be the first time, since the Civil War of 1936 to 1939, that a left wing party enters the government —unless you consider that PSOE is a leftist organization. It will also be the first time that Spain has a coalition government.

The agreement signed by Sánchez and Iglesias includes 10 somewhat vaguely defined points. The first nine any progressive would support. Indeed, the document calls for measures to create decent employment and revert years of legislation that has fostered an increasingly precarious labour market. New civil rights will be regulated such as euthanasia. Efforts will be made to fight corruption and increase transparency in government. The agreement also calls for policies that will arrest the depopulation of much of central Spain. PSOE and Podemos also pledge to increase investment in research & development and promote industrial policies that are coherent with decarbonization objectives. Both leaders want to show a more conciliatory approach to the solution to the Catalan crisis —though the PSOE will be reluctant to offer a referendum which would settle the issue of sovereignty in a civilized way once and for all—. Although wanting in detail, all these clauses are useful and unobjectionable.

Pablo Iglesias has told his followers that Podemos has reached the gates of Heaven. The problem is that the agreement contains a Faustian bargain that Iglesias is apparently not aware of. In a Faustian bargain the signer gains enormous power but will eventually have to trade in his soul. If Pablo Iglesias understood Modern Money Theory he would immediately grasp the consequences of clause number 10 which commits to “fiscal justice and budgetary balance. The evaluation and control of public spending are essential to sustain a solid and lasting welfare state.” I beg to disagree. Balanced budgets are anathema to the goal of sustaining a welfare state in the event of a recession and will certainly encumber the pursuit of the other nine points in the deal.

Of course balanced budgets are a default condition for Eurozone countries who have relinquished much of their economic sovereignty to the European Central Bank and the Commission. Without a central bank and a currency of its own the Spanish state needs the European Central Bank (ECB) to support its public debt in secondary markets. The rules of the European game are that this can only happen if Southern European countries commit to balanced budgets. This implies austerity if there is a downturn in the business cycle. And all the advanced economic indicators suggest that a recession could happen in the next few quarters.

In this Faustian bargain the role of Mephistopheles will be played by Nadia Calviño, the orthodox former Minister of Economy soon to become all powerful Economic Vice-president. Mrs. Calviño was a former Budget General Director of the European Commission who gets raving applause from the commissioners whenever she visits Brussels to show her allegiance to the sacred tenets of fiscal discipline. Fiscal soundness runs through her veins.

European authorities have shown their willingness to turn a blind eye to breaches of the rules by the larger nations, especially when led by centrist parties. It could well be that this new government is given some slack. Spain was spared the pain of a quicker adjustment of its fiscal balance only because former Prime Minister Rajoy was seen as a bulwark against the rise in popular support for Podemos, a party perceived as radical and undesirable by European authorities. Rajoy was allowed to be in permanent breach of European deficit and debt targets.

Due to Pedro Sánchez’ inability to form a cabinet Rajoy’s budget had to be carried over into 2019 so Ms. Calviño has been frustrated in her desires for a quicker fiscal adjustment. Strong growth has increased tax collections and helped decrease the gap with the fiscal balance targets required by the European Treaties. But if she had her way the country would have plunged into recession.

After more than a decade of austerity the country is suffering from a deficit in government spending. The starting point for the new coalition government is one of an inequitable recovery from the global financial crisis with a massive spillover of unemployment that is still as high as 14%.

What this situation would call for is massive fiscal stimulus, not balanced budgets. With deteriorating prospects in the Eurozone economy a balanced budget will become an elusive target. The Spanish economy is still growing thanks to domestic demand but it is losing momentum. In a deteriorating economy the deficit can only widen. Eurozone arrangements and clause number 10 would suggest that new spending cuts will be in order, not the type of expansionary fiscal stance associated with an ambitious transformation of Spain’s economic model and a progressive agenda. The Eurozone’s commitment to fiscal rigidity is still official policy and member states do not seem to be intent on reforming the Treaties even if all evidence suggests that more unconventional monetary policies from the ECB are unlikely to achieve a growth of bank credit and investment.

Fiscal justice, probably meaning a redistribution of the tax load, is an urgent necessity after decades of reforms that led to an increasingly regressive system that burdens worker’s incomes at double the rate applied to income from capital. But fiscal redistribution will not provide the type of stimulus needed to overcome a potential recession. As soon as the economy slows down automatic stabilizers will kick in, tax revenues will decline and spending in unemployment benefits will rise. The only way to meet clause number 10 will be to give up on many of the other nine points. The progressive agenda will have to be abandoned and Sánchez and Iglesias will be made responsible for another crisis just like Prime Minister Zapatero was blamed a decade ago for the effects of the Global Financial Crisis.

Pedro Sánchez and Pablo Iglesias will only manage fragments of sovereignty. Spain’s politicians govern a country with limited sovereignty. This has rendered the political system dysfunctional and incapable of providing the type of ambitious statesmanship that is required to steer the country out the malaise and declining living standards experienced by many of its citizens and leading a badly needed transformation of its obsolete productive fabric. The options open for the new Spanish government will come in shades of austerity.

Unsurprisingly many Catalans have realized that Spain is not a useful state any longer which is a key driver of the growing support for independence. But wasn’t this one of the main objectives of the European Union? Destroying nation states and centralizing all authority in the undemocratic institutions of the Europe is the outcome that Hayek desired for Europe. All may be going on according to plan.

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