I’ve been thinking about the state of the Spanish economy in advance of a visit there soon to speak at the ‘anti-capitalist left (IA)’ summer school.
There were huge demonstrations across Spain on May Day. Hundreds of thousands of young people, trade unionists and unemployed protested about the collapse of the Spanish economy and the policies of the Rajoy government in making the majority pay for the failure of a tiny minority who own and control the Eurozone’s fourth-largest economy. The rate of unemployment hit 27%, the first time since records began. That’s six million Spaniards without work in a population of 47m. Youth unemployment (15-24 years) has reached an astronomical 55% – only Greek youth are in a worse position for employment.
Spain’s right-wing government announced that the unemployment rate would stay above 25% until at least 2016. And for the first time, permanent employment has started to fall as much as temporary employment in this deep economic recession that began in 2008, while long-term unemployment has doubled since 2008. (Note all graphs below are from official IMF and EU Commission sources except those on the rate of profit which are my calculations.)
And this unemployment rate would be even higher except that Spaniards are on their bikes and cars and leaving the country to look for work elsewhere in Europe or even Latin America. The rate of net emigration has reached 250,000 a year, draining the economy of some of the most educated and productive young Spaniards. Average wages are plummeting, down nearly 6% in 2012 in nominal terms (i.e. before inflation). Wages fell at a 14% annualised rate in the last quarter of 2012. Deducting inflation and real wages are down nearly 9% last year as the government hikes VAT and other taxes.
While this misery engulfs the 99%, the remaining top 1% of Spaniards continues to do well. The Spanish stock market is booming and government bond prices are recovering fast. Backed by ECB funding to Spain’s banks, interest rates are falling and those with cash are engaged in speculative trading in financial assets. While this new credit bubble blows, no cash is getting to where it is needed, to help small and medium business (SMEs) to fund the businesses and invest more to restore employment. Spain’s SMEs are suffering more than anywhere in Europe (except Greece). The banks are not lending to them.
And yet it was Spain’s greedy and corrupt banks that triggered the crisis in the first place. Spain is the largest of those states in Europe forced to take financial support from the Euro leaders in order to ‘save’ its banks from going bust. Spain’s banks crashed because of the collapse in the huge property bubble that was behind Spain’s apparent boom from 2002 onwards. Spanish bankers lived the good life with grotesque pay packets and bonuses (as elsewhere), but many acted corruptly in organising sweetheart deals for reckless developers and in funding political parties that allowed them to do what they wanted without any regulation. Rajoy’s People’s Party is accused of taking money from developers to fill its campaign funds and add to MPs’ salaries.
The former head of the Bank of Spain, Miguel Angel Fernandez Ordonez, was forced to resign in a scandal. And the CEO of Spain’s largest and most powerful international bank, Santander, stepped down to try and avoid criminal charges. He had been sentenced to six months in 2009 on charges of making false accusations when chairman of Banesto bank in the early 1990s. but was pardoned by the Socialist government in 2011. In 2012, Banco Santander chairman Emilio Botin and 11 of his relatives were investigated over possible income and wealth tax evasion – with Swiss bank accounts with the notorious money launderer, HSBC. Again the case was dropped. And worst of all, Rodrigo de Rato, a former economy minister in a previous Conservative (PP) government and ex-managing director of the International Monetary Fund, had to resign as head of the mortgage lender Bankia that went bankrupt, costing the taxpayer €20bn.
The restructuring and recapitalisation of Spain’s banks was estimated to cost €56bn. Some of this has been found by defaulting on debts to some bond holders (€13bn) and €2bn was raised in new equity. But that left €41bn. After refusing to recognise that there was even a problem, finally the government had to go cap in hand to the European Stability Mechanism (ESM) for the money. This has dramatically raised the deficits and debt for the public sector, which the government and the Euro leaders are insisting must be paid for by draconian austerity measures of higher taxes and huge cuts in government services and welfare benefits. And it looks as though more money for the banks will be needed, because the banks still have massive non-performing loans on their books from bankrupt real estate developers and construction companies. Bad debts are just 8% of loans to industry, but 26% of loans to construction companies and 30% for loans to buy real estate for development.
Spain’s much heralded economic boom saw 3.5% real growth per year during the 1990s, but stopped being based on productive investment for industry and exports in the 2000s and turned intoa housing and real estate credit bubble, just Ireland’s Celtic Tiger boom did. House prices to income peaked at 150%, nearly as high as Ireland. It has fallen back to 120% now, but Ireland has dropped to 85%. Household debt reached 90% of GDP. Non-financial corporate debt including that of the developers reached 200% of GDP, the highest in the OECD.
Housing construction doubled from 1995 to 2007 reaching 22% of GDP in 2007! Investment in real estate then fell from12.5% of GDP in 2006 to 5.3% at end of 2012 and below the historic low of 7% in 1997. Oversupply of housing is now around 700,000 units. Sales of new homes have dropped from 400k in 2007 to 115k in 2012. It would take six years to clear the backlog. House prices are down 31% in nominal terms and 38% in real terms, but there is still some way to go. Irish house prices fell 60%. During the property boom, credit grew at 20% a year, way faster than nominal GDP at about 7% a year. But lending collapse from 2008. The private sector has deleveraged its debt by 15% of GDP since the peak of 2008. But debt is still well above accepted international level of 160%.
This is seriously holding back economic recovery. Capitalists won’t invest if they have to meet heavy debt burdens. And Spanish corporations are most indebted among the major economies.
An IMF study showed that “countries with boom-bust cycles typically have deep recessions and sluggish recoveries, with GDP remaining 9-10% below the pre-crisis trend for 5-10 years” (IMF 2009). Deleveraging can take 5-6 years in high income OECD economies and require around 20-30% pts of debt to GDP reduction. Housing crises preceded by a build-up of household debt cuts GDP by 4% at least over five years (IMF WEO Sept 2009 and Aspachs-Bracons, Jodar-Rosell, Gual “perspectives de deaspalancamiento en Espana, La Caixa Vol m23, 2011. IMF WEO May 2012).
Much of the funding for the property boom came from abroad, mainly other European banks, greedy to get a piece of the property cake. Spanish household savings and corporate profits were not nearly enough to fund the boom and all those consumer purchases that it enabled. Costs of production rocketed and the real price of Spanish exports rose 20% from 2000 to 2009, increasingly pricing them out of world markets. So Spain’s external deficit with the rest of Europe and the world mushroomed. The current account deficit reached 10% of GDP in 2007 and net international liabilities (debt and equity) hit 92% of GDP, well above the recommended prudent level of 35% for a growing emerging economy. Gross external debt is now 160% of GDP, with nearly half in short-term loans. External debt interest to foreign banks sucks up 2.5% of GDP each year. Spanish banks and companies can only borrow from the ECB now. Borrowing from Eurosystem rose from 6% in 2010 to 12% of GDP in 2012. The Bank of Spain has net liabilities to the Eurosystem at 30% of GDP. This is a huge burden. And this is a burden that cannot be borne because of the hidden Achilles heel of Spanish capitalism: the long-term decline in its profitability.
Spanish capitalism was not a great success under the military rule of Franco. Profitability fell from the great heights of the golden age of post-war capitalism, as it did for all other capitalist economies from 1963 onwards, in a classic manner, with the organic composition of capital rising nearly 30%, while the rate of surplus value fell by about same. Eventually that led to the fall of Franco and, for a while, Spanish capitalism reversed the decline as foreign investment flooded in to set up new industries, relying on a sharp rise in the rate of exploitation brought about by plentiful surplus labour and a system of temporary employment contracts (while freezing permanent employment), the so-called dual labour policy.
The rate of exploitation rose over 50% to 1996, accompanied by the foreign-led investment boom in the 1990s. This drove up the ratio of capital to labour (by 19%), as German and other capitalist companies relocated to Spain in search of cheaper labour and higher profits. That eventually put renewed pressure on the rate of profit. From 1996, profitability dropped sharply as the wages (blue line below) squeezed profits (red line) in the boom of the 2000s.
Spanish capitalists switched to investing in property and riding on the cheap credit boom that disguised weakening profitability in the productive sector. The Spanish economic ‘miracle’ came to a sorry end in the Great Recession, which in turn led to the property bubble burst, bringing about the banking crash. Indeed, it was in that order, unlike the US and the UK.
The aim of ‘austerity’ and high unemployment is to restore Spanish profitability. It’s a modern capitalist form of the Spanish Inquisition on the people. Corporate revenues dropped by €3bn in 2012 (a 0.5% drop), but there was a €17bn (5%) cut in wages to employees, so profits rose by €6bn. Unit labour costs fell by 3.5% in 2012 as labour laws have been introduced to make it easier to sack permanent staff and end the dual labour system – an ironic reversal of neo-liberal policies. The aim, of course, is not to provide rights for temporary workers but to end them for permanent workers – levelling down.
Spanish capitalism has failed and is now on its knees. But the previous socialist government’s answer was not to replace it, but instead to bail it out with taxpayers’ money and people’s jobs. This policy was continued with renewed enthusiasm by the right-wing government. But bailouts and austerity is not working. The government cannot meet its fiscal targets despite ever more measures of austerity. Last year’s government deficit was 10.6% of GDP when the bank recapitalisation is included and 7.1% without it. This year’s shortfall is projected at 6.3% rather than the EU’s previous target of 4.5%. The EU is allowing Spain to relax its targets. But even so, next year, the deficit is expected to be 6.9%, the year after 6.6% and so on with very little further progress thereafter. By 2018, Spain will have by far and away the worst structural deficit of any advanced economy, including other such well known fiscal basket cases as the UK and the US. The general government gross debt is forecast to rise from 84.1% of GDP last year to 110.6% in 2018. No other advanced economy has such a dramatically worsening outlook. Spain is the marker for the failure of austerity – this modern Inquisition.
The government continually revises down its forecasts for growth. In 2012, the economy contracted by 1.4% and another 1.5% decline is expected this year, making a contraction of 6% since 2009, or a difference of 20% compared to trend growth! The IMF reckons that economic growth in Spain between 2015 and 2018 will average around 1.5% annually. This forecast represents a significant downward revision from earlier optimism. And it’s still too optimistic.
This terrible depression is also beginning to break up the Spanish state. Regional governments are deeply in debt and are being asked to make huge cuts. Richer regional areas with their own nationalist interests, as in Catalonia and the Basque country, are making noises about separation from Madrid. The centrifugal forces that are raising the odds of a euro break-up are also doing the same to Spain itself.
Can lower wages and high unemployment eventually make Spanish exports more competitive and so restore growth through exports? Spanish exports in real terms are up €26.3 bn from 2007 (+10%) but its imports are €64.4 billion lower (-20%). So lower wages and the cost of labour are helping trade, but this change in net trade has been paltry relative to the complete collapse of investment of €108 billion (-36% in real terms). The Spanish depression is a result of the collapse in capitalist investment (see green line in graph below). To reverse that requires a sharp rise in profitability. And until investment recovers, the depression will not end.
PM Rajoy has rejected the idea of the Socialist opposition leader Alfredo Perez Rubalcaba that unused funds from the ESM bank bailout be used to fund job creation because it would mean more borrowing. Left Unity proposes to reduce unemployment to the EU average (which would require creating 3.4M jobs), to almost double the minimum wage and the lowest pensions, and to use the nationalised banks to lend to SMEs. It claims it could fund these measures by making ‘taxes more progressive’ and ‘curbing corporate tax dodging and the underground economy’. There’s good intention here, but wishful thinking. A much more radical restructuring of Spanish economy would be required, namely the replacement of the old order with the new.
Sure, when unit labour costs are driven down sufficiently, enough weak companies are bankrupted and exports are cheap enough , then corporate profitability will rise from the ashes of millions of unemployed, much lower living standards, decimated pensions and destroyed public services that have been burnt at the stake of capitalist accumulation. The Spanish inquisition will eventually have done its job after years more misery.