Thursday, 28 July 2016

Spain: Fear and Austerity in the EU

It seems that the class struggle, or at least the fear of it, is indeed the motive force of history. The EU has announced that it will not, after all, impose a hefty Є2.2 billion fine on Spain for repeatedly missing its budget reduction targets, as it had been threatening to do for months. EU hard-liners, particularly the Germans, were until recently demanding a Є5 billion fine. Spain has now been given another two years to get its finances in order.
EU Economic Affairs Commissioner Pierre Moscovici, who made the announcement, explained that the Spanish people had already made sacrifices and it was not appropriate to demand more of them, particularly at a time when there is a question mark over the entire European project.  Why has Spain been shown such largesse, when the Greeks were not? The Greek people also made sacrifices, larger than those imposed on Spain.
More significant still is that, according to German press reports, it appears that the change in policy was promoted by none other than German Finance Minister Wolfgang Schäuble, the hard-line archduke of fiscal probity and sticking to the rules. The German business paper Handelsblatt reports that following a long discussion with French, Italian and Spanish ministers at the recent G-20 summit in Beijing, Schäuble himself phoned the EU Commission pressing for a policy change in favour of more carrot and less stick. The Spanish argued that a fine would undermine Spain’s Christian democrats and would only benefit the ‘populist’ Podemos.
The EU’s problem is that the three areas in which it wants to see some major traction – labour market flexibility, pensions, and social spending – are all very politically sensitive and disruptive. This limits how far it can push austerity. Spanish Economy Minister Luis de Guindos has been bragging openly for weeks that the EU would not impose a fine, which was rather undiplomatic.
Greece, with only 2% of the EU’s population and of little economic importance, can be pushed around. Spain, the EU’s fifth-largest economy, is a different matter.  Despite being wrongly dubbed a ruthless neoliberal by the Left, prime minister Rajoy has been resisting on all three fronts.  Sledge-hammer austerity can only knock Spain’s social and constitutional order to pieces and push the popular classes into the arms of Podemos and possibly beyond.


Spain has around 30 different forms of employment contract. Brussels wants these cut down to three or four to make hiring and firing easier. The Spanish labour market is highly differentiated. About a third is ‘protected’, while two thirds form a ‘precariat’ surviving on very short-term contracts with only basic employment rights. The average duration of an employment contact is now 53 days. The effects of this are dramatic. While wages in the protected sector have dropped a few percent since the beginning of the financial crisis, the wages of the ‘precariat’ have dropped 14-17%. This accounts for Spain’s recent improvement in exports, in the absence of any significant rise in productive investment.  So the employment contract reform Brussels wants to see implemented is aimed mainly at the protected sector. But this section of the labour force, which includes much middle class employment, is the bedrock of the two mainstream parties. Destroying employment protection hacks away at political stability. 


Spain has 9.42 million pensioners. Around 45% of the ruling conservative party’s voters are pensioners, as are 40% of socialist party voters. Only 16% of the Podemos vote is made up of pensioners. Moreover, half of those receiving pensions are supporting their offspring’s families. So pensions are a vital source of income in a country where just under half the unemployed no longer receive any benefits at all as their entitlement period has expired.  So deep cuts in pensions, as demanded by the EU, would push a substantial number of families over the brink.

State spending

Due to Spain’s very late development as a modern economy, and the weakness of its central state, Spanish politics remains very regional, often parochial, and is dominated by local elites and parties, which are voted in with the express aim of getting as much as possible out of Madrid. The regional federations of both the main parties are very strong.
A significant part of state spending, such as health and education, is channelled through regional governments, the majority of which are conservative. Cuts in social spending have an immediate effect on regional politics and immediately create intra-party revolt.  For example, the main impetus behind Catalans' apparent bid for independence is really a ploy to pressure Madrid to allow Catalans to keep all or a larger part of their taxation, a privilege the Basques already enjoy. So, although the ruling conservative party is hostile to everything Catalan that smacks of independence, it continues to make large concessions to the region in the hope that those wanting only tax autonomy will curb those backing complete independence.
No one really believes that Spain can turn its economy around in two years or meet its budget reduction targets, which have been raised to 4.6% of GDP for 2017. But, for a while, the EU has put this problem on the back burner because it now has its hands full with Brexit.

Susil Gupta, 28 July 2016

1 comment:

Biswadip Dasgupta said...

Excellent analysis of the relationship between fiscal policy and representative democracy - bravo!