Southern Europe faces fresh pain

February 4, 2012
Anti-austerity protest in Barcelona, January 28.

A vast icy pool of Siberian air, the coldest in 50 years, settled over all Europe in late January. At least 150 people without shelter were killed.

Yet the suffering from this extreme cold snap will be nothing compared with that of the economic ice age now threatening to entomb Europe’s most vulnerable economies.

Over the past fortnight southern Europe’s growth prospects have become increasingly wintry:

· On January 24, the International Monetary Fund cut its September 2011 growth forecast for the euro area (17 of the European Union’s 27 countries) from 1.1% to -0.5% for 2012, with Italy’s economy predicted to shrink by 2.2% and Spain’s by 1.7%.

· On January 27, Spain’s National Statistical Institute announced that official unemployment in the country had recorded its biggest jump (295,000) since the crisis first struck in the first quarter of 2008. Nationally, 22.9% are out of work and more than 30% in the southern regions of Andalucia and Extremadura and the Balearic and Canary Islands. Youth unemployment stands at 48.7% and more than 1.5 million Spanish households have to survive without any breadwinner.

· On January 31, Eurostat, the European Union statistical agency, announced that 23.7 million are now officially out of work in the EU. Youth unemployment stands at 5.5 million and since the crisis struck nearly 8 million have joined the dole queues.

As always, the official statistics lag behind reality. In Spain, evidence of the deepening economic misery lies everywhere. It can be seen in the hundreds of thousands in Barcelona alone who already rely on charity for food and clothing, in the 500,000 Spanish households that are predicted to face eviction by 2016, in the 800 desperate jobseekers who last year turned up for four gravedigger positions in a cemetery in Valencia, and in the 140,000 small and family businesses that since 2008 have given up the struggle to survive.

Even greater misery lies just around the corner. On January 28, the airline Spanair, the country’s second carrier, declared that it would stop flying. This leaves 2600 distressed and angry workers on the scrapheap.

Looming bank and credit union mergers planned by economy minister Luis de Guindos (once Lehman Brothers’ man in Spain and Portugal) will result in tens of thousands of jobs being cut in finance.

Forty percent of firms interviewed in the latest “Business Barometer” of daily El Pais said they would cut staff in 2012 (only 14% will increase hiring).

Economist Jose Garcia Montalvo says six million unemployed is likely in Spain by the end of 2012: “[J]obs are being destroyed at an incredible rate, and not just in the once overinflated construction and real estate sector.”

Hypocrisy in Brussels

So what impact did this frightful scene have on the European heads of government (“European Council”) when they met in Brussels on January 30?

They agreed (with the exceptions of Britain and the Czech Republic) to a pompous and punitive “Treaty of Stability, Coordination and Governance”. This will force member states to include a balanced budget rule in their national constitutions.

They also agreed at their next meeting to look into the “adequacy of resources” of the European Financial Stability Fund and its successor, the European Stability Mechanism.

Then, among pious hand-wringing about young people’s poor job prospects, they triumphantly unveiled a three-point “growth plan” that pretends to stimulate employment (“especially for young people”), to complete the single European market and “boost the financing of the economy, in particular small and medium enterprises”.

Where are the funds coming from? National banking regulators are to ask their banks not to crunch credit too much this year, while 80 billion euros in European Union funds will be diverted from existing projects. But there’s not a single new euro.

What’s more, as economic commentator Xavier Vidal-Folch uncovered, the text of the European leaders’ statement repeats, practically word for word, EU documents from 1997 and 2000.

“Merkozy” (referring to the German chancellor and French president) and Brussels obviously felt they had to seem to be doing something about unemployment, and someone was sent away to plagiarise old texts.

As for job creation and training for young people, the main strategy seems to be to generalise the German “mini-jobs” approach. This means driving down wages and conditions of work in a widening circle of industries to make it profitable for employers to take on the next generation of workers.


So when will growth return? In Spain, the Popular Party (PP) government’s fantasy for popular consumption is that if the nation takes its bitter medicine now, then its economic pulse should start to revive late this year.

Yet no-one in the know believes this light-at-the-end-of-the-tunnel theory, certainly not Spanish big capital.

Seventy percent of firms interviewed by El Pais expect business to be worse in 2012, with no recovery in sight until the second half of 2013 at the earliest. Twenty percent believe the recession will last until 2015.

This assessment is repeated in a January McKinsey Global Institute report called Debt and Deleveraging: Uneven Progress on the Path to Growth.

Even as it tries to create hope ― outlining how in the 1990s Sweden and Finland managed to pull out of episodes of high debt and recession brought on by a private banking and real-estate frenzy ― the contrast with the much more difficult plight of “peripheral” Europe today is clear.

The authors argue Finland and Sweden “went on to experience a decade of robust economic growth” because they passed “six critical markers of progress”.

That is, their governments quickly stabilised over-indebted banking systems, then guaranteed long-term budget sustainability, then passed “structural reforms to unleash private-sector growth”, then set the conditions for a strong export revival, and finally restored the “confidence” that allowed private investment and then the housing market to again take off.

By contrast, in Japan, “failure to recognise and resolve nonperforming loans in the corporate sector weighed on Japanese banks for more than a decade”.

Governments tried to compensate for the collapse in private investment by boosting public spending ― to the point that the country’s ratio of public debt to production (Gross Domestic Product) is now the highest in the world (226%).

A sober-minded comparison of the situation in the southern European countries leads to the conclusion that if present economic policy continues, their economies will be very lucky even to match Japan’s two decades of stagnation.

That miserable result would come at the cost of much more pain for working people and the unemployed.

Without saying so explicitly, the McKinsey report supplies many of the reasons why it looks impossible to jump over McKinsey’s six hurdles to revived growth, especially for Spain.

Banking system stabilisation? Five of the eight banks that failed in European Banking Authority’s unexacting July 2011 “stress tests” were Spanish. The Bank of Spain calculates that half of the 340 billion euros in bank loans to real estate developers are in trouble.

Stabilising the banking system will put further strain on the government budget deficit, as in Ireland.

Plan for fiscal sustainability? The previous Spanish Socialist Workers Party (PSOE) government tried in vain to reduce the budget deficit from 11% of GDP in 2009 to 6% by 2011 (it stands at 8.3%).

Despite this, the new PP government of Mariano Rajoy has pledged to reach a deficit of 4.4% by this year. The huge cuts to date, done to assure the markets of Spain’s solvency, have largely contributed to the recession, with the ironic result that public debt to GDP keeps rising (as in Greece).

The collapse in internal demand reinforces the stagnation in consumption and business investment.

Structural reforms to unleash private sector growth? The main “structural reform” the Rajoy government has in mind is to eliminate industry-wide bargaining.

If successful, it may raise the profitability of some firms, but at the cost of cutting wages and demand in an already moribund economy, further undermining growth.

Create conditions for export growth?

The two reasons why Sweden and Finland could enjoy an export boom from the mid-1990s were that they got access to larger markets by joining the European Union and devalued their currencies by at least a third.

Neither move is available to euro member Spain: its main weapon for raising export competitiveness is “internal devaluation” ― further cuts to wages and conditions.

And exactly how much would they have to cut in a world where all economies are seeking to increase exports?

Raise business investment? During the 2000-08 real estate bubble in Spain, the debt of non-financial corporations nearly doubled, from 74% to 137% of GDP.

Little wonder that private business investment since 2008 has crashed more than in any country except Ireland (from 27% to 18.6% of GDP).

Even if the PP government succeeds in bailing out the country’s banking sector, making it easier to raise commercial credit, there is no guarantee that demand for credit will return soon.

Indeed, the indebtedness of Spanish non-financial business parallels that of Japan in the 1990s, when “companies could not afford to invest in growth”.

Revive the housing market? Investment in housing will take a decade or more to recover. There are 1.5 million units that still remain unsold after the frenzy of 1997-2007, when five million units were built while households increased by only 2.5 million.

So long as present policy prevails in the European “periphery”, the atrocious social pain already inflicted by the crisis is bound to increase ― and with no guarantee of gain.

The situation is so bad that Financial Times lead economic commentator Martin Wolf, even while attacking “Merkozy’s” obsession with balancing budgets and asking why the lessons of the Great Depression have been forgotten, remarked on February 2 that “maybe stagnation is the best we can manage”.

And it is ― so long as a huge boost in job-creating public spending on socially and environmentally necessary infrastructure continues to be ruled out.

[Dick Nichols is Green Left Weekly’s European correspondent, based in Barcelona.]

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