Whilst Prime Minister Mariano Rajoy is sitting in Moncloa palace biting his nails, banks, the business community, the socialist opposition and almost all economists are imploring him to make the request before the situation deteriorates further.
In another part of this report, I confirm that the decision has been taken, and that Spain is actively negotiating the rescue package under the euphemistic title “finding out the conditions involved” and “whether the application will be accepted by all who have a say.”
The latest leaks from ‘official European sources’ indicate the formal petition for a rescue will be handed in this week (this article is written Tuesday 2nd October). We shall see, it may happen today, tomorrow or next week, but happen, it will!
The procedures
The rescue will probably be in the form of a massive purchase of Spanish Government Bonds by the European Central Bank on the ‘secondary market’ (meaning not directly from the Spanish state) with the intention of pushing down the crippling borrowing costs which Spain is suffering to finance its huge debts. Nevertheless, the use of the ’big bazooka’ by the Central Bank needs the approval of those countries that will have to suffer the possible consequences of Spanish Bonds becoming worthless.
In the Euro Zone there are seven countries obliged by law to submit any request for financial assistance, over and above that agreed in the European Stability Mechanism, to their respective Parliaments for approval. The countries are:- Germany, Italy, Holland, Finland, Estonia, Slovenia and Malta, which collectively amount to 53.22% of the votes in the new rescue fund that now has come into force.
According to the Agreement on this mechanism, a decision requested by a member must be unanimously approved, however, there exists the possibility for urgent action if the European Commission and the Central Bank consider the situation as ‘a danger to the Euro Zone.’ In such a case only 85% of the votes is required, however, this means Germany (27.14% of all votes) France (20.38%) and Italy (17.91%) have a veto. Germany and Italy are obliged to obtain approval by their parliaments.
The situation in Germany
German Chancellor, Angela Merkel, maybe delaying the application for a Spanish rescue as she recently said that any increase in the German share to cover the debts of Southern European states, could only happen ‘over her dead body.’ Albeit that politicians are known to ‘forget’ promises and statements, it is a fact that resistance to further payment is growing in Germany, with the electorate (national elections next year) the Government coalition and within her own party.
While we wait for the decision, I reprint what I wrote in the Yearly Report 2011 (written in December of that year). It seems it was not far off the mark:
“What will happen 2012?
The good news this year ¡s that it will see the end of the world, as some, based on the Maya calendar, had predicted !
But if the world’s politicians do not take the right decisions, there is a certain chance (maybe 1 in 3) that Europe and USA will enter a financial and social crisis, in certain aspects similar to the one the world remembers as ‘the crisis of 1929’ and following years.
For the same good reason there is a 1 to 2 chance that the Euro Zone will collapse this year or at least change its current form as certain member states are forced to leave
Spain will go into a more profound recession as Mariano Rajoy uses the axe on public works and infrastructure investment. The economy may shrink 2% to 5% during 2012
As a result of the cuts and the recession, unemployment will go above 25%
In the desperate search for more income for the state, the regions and town halls, many taxes and charges will increase, and new ones will be invented
Spain will have increasing difficulties in finding new money to repay soaring public debt and subsequently the ‘country risk’ will rise and Rajoy may be forced to ask for a rescue package
Whilst the recession continues to affect the middle class in the rest of Europe, very few new buyers will be found by promoters and the banks for property in Spain
The banks will be unable to rid themselves of the millstone around their necks (meaning unsold property) and some of them will not survive the year
The rise in unemployment, and worsening conditions for those in work, will bring hundreds of thousands recruits for the movement of the 'indignados', which will spread throughout Spain and become more radical.
Budget for 2013 to Parliament
The 2013 budget has presented to the Parliament for approval. The proposals contained therein show ‘the game Prime Minister Rajoy is playing’ as it includes most of the ‘dirty work’ which the “Troika” will demand the day Spain formally asks for a rescue.
The main points are:-
Spanish State debt in the coming year will rise to 900,000 million euro, that is 90.5% of the Gross Domestic Product (the value of what is being produced by the country in one year), up from 85.3% this year. The debts of state agencies like FROB, the agency for the financial rescue of the Spanish banks will rocket from 60,000 million this year to 143,000 million next, and it is not included in the totals of the state budget.
The Government expects to offer new bonds valued at 207,000 million euros next year, 11.3% more than this.
22.7% of total expenses will be to service debts. This amounts to an increase of 33.8% on this year; it illustrates better than anything else how serious the financial situation is and how fast it is worsening.
The Government is using the axe on the Spanish Welfare State, reducing the funds for unemployment assistance 6.3%, even though unemployment will not fall next year.
Pensions will shrink next year, with a formal increase of 1% which will be eaten up by an inflation which now has reached almost 3%.
Funding for the King and his family will be cut by 4%, which with previous reductions, also voluntary, means the cost of running a kingdom is down 10.9% over the past 3 years.
Even worse is the 14.4% reduction in education, especially in stipends for students studying foreign languages.
The Ministry of Health gets a haircut of 22%, Industry reduced 21.3, Culture down 19.6 and Agriculture and Environment down 25.4%
The Ministry of Foreign Affairs is reduced by 10%, Foreign Assistance 18.8.
The Ministry of the Interior is reduced by 5% and Defence cut by 6.
New ‘Catastrazo’ is coming
The budget proposals allow for 3 million properties to have their cadastral values revised – upward, of course. The cadastral value is the basis for the calculation of local property taxes, one of the main sources of income for the debt ridden local governments, and also Wealth Tax and Inheritance Tax. It is anticipated that the increase will provide an additional tax income of 918 million euro.
Fitch doubt budget previsions
The Fitch Agency has expressed doubts concerning the Budget proposals and the information on which they are based. The Agency predict a public deficit of 5% in relation to Gross Domestic Product, instead of the 4.5% contained in the budget, and a recession of 1.5% instead of 0.5%.
10 people die in bad weather
Severe storms and torrential rain has hit Andalusia, Malaga and Murcia. Ten have been killed and the rescuers are still searching for those reported missing. Hundred of families have been evacuated, many dwellings destroyed and hundred of hectares cultivated land lost.
Run on saving banks
Clients are withdrawing their money from Spanish saving banks. Just in July the saving banks lost 24,069 million euros, 3.73% of total deposits. Friday last week saving banks lost a further 5,944 million.
Half of the withdrawals took place in Bankia (previously Caja de Madrid, merged with Bancaja and some other smaller entities). This black hole in the Spanish banking system needs a recapitalisation, of up tot 25,000 million euros.
Banco Popular suspended on stock exchange
Banco Popular shares were preliminary suspended from trading on the Ibex stock exchange, albeit that the suspension was lifted after the bank presented a plan for refinancing. The plan foresees the creation of an ‘interior bad bank” and has suspended dividends for 2012 and will increase social capital by 2,500 million euros.
The red warning light is blinking for clients of the bank.
Moody’s warns banks may need up to 105 billion
Rating Agency Moody’s has warned the recapitalisation of Spanish banks may rise above the 60 billion estimated by the company Wyman. Moody’s estimate the need for new capital may be between 70 and 105 billion euros.
Mayor of Alicante indicted – who is not?
The Mayor of Alicante, Sonya Castedo, has been indicted by the Valencia Supreme Court for revealing privileged information, influence peddling and taking bribes, connected to the ’Brugal’ case. Both Castedo and the former mayor, Diaz Alperi, are accused of changing the Town’s General Plan for the benefit of the mega promoter Enrique Ortiz.
80,000 new unemployed in September
The number of unemployed increased in September by a further 80,000, up 11.32% on the same time last year, to a total of 4,705,279. Only 98,000 new labour contracts were registered (down 6.41% on the same month last year). 52,000 of the new contracts were for full time jobs, 46,000 for part time.
Le Monde Diplomatique / Spain / This fall will be a hot one
By Ignacio Ramonet *
PARIS, Sep (IPS) As if the summer holiday were a veil of forgetfulness, the media have tried to distract us the brutality of the crisis with massive doses of collective stupefaction: the European Football Championship, the Olympics, the summer adventures of celebrities, etc. Do they want us to forget that a new wave of cuts is on the way and that the second bailout of Spain will be even more painful? But they haven't succeeded. This fall will be a hot one.
In a public conversation I had last August in Benicassim, Spain, with philosopher Zygmunt Bauman, we agreed on the necessity of breaking with the reigning pessimism of our society, which is disappointed by traditional politics. We must stop being isolated individuals and become agents of change, interconnected social activists.
"We have a duty to take control of our own lives," Bauman argued. "We are living in a period of profound uncertainty in which citizens do not really know who is in charge, and because of this we have lost confidence in our politicians and traditional institutions. This creates a condition of constant fear and insecurity in the people.
"The politicians encourage this fear as a way of controlling them, abridging their rights, and limiting their individual liberties. This is a very dangerous time because all of this affects our daily lives: we are told repeatedly that we must hold onto our jobs despite the harsh work conditions and precariousness because in this way we will earn enough money to spend...Fear is a very powerful form of social control."
If the people do not know who is in control, it is because power and politics have broken away from one another. Until not long ago, it was hard to tell them apart. In a democracy, the candidate who won the presidency through elections was the only figure who could legitimately perform that function. Today in neoliberal Europe this is no longer the case. Winning at the polls does not guarantee a president real power because two unelected supreme powers (in addition to Berlin and Angela Merkel) trump the presidential mandate and control the president's actions: the technocrats of the European Union (EU) and the financial markets.
The latter entities impose their own agendas. The Eurocrats demand blind obedience to treaties and EU mechanisms that are quintessentially neoliberal, while the markets then punish any deviation from the ultraliberal orthodoxy. Thus imprisoned between these twin embankments, the river of politics flows in a single direction with no manoeuvring room whatsoever - or, to put it another way, without power.
"The traditional political institutions are less and less credible," said Bauman, "because they do nothing to help solve the problems the people find themselves suddenly trapped by. Democracy (what the people voted for) has suffered a collapse as the dictates imposed by the markets are shredding people's fundamental social rights."
We are witnessing an epic battle between the Market and the State in which the market, with its totalitarian ambitions, wants to control everything: the economy, politics, culture, society, and individuals. And now, allied with the media, which serve as its ideological apparatus, the market wants to dismantle the edifice of social advances and what we call the "Welfare State".
What is at stake is fundamental: equality of opportunity. Consider, for example, the effects of the fact that education is quietly being privatised, transferred to the private sector. Funding cuts will give rise to a level of public education in which working conditions are onerous for both teachers and students. Public schools will have a harder time preparing children from humble backgrounds, though for the children in economically comfortable families, private education will play an increasingly significant role and become the midwife of a new privileged class and a stepping stone for national leadership positions. Those in the bottom tier, in contrast, will have access only to grunt jobs as opposed to leadership roles. This is intolerable.
In this regard, the crisis will probably serve as a shock in the sense used by sociologist Naomi Klein in her book 'The Shock Doctrine': the economic disaster will be exploited as an opportunity to impose the neoliberal agenda. Mechanisms have been created to monitor and control national democracies so that (as we now see in Spain and have seen in Ireland, Portugal, and Greece) savage structural adjustment programmes can be imposed and overseen by a new authority: the "troika" comprised of the International Monetary Fund, the European Commission, and the European Central Bank, all non-democratic institutions whose members are not elected and do not represent the citizens.
These institutions - with the backing of the media, which obey the economic, financial, and industrial lobbies - are charged with creating the systems of control to reduce democracy to mere theatre - with the complicity of the major governing parties.
What is the difference between the budget slashing of current Spanish president Mariano Rajoy and that of his predecessor Jose Luis Rodriguez Zapatero? Very little. Both caved in to financial speculators and blindly did the bidding of the Eurocrats. Both liquidated national sovereignty. And neither did anything to rein in the irrational behaviour of the markets. Both had the same response to the dictates of Berlin and the attacks of speculators: like some cruel ancient ritual, the only solution was to sacrifice the population as if the torments inflicted on society might mitigate the greed of the markets.
In conditions like these, do the people have any chance of rebuilding politics and reviving democracy? Yes. Social protests continue to spread. And movements for social justice continue to proliferate. For now Spanish society still believes that this crisis is just an accident and that things will soon return to the way they were. This is an error, a mirage. When the people realise that this is not the case and that the adjustments imposed are not "crisis measures" but structural changes intended to be permanent, social protests will probably reach a critical level.
But what will the protesters demand? Our friend Bauman is clear about that: "We must build a new political system that allows for the emergence of a new model of life and a new and true democracy of the people." What are we waiting for?
Spain feels full fury of financial crisis as borrowing costs surge
AFP Sep 25, 2012
Spain felt the multi-faceted fury of the financial crisis on Tuesday as borrowing costs surged, protesters rallied and a political rift widened with debt-ridden Catalonia.
The challenges to Prime Minister Mariano Rajoy's government were multiplying even as it hoped to avoid a full-blown sovereign bailout, seen by many investors as inevitable.
In a short-term debt auction, financial markets demonstrated their impatience with Madrid as the Treasury sold 3.983 billion euros ($5.1 billion) in three- and six-month bills.
Borrowing costs had fallen this month after the European Central Bank outlined plans to buy the bonds of stricken eurozone states in return for strict conditions set by eurozone bailout funds.
But they climbed sharply in the latest Spanish issue.
Compared with the previous similar sale on August 28, the three-month rate rose to 1.203 per cent from 0.946 per cent and the six-month rate to 2.213 per cent from 2.026 per cent, Bank of Spain figures showed.
Spain has cut a deal with the European Union for a rescue loan of up to 100 billion euros for banks hobbled by bad loans extended before a 2008 property market crash.
But it has refused to be rushed into seeking a full-blown sovereign bailout until it knows the conditions.
"Investors remain concerned by the situation in Spain. Many are beginning to get impatient because the Spanish government has not taken the step and asked for a full-blown rescue, something that has been discounted for weeks as being inevitable," said a report by brokerage Link Securities.
"Nevertheless, all the signs are that the Spanish executive is trying to avoid that possibility," it said.
Rajoy's government, facing growing resistance to austerity measures aimed at curbing the public deficit, is reluctant to submit to specific conditions imposed from the outside and it has ruled out cutting pensions.
In fact, even as the government prepares to release an austerity budget for 2013 on Thursday, Deputy Prime Minister Soraya Saenz de Santamaria said that pensions would be going up.
A new level for pensions would be decided in November, she told private Cadena Ser radio.
"Will pensions go up? Yes, pensions are going to go up. Pensions will obviously be adjusted for the cost of living," she said.
While the government is standing by its pre-election promise to protect pensions, it has enacted a series of other painful measures including public sector pay cuts and a substantial increase in sales tax.
Hundreds of protesters gathered in Madrid to protest those measures, vowing to take their complaints to the lower house of parliament, the Congress of Deputies, in the city centre.
Police cut off main routes to the Congress with a double layer of metal barricades, backed by vans and with a helicopter hovering overhead.
Rallying outside the city's Atocha railway station, Carmen Rivero, a 40-year-old photographer and "indignant" anti-establishment activist, said she travelled overnight in a bus with 50 protesters from the southern city of Granada to make her voice heard.
"We think this is an illegal government. We want the parliament to be dissolved, a referendum and a constituent assembly so that the people can have a say in everything," she said.
"We don't agree with the cuts they have made."
At the same time, the government is faced with growing pro-independence stirrings in Catalonia, fuelled by a sentiment that it is getting a raw deal from Madrid in the crisis.
Last month, Catalonia was forced to reach out for 5.0 billion euros from the liquidity fund to make repayments on its 40-billion-euro debt, equal to a fifth of its total output.
The region, whose capital is Barcelona, complains that it gets far less from Madrid than it pays in taxes.
But a bid by the region's president Artur Mas for Catalonia to be given the power to levy and spend its own taxes was flatly rejected last week by Rajoy, who said there was "no margin" for negotiation.
The Catalan parliament opened three days of debate on Tuesday to consider its next steps.
Opinion polls show growing support for independence in Catalonia, but the Spanish constitution bars even holding a referendum on the matter.
"I think this debate, at this time, is creating tremendous instability," the deputy prime minister said.
"What we have said to Mas is: 'Think carefully about the situation the country is in'," Saenz de Santamaria added. "With all these actions a new crisis is beng added to the crisis."
New York Times about Spain:
Spain Recoils as Its Hungry Forage Trash Bins for a Next Meal
Samuel Aranda for The New York Times
Published: September 24, 2012
MADRID On a recent evening, a hip-looking young woman was sorting through a stack of crates outside a fruit and vegetable store here in the working-class neighborhood of Vallecas as it shut down for the night.
At first glance, she looked as if she might be a store employee. But no. The young woman was looking through the day’s trash for her next meal. Already, she had found a dozen aging potatoes she deemed edible and loaded them onto a luggage cart parked nearby.
“When you don’t have enough money,” she said, declining to give her name, “this is what there is.”
The woman, 33, said that she had once worked at the post office but that her unemployment benefits had run out and she was living now on 400 euros a month, about $520. She was squatting with some friends in a building that still had water and electricity, while collecting “a little of everything” from the garbage after stores closed and the streets were dark and quiet.
Such survival tactics are becoming increasingly commonplace here, with an unemployment rate over 50 percent among young people and more and more households having adults without jobs. So pervasive is the problem of scavenging that one Spanish city has resorted to installing locks on supermarket trash bins as a public health precaution.
A report this year by a Catholic charity, Caritas, said that it had fed nearly one million hungry Spaniards in 2010, more than twice as many as in 2007. That number rose again in 2011 by 65,000.
As Spain tries desperately to meet its budget targets, it has been forced to embark on the same path as Greece, introducing one austerity measure after another, cutting jobs, salaries, pensions and benefits, even as the economy continues to shrink.
Most recently, the government raised the value-added tax three percentage points, to 21 percent, on most goods, and two percentage points on many food items, making life just that much harder for those on the edge. Little relief is in sight as the country’s regional governments, facing their own budget crisis, are chipping away at a range of previously free services, including school lunches for low-income families.
For a growing number, the food in garbage bins helps make ends meet.
At the huge wholesale fruit and vegetable market on the outskirts of this city recently, workers bustled, loading crates onto trucks. But in virtually every bay, there were men and women furtively collecting items that had rolled into the gutter.
“It’s against the dignity of these people to have to look for food in this manner,” said Eduardo Berloso, an official in Girona, the city that padlocked its supermarket trash bins.
Mr. Berloso proposed the measure last month after hearing from social workers and seeing for himself one evening “the humiliating gesture of a mother with children looking around before digging into the bins.”
The Caritas report also found that 22 percent of Spanish households were living in poverty and that about 600,000 had no income whatsoever. All these numbers are expected to continue to get worse in the coming months.
About a third of those seeking help, the Caritas report said, had never used a food pantry or a soup kitchen before the economic crisis hit. For many of them, the need to ask for help is deeply embarrassing. In some cases, families go to food pantries in neighboring towns so their friends and acquaintances will not see them.
In Madrid recently, as a supermarket prepared to close for the day in the Entrevias district of Vallecas, a small crowd gathered, ready to pounce on the garbage bins that would shortly be brought to the curb. Most reacted angrily to the presence of journalists. In the end, few managed to get anything as the trucks whisked the garbage away within minutes.
But in the morning at the bus stop in the wholesale market, men and women of all ages waited, loaded down with the morning’s collection. Some insisted that they had bought the groceries, though food is not generally for sale to individuals there.
Others admitted to foraging through the trash. Victor Victorio, 67, an immigrant from Peru, said he came here regularly to find fruits and vegetables tossed in the garbage. Mr. Victorio, who lost his job in construction in 2008, said he lived with his daughter and contributed whatever he found on this day, peppers, tomatoes and carrots to the household. “This is my pension,” he said.
For the wholesalers who have businesses here, the sight of people going through the scraps is hard.
“It is not nice to see what is happening to these people,” said Manu Gallego, the manager of Canniad Fruit. “It shouldn’t be like this.”
In Girona, Mr. Berloso said his aim in locking down the bins was to keep people healthy and push them to get food at licensed pantries and soup kitchens. As the locks are installed on the bins, the town is posting civilian agents nearby with vouchers instructing people to register for social services and food aid.
He said 80 to 100 people had been regularly sorting through the bins before he took action, with a strong likelihood that many more were relying on thrown-away food to get by.
But Mr. Berloso’s locks created something of an uproar across Spain, where the economic crisis is fueling more and more protests highlighting hunger. A group of mayors and unionists in southern Spain, where unemployment rates are far above the average, recently staged Robin Hood raids on two supermarkets, loading carts with basic foods and pressing them to donate more food to the needy.
More than a dozen people are facing prosecution for theft over the stunt. But they are unrepentant and appear to have huge local support. “Taking some food and giving it to families who are having a really hard time, if this is stealing, I am guilty,” one of the men, Francisco Molero of the farmworkers’ SAT union, told the local news media afterward.
Some politicians say Girona’s locks are really all about protecting Girona’s image. Dominated by medieval buildings and the picturesque cobblestone streets of a beautifully preserved former Jewish quarter, the city of about 100,000 derives most of its income from tourism.
“The social workers or civil agents could refer people to the food distribution center without having to lock bins,” said Pia Bosch, a Socialist councilor in Girona. “It’s like killing a fly with a cannonball.”
The unemployment rate is still relatively low in Girona 14 percent over all, compared with 25 percent for the country as a whole. But more and more families have no income. Of the 7,700 unemployed in Girona, Mr. Berloso said, 40 percent have now run out of benefits.
Many, he said, were “people who never expected to find themselves in this position.”
Ramon Barnera, who runs the Caritas programs in Girona, said the organization realized early on that shame was a factor preventing people from coming forward to ask for food. So three years ago, it helped create food distribution sites that looked more like supermarkets, and removed the charity’s name from the outside of the building.
“We looked for a system that would give dignity,” Mr. Barnera said. “This is not easy for people.”
On a recent morning, Juan Javier, 29, who had come to collect milk, pasta, vegetables and eggs from one of the distribution centers, was one of the few clients who would discuss his circumstances. A former printer, he has been out of work for two years. “I would like to have a job,” he said, “and not be here.”
In a nearby soup kitchen, Toni López, 36, waited quietly for a free lunch with his girlfriend, Monica Vargas, 46, a beautician. The couple recently became homeless when they fell two months behind on their rent. “All our lives we have been working people,” Mr. Lopez said. “We are only here because we are decent people. The landlord was knocking on the door demanding the rent, so we said, ‘Here, here are the keys.’ ”
Mr. Lopez, who gets occasional work these days in restaurant kitchens, said he had a sister but had not gone to her for help. “I can’t bear to tell her,” he said. “I have always pulled through. I’ve always managed to get by. This is new.”
Theory of Spain’s political class
In 2013, César Molinas will publish ¿Qué hacer con España? (or, What to do with Spain?). This text is an excerpt from one of the chapters, in which he analyzes some of the causes at the root of the country's current problems
In this article I propose a theory of Spain's political class to make a case for the urgent, imperious need to change our voting system and adopt a majority system. A good theory of Spain's political class should at least explain the following issues:
1. How is it possible that five years after the crisis began, no political party has a coherent diagnosis of what is going on in Spain?
2. How is it possible that no political party has a credible long-term plan or strategy to pull Spain out of the crisis? How is it possible that Spain's political class seems genetically incapable of planning?
3. How is it possible that Spain's political class is incapable of setting an example? How is it possible that nobody - except the king and for personal motives at that - has ever apologized for anything?
4. How is it possible the most obvious strategy for a better future - improving education, encouraging innovation, development and entrepreneurship, and supporting research - is not just being ignored, but downright massacred with spending cuts by the majority parties?
In the following lines I posit that over the last few decades, Spain's political class has developed its own particular interest above the general interest of the nation, which it sustains through a system of rent-seeking. In this sense it is an extractive elite, to use the term popularized by Acemoglu and Robinson. Spanish politicians are the main culprits of the real estate bubble, of the savings banks collapse, of the renewable energy bubble and of the unnecessary infrastructure bubble. These processes have put Spain in the position of requiring European bailouts, a move which our political class has resisted to the bitter end because it forces them to implement reforms that erode their own particular sphere of interest. A legal reform that enforced a majority voting system would make elected officials accountable to their voters instead of to their party leaders; it would mark a very positive turn for Spanish democracy and it would make the structural reforms easier.
THE HISTORY
The politicians who participated in the transition process from Franco's regime to democracy came from very diverse backgrounds: some had worked for Franco, others had been in exile and yet others were part of the illegal opposition within national borders. They had neither a collective spirit nor a particular group interest. These individuals made two major decisions that shaped the political class that followed them. The first was to adopt a proportional representation voting system with closed, blocked lists. The goal was to consolidate the party system by strengthening the internal power of their leaders, which sounded reasonable in a fledgling democracy. The second decision was to strongly decentralize the state with many devolved powers for regional governments. The evident dangers of excessive decentralization were to be conjured by the cohesive role of the great national parties and their strong leaderships. It seemed like a sensible plan.
But four imponderables resulted in the young Spanish democracy acquiring a professional political class that quickly grew dysfunctional and monstrous. The first was the proportional system with its closed lists. For a long time now, members of party youth groups get themselves on the voting lists on the sole merit of loyalty to their leaders. This system has turned parties into closed rooms full of people where nobody dares open the windows despite the stifling atmosphere. The air does not flow, ideas do not flow, and almost nobody in the room has personal direct knowledge of civil society or the real economy. Politics has become a way of life that alternates official positions with arbitrarily awarded jobs at corporations, foundations and public agencies, as well as sinecures at private regulated companies that depend on the government to prosper.
Secondly, the decentralization of the state, which began in the early 1980s, went much further than was imaginable when the Constitution was approved. As Enric Juliana notes in his recent book Modesta España (or, Modest Spain), the controlled top-down decentralization was quicky overtaken by a bottom-up movement led by local elites to the cry of "We want no less!" As a result, there emerged 17 regional governments, 17 regional parliaments and literally thousands of new regional companies and agencies whose ultimate goal in many cases was simply to extend paychecks and bonuses. In the absence of established procedures for selecting staff, politicians simply appointed friends and relatives, which led to a politicized patronage system. The new political class had created a rent-seeking system - that is to say, a system that does not create new wealth but appropriates existing wealth - whose sewers were a channel for party financing.
Thirdly, political parties' internal power was decentralized even faster than the public administration. The notion that the Spain of the Regions could be managed by the two majority parties (the conservative Popular Party and the Socialists) fell apart when the regional "barons" accumulated power and, like the Earl of Warwick, became kingmakers within their own parties. This accelerated the decentralization and loss of control over the regional savings banks. Regional governments quickly passed laws to take over the cajas de ahorros, then filled the boards with politicians, unionists, friends and cronies. Under their leadership, the savings banks financed or created yet more businesses, agencies and affiliated foundations with no clear goal other than to provide yet more jobs for people with the right connections.
Additionally, Spain's political class has colonized areas that are not the preserve of politics, such as the Constitutional Court, the General Council of the Judiciary (the legal watchdog), the Bank of Spain and the CNMV (the market watchdog). Their politicized nature has strangled their independence and deeply delegitimized them, severely deteriorating our political system. But there's more. While it invaded new terrain, the Spanish political class abandoned its natural environment: parliament. Congress is not just the place where laws are made; it is also the institution that must demand accountability. This essential role completely disappeared in Spain many years ago. The downfall of Bankia, played out grotesquely in last July's parliamentary appearances, is just the latest in a long series of cases that Congress has decided to treat as though they were natural disasters, like an earthquake, which has victims but no culprits.
THE BUBBLES
These processes created a political system in which institutions are excessively politicized and where nobody feels responsible for their actions because nobody is held accountable. Nobody within the system questions the rent-seeking that conforms the particular interest of Spain's political class. This is the background for the real estate bubble and the failure of most savings banks, as well as other "natural disasters" and "acts of God" that our politicians are so good at creating. And they do so not so much out of ignorance or incompetence but because all these acts generate rent.
The Spanish real estate bubble was, in relative terms, the largest of the three that are at the origin of today's global crisis, the US bubble and the Irish bubble being the other two. There is no doubt that, like the others, it fed on low interest rates and macroeconomic imbalances on a global scale. But unlike the US, in Spain decisions regarding what gets built where are taken at the political level. In Spain, the political class inflated the real estate bubble through direct action, not omission or oversight. City planning is born out of complex, opaque negotiations which, besides creating new buildings, also give rise to party financing and many personal fortunes, both among the owners of rezoned land and those doing the rezoning. As if this power were not enough, by transferring control of the savings banks to regional governments the politicians also had power of decision over who received money to build. This represented a quantum leap in the Spanish political class' capacity for rent-seeking. Five years on, the situation could not be more bleak. The Spanish economy will not grow for many years to come. The savings banks have disappeared, mostly due to bankruptcy.
The other two bubbles I will mention are a result of the peculiar symbiosis between our political class and Spanish capitalists who live off government favors. At a recent meeting, a well-known foreign investor called it "an incestuous relationship" while a Spanish investor talked about "a collusion against consumers and taxpayers." Be that as it may, let us first discuss the renewable energy bubble. Spain represents two percent of world GDP yet it is paying 15 percent of the global total of renewable energy subsidies. This absurd situation, which was sold to the public as a move that would put Spain on the forefront of the fight against climate change, creates lots of fraud and corruption, and naturally captured rent, too. In order to finance these subsidies, Spanish households and businesses pay the highest electricity rates in all of Europe, which seriously undermines the competitiveness of our economy. Despite these exaggerated prices, the Spanish power system debt is several million euros a year, with an accumulated debt of over 24 billion euros that nobody knows how to pay.
The last bubble I will discuss concerns the countless unnecessary infrastructure projects built in the last two decades at an astronomical cost, benefiting the builders and hurting the taxpayers. One of the most scandalous cases is the spoke highways into and out of Madrid. Meant to improve traffic flows into the capital, the radiales were built with no thought given to important principles of prudence and good management. First, rash forecasts were made regarding the potential traffic on these roads (currently it is 30 percent of expectations and not because of the crisis; there was no traffic in boom times, either.) The government allowed the builders and the concessionaires to be essentially the same people. This is madness, because when builders disguised themselves as license holders through companies with very little capital and huge debt, builders basically got money from the concessionaires to build the highways, and when there was no traffic, they threatened to let the latter go broke. The main creditors were - surprise! - the savings banks. So nobody knows how to pay the more than three billion euros in debt, which will ultimately fall on the taxpayers' shoulders.
THE THEORY
The principle is very simple. Spain's political class has not only turned itself into a special interest group, like air traffic controllers for example; it has taken a step further and formed an extractive elite in the sense given to this term by Acemoglu and Robinson in their recent and already famous book Why Nations Fail. An extractive elite is defined by:
"Having a rent-seeking system which allows, without creating new wealth, for the extraction of rent from a majority of the population for one's own benefit."
"Having enough power to prevent an inclusive institutional system - in other words, a system that distributes political and economic power broadly, that respects the rule of law and free market rules."
Abominating the 'creative destruction' that characterizes the most dynamic forms of capitalism. In Schumpeter's words, "creative destruction is the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one." Innovation tends to create new centers of power, and that's why it is detested.
What does this simple theory have to say about the four questions set forth at the beginning of this article? Let us see:
1. Spain's political class, as an extractive elite, cannot effect a reasonable diagnosis of the crisis. It was their rent-seeking mechanisms that provoked it, but obviously they cannot say that. The Spanish political class needs to defend, as it is indeed doing to a man, that the crisis is an act of God, something that comes from the outside, unpredictable by nature, and in the face of which we can only show resignation.
2. Spain's political class, as an extractive elite, cannot have any exit strategy other than waiting for the storm to pass. Any credible long-term plan must include the dismantling of the rent-seeking mechanisms that the political class benefits from. And this is not an option.
3. Nobody apologizes for defending their particular interests. Air traffic controllers didn't, and neither will our politicians.
4. Just as the theory of extractive elites states, Spanish political parties share a great contempt for education, innovation and entrepreneurship, and a deep-seated hostility towards science and research. The loud arguments over the civics education course Educación para la Ciudadanía are in stark contrast with the thick silence regarding the truly relevant problems of our education system. Meanwhile, innovation and entrepreneurship languish in the midst of regulatory deterrents and punitive fiscal measures. And spending on scientific research is viewed as a luxury that politicians cut back savagely on, given half a chance.
THE FORECAST
The crisis has underscored the conflict between the particular interest of Spain's political class and Spain's general interest. The necessary reforms to keep the country in the euro are in direct conflict with the rent-seeking mechanisms that sustain this particular interest. On one hand, budget stability requires a structural reduction of spending in public administration that is upwards of five percent of GDP. This cannot be achieved with further superficial cuts; now we need deep reforms that will reduce the main source of rent for the political class. On the other hand, in order to grow, the Spanish economy needs to become more competitive. The necessary reforms to make that happen will also make it more difficult to create new bubbles.
The infinite reluctance with which our political class is tackling the reform process illustrates how, collectively at least, it is pondering the consequences that these reforms will have on their particular interest. The government is deliberately getting reform confused with cost-cutting and tax hikes, offering the second rather than the first in the hopes that the storm will let up and that, in the end, nothing really essential will have to be changed. But since this is not going to happen, at some point the Spanish political class will have to consider the conundrum of either seriously embracing reform or abandoning the single currency. And this, I believe, is going to happen sooner rather than later.
The theory of extractive elites predicts that the particular interest will tend to prevail over the general interest. I see a likely scenario in which both majority parties will quickly develop a "pro peseta" sentiment. The confusion created between cuts and reforms has the perverse consequences of preventing the population from seeing the long-term advantage of the reforms, although it does feel the short-term pain of cuts that are invariably presented as a foreign imposition. This creates the necessary conditions to present a departure from the single currency as a defense of national sovereignty in the face of outside aggression and unacceptable cuts to the welfare state.
Leaving the euro, either on its own initiative or because northern countries have gotten tired of living with southern ones, would be disastrous for Spain. It would mean, as Jesús Fernández-Villaverde, Luis Garicano and Tano Santos accurately wrote in EL PAÍS last June, a return to the 1950s economically speaking, but also a return to the patronage system and a political and social corruption that would take us back to much earlier dates and amply surpass today's situation, which is already very bad.
There is a very significant danger of all this happening in the short term. Can something be done to avoid it? Not much, except to keep publishing articles like this one. Spain's political class has no short-term alternatives. In the long run it does, as I will now explain.
ELECTORAL REFORM
Spain's political class, as we have seen, is the result of several factors, chiefly the proportional representation system with closed, blocked lists that are drafted by party leaders. This system grants the latter enormous power and has produced a dysfunctional political class. There is no perfect electoral system, but because of everything that's been discussed here, Spain should change its voting system to obtain a more functional political class. First-past-the-post systems produce elected officials who answer to their voters, instead of just to their leaders. As a result, party leaderships have less power and the representation afforded by the polls is less influenced by the media. These are the advantages. There are also drawbacks. A proportional system ends up awarding seats to minority parties that might not get any with a majority system. This would hurt state-wide minority parties, but benefit regional minority parties. In any case, the most relevant feature of a majority system is that the voters have power of decision over the parties and over the candidates who are elected, and this right now is a peremptory need in Spain that compensates the drawbacks of the system. It would not heal all wounds, but it would very likely create a different political class more attuned to Spain's needs. In Italy, there is an imminent legal initiative to change the current proportional system to a corrected majority system. It seems that the technocratic government of Mario Monti has reached similar conclusions to my own here: without changing a dysfunctional political class, one cannot embrace an ambitious program of reform. As I once heard former Socialist Economy Minister Carlos Solchaga say, a "technocrat" is a politician who also happens to be knowledgeable about a topic. How long until we have electoral reform in Spain? Will we have to wait for the "technocrats"?
Si (
No(
