Original Article: Sterdyniak : “on demande à l’Espagne de prendre des mesures très lourdes sur le plan social et inefficace sur le plan économique,” translated by Stephan Crown-Weber and reviewed by Derek Hanson.
Henri Sterdyniak is the Director of the Economics of Globalization Department at the French Economic Observatory, a professor at l’Université de Paris-Dauphine, and a member of the Grounded Economists’ Collective. He offers his explanations and analysis of the deepening crisis in Spain.
The Spanish banks got infusions of capital on several occasions and are in trouble again. Why are they having difficulties?
This much is clear. Spain had a real estate bubble which burst, and so, naturally, the Spanish banks are racking up a lot of non-recoverable debt. They made a lot of loans to developers who themselves went bankrupt, which translated into banks going bankrupt.
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The other factor is that Spain is in a recession; its growth is extremely weak. And it has a really high unemployment rate. Some households have consequently had trouble paying off their loans, and businesses have had financial difficulties, so Spain is caught in a vicious circle: the banks are in trouble, they’re generating less credit, and, as a result, it makes the banks’ situation even worse, and all this has contributed to Spain’s downward plunge.
You describe the country’s economy as being in an infernal spiral. And yet, the government is getting ready to pay out billions to Spanish banks. How to explain this ambiguity between the austerity long applied in Spain and this permanent search for money for the banks?
That reflects the deep imbalance of the banks in 2007. They’d made massive loans to the real estate sector and, so, totally naturally, the collapse of that sector is becoming extremely costly. Moreover, it must be noted that all the loans that the Spanish banks could make, in particular the public debt that they hold, have become risky loans since the markets consider them as such. And therefore the banks faced with these risky loans are obliged to maintain a capital base. Which generates extremely large liquidity requirements to the point where the Spanish government has refused to default on a part of the banking debt. It’s extremely costly since the banks’ creditors must be reimbursed.
Several times, Rajoy’s government has announced it was revising its public deficit figures upward, as George Papandreou did in Greece between October 2009 and May 2010. Is there a risk of Greek scenario in Spain?
Spain’s problem is a general European problem. In 2010, it was running a high public deficit: at 9.3% of GDP, they’re being asked to undertake the challenging task of reducing this deficit. The Spanish government is committed to this. The problem is that, as a result, Spain has bad economic growth, and the economy isn’t recovering. And then, when they raise taxes, that hinders growth, it dampens tax receipts, so the government can’t honor its agreements. Furthermore, the question arises about Spain’s regions: its regions have to be major contributors to the effort. Or rather, the regions must “get” households to adopt these efforts, by reducing health and education spending, which isn’t popular in Spain. We’re in a scenario where Spain is being asked to adopt socially-burdensome and economically-ineffective measures. Spain was unable to hold to this agreement. It committed to providing a budgetary measure consisting of four percentage points of GDP, which is enormous. In fact, it only came up with two points, which is already a lot. The problem is that it committed to making the same level of effort in 2013. Again, this commitment is impossible to honor. There’s a contradiction between what a country can bear and the Commission’s demands. The country isn’t going to meet these objectives and will find itself subjected to speculation or to the fears of financial markets—and the crisis won’t end. Moreover, this is happening in a context where the Eurozone as a whole is practically seeing negative growth (-0.1% to -0.2% of GDP for the zone as a whole), which does not help Spain. It won’t be able to honor its agreements, which raises concerns about a financial and political crisis. The Eurozone isn’t functioning: that’s the problem. Spain’s deficit isn’t higher than the United States’, and they aren’t being attacked by financial markets, aren’t making the huge public deficit commitments that are being imposed on Spain.
Spain’s debt, however, is lower than Germany’s and France’s. Isn’t it an error to fixate on the debt?
The European Commission is looking at the deficit, which is relatively big for Spain. The markets are looking at the public debt but also the whole problem linked to the banks. It’s why the markets speculate—they’re fearful about the Spanish situation. The Eurozone’s problem is that there are countries in trouble that don’t have the means to escape these difficulties. They are bogged down by the Eurozone’s rules and can’t devalue like the Scandinavian countries could. They don’t dare take major actions targeting the banks’ creditors. Consequently, these countries are condemned to austerity policies that don’t reassure the financial markets, don’t allow a reduction of the debts and public deficits, which aggravates the situation for banks and businesses. And therefore, they’re trapped in a circle. The solution that involves saying “The countries can’t devalue because they’re in the Eurozone, but in exchange, they do benefit from the Eurozone’s strong solidarity” doesn’t apply, one hopes, since in order to have strong Eurozone solidarity, Spain would have to request aid from the European Financial Stability Facility before it can be subjected, like Ireland, Greece, and Portugal, to the troika, which Spain wants to avoid. We have a situation where Spain is completely trapped between the constraints of the Eurozone, which prevents it from having a strong policy, and the absence of real solidarity within the Eurozone. And at the same time, the markets are paying close attention; they say that Spain is going to crack, the Eurozone won’t be able to come to its aid, so Spain is a weak link, and that deepens Spain’s troubles. They’re stuck, much like the other southern countries. We have a Eurozone that doesn’t function and markets watching for signs that the Eurozone is falling apart. The situation is therefore unsustainable.
In your opinion, is the hypothetical implosion of the Eurozone worth taking seriously?
It’s a serious threat. The zone isn’t functioning. Every 15 days, there’s a speculative movement against Greece, against Spain…the countries are permanently subjected to blackmail: either practice the austerity that leads to recession, or be victims of financial markets’ speculation. And Europe is incapable of the requisite solidarity which ought to be a condition for salvaging the situation. Europe is also incapable of a growth program since we see deep divergences between those who say that to generate growth, we have to stop austerity and make productive investments, and those who say that to generate growth, we have to implement austerity and increase the flexibility of the goods and services markets—that’s the German position. Meanwhile, in Spain’s case, we already have an unemployment rate of 24%: we don’t see how increasing the labor market’s flexibility could help.
Europe’s problem is that there are no strategies for growth, no clear strategy vis-à-vis the markets. There’s a clear risk of implosion. With Germany saying that there won’t be solidarity if the budget pact isn’t implemented—right when there’s a budget deal which requires everyone to implement austerity policies that hinder growth, we see why the Eurozone is extremely fragile and hasn’t found a satisfactory way to function. The Eurozone has to be changed and there are two ways to change it: the incompatible French and German approaches.