Why spain is in crisis

Spaniards might be all the more minded to transfer their money to the safety of a German bank account if they witness a traumatic exit of Greece from the eurozone - something likely to involve the freezing and forced conversion of ordinary Greeks' savings into severely devalued drachmas.

On the other hand, if the Spanish banks get into trouble then the government in Madrid may not have enough money to bail them all out. But the problems faced by Spain's government and its banks are just symptoms. The real issue is the mess that is Spain's economy. Believe it or not, before Spain's government was one of the least spendthrift in the eurozone - unlike Greece. Or Germany.

What's more, Madrid was in the process of paying its debts off - it earned more in tax revenues than its total spending. Evidently, this crisis has nothing to do with the recklessness of Spain's government. Instead, it was other people in Spain who behaved recklessly. Interest rates fell to historic lows when the euro was launched in So Spain's banks, property developers and ordinary home-buyers collectively borrowed and fuelled an enormous property bubble.

Between and , Spanish property prices tripled - comparable to the price rises seen in the UK. Now the bubble has popped. Those prices are steadily falling - and they look like they have a lot further to go. The construction industry has collapsed, leaving hundreds of thousands out of work.

Overindebted home-owners face financial misery and have cut back on spending. And the banks are staring at a mounting pile of bad mortgage debts.

All of which means that now - just like the UK - Spain's government finds itself borrowing and spending like crazy to stop its economy from collapsing altogether. Unfortunately for Spain, a burst housing bubble isn't the biggest problem the country faces. That's because Spain also experienced another bubble - in its labour markets. Wages rose far too quickly during the boom years of the last decade. That loss of competitiveness has left Spain - not just the government, but the entire country - with a big overspending problem.

Unfortunately for Spain, it shares a currency with Germany. That means Spain can no longer simply devalue the peseta - something that would automatically make its workers cheaper and more competitive in the world. There is no peseta to devalue. It means that Spain will remain stuck in an overvalued currency - while Germany will continue to enjoy an undervalued currency - for many more years, until that gap in the relative competitiveness of their workers slowly closes again.

And this is where it gets really nasty. Because so long as Spanish workers remain uncompetitive in the world economy, it is inevitable that Spain as a whole - government and private sector - will continue to have to borrow from the rest of the world. To eliminate this overspending altogether may require a far deeper recession. As far as Spain is concerned this Europe, the neoliberal and post-neoliberal Europe that has presided over the Community since our accession has not been of great value to our country.

It may be that our economy has grown by a few points more than if we had not joined, and even that is not certain, but it seems to us that belonging to the Union has instead exacerbated the previous imbalances we traditionally had. The prospect of a more powerful European Union is not that attractive seen from the perspective of a peripheral country like Spain.

No surprise that most people in a country who used to be deeply pro-European are increasingly eurosceptic. Unemployment is the key problem for the Spanish population, together with uncertainty for those who are working and the degradation of wages and labour conditions.

Temporary work has become the norm, more and more people are being evicted from their houses, social services have deteriorated, and no improvement is even on the table. A general atmosphere of hopelessness, fear for the future and despair dominates the country. The heaviest cuts imposed by the austerity measures are affecting the nucleus of the welfare state: pensions, health care and education. That Spain cannot grow and create employment with these austerity policies is absolutely clear.

Even business is not doing so well: overall in there was a 5. The measures that are being taken will make the recession permanent and deeper. What is more, they are not helping to pay the debt and even paying for its interest might be difficult. If the measures are not going to solve the problems of the countries concerned, why are these measures being taken? Do the decision makers still believe that saving on other expenses will allow them to pay off the debt?

The difficulty is evident. Or is it possible that decisions makers have been persuaded that supply economics work? The evidence points directly in the opposite direction. That leaves only one possible explanation: mounting government debt is being used to scare populations into accepting all these austerity policies as unavoidable and necessary. By redesigning macroeconomic policies, productive systems and labour relations, and by destroying the welfare state in favour of the interests of private capital, this corporate agenda is leading the EU countries into a new phase of capitalism in which profits for a minority will be the only relevant variable and everything else has to totally submit to this.

Since May , young and not so young people have started to react. Thousands of them gathered in the main public squares of cities and towns to protest. Existing social movements have integrated themselves into the groups and have helped to give more political content to the gatherings.

The movement is known under many names but perhaps most often as the M movement, named after the day when it all started May 15, Against all expectations these movements have continued. They are debating and discussing politics and social issues with creative and interesting horizontal structures for doing things assemblies without leaders. Public opinion is totally on their side. Nobody knows what will come out of that movement. They are so different from most political and social work taking place until now that it is difficult to assess their future.

But for the time being they have reacted, shown their rejection of the present situation, expressed their frustration and anger, and brought a spark of hope. We are a small team that works fully independently of funding from EU institutions and corporations. Every single donation helps us fight the hold of Big Business over the EU. Search this site. Facebook Twitter Mail Print. Spain in crisis: the role of the EU. Business profits increased 4.

Economic integration and the European periphery European economic integration has brought together countries with very different productive models and varying degrees of competitiveness. The crises, indebtedness and adjustment policies When the financial crisis started in the United States and spread through the world, the Spanish authorities and even the financial sector reacted quite optimistically. The effects of the crisis Unemployment is the key problem for the Spanish population, together with uncertainty for those who are working and the degradation of wages and labour conditions.

A glass ball for the next decade and beyond If the measures are not going to solve the problems of the countries concerned, why are these measures being taken? Help us stay independent. As for Spain's debt, the best official data at our disposal are those of the gross external debt position and these can be found in The World Bank Open Data collection of time series data of the World Bank.

In Table 1 the reader can find the yearly data concerning Spain's gross external debt position from to The difference between the amount reached in and that of end of the year , shows the increase in debt Spain had to endure in the period under exam. Statistical data concerning Spain's external debt between and in millions of US dollars. As for the data liable to justify this increase, the most significant are those of Spain's current account CA deficit.

The ones entered into Table 1 are those collected by the IMF and show a persistent deficit throughout the period — and a surplus for the following three years. The sum of Spain's net current account deficits from and explains part of the increase in its external debt during the same period. Another pertinent data set concerns the variation in Spain's official reserves.

Yet, as the data of Spain's external debt are those of its gross external debt position and given the negative sign of Spain's current account, it is clear that the increase in its official reserves gives necessarily rise to an equal increase in its gross external debt. The same is true for the other components of Spain's official reserves. Gold, for example, is an asset that the Spanish central bank can obtain only by purchasing it, a transaction that requires the expenditure of an equivalent amount of foreign currencies.

Finally, the positive variation in Spain's official reserves, given by the difference between their amount in and in end of the year , has to be included in the data accounting for the increase in Spain's gross external debt position in the period — In particular, what we have to verify is whether from to Spain's IIP was positive or negative.

The negative sign of the IIP shows, in fact, that in those years Spain was no net purchaser of foreign financial claims. This is to say, that during the period — Spain has benefited from net foreign loans, so that its net financial imports are not part of the cause of the rise in its external debt.

To the extent that net foreign loans increase the country's inflows of foreign currencies, the variation of Spain's official reserves already account for them, which indicates that the increase in Spain's gross external debt position is justifiable up to the sum of its CA deficit and the increase in its official reserves. If no pathology had affected the payments of Spain's international transactions, the following equation would apply for the period — On the contrary, the difference between the latter and the former gives the amount of the pathological increase in Spain's external debt.

Statistical data are subject to distortions due to exchange rate fluctuations. Despite cross verifications, increases in control, and the adoption of a shared methodology and protocol by international institutions, their reliability remains approximate.

Because of this, one cannot provide a true statistical proof of the pathological duplication of Spain's external debt. Although not comparable to a formal proof, the convergence between the unjustifiable increase in Spain's foreign debt and the amount of its net imports is a statistical confirmation of what Schmitt has established on logical basis.

It confirms, indeed, that, in the present non-system, the payment of Spain's net global imports is at the origin of its sovereign debt, an external debt carried by the country as a whole whose nature is entirely pathological. The aim of a reform dealing with the sovereign debt crisis is clear: to allow Spain to pay only once for its net imports. One must find a way to enable Spain, or any other single country willing to follow its example, to carry out its external payments on its own without incurring a sovereign debt in the presence of a framework characterized by a non-system of international payments.

In other words, one has to show that any single country can implement a mechanism capable of protecting it against the pathologies of the present non-system without any negative side effects for its foreign partners. Spain must pay its foreign economic correspondents their due, and it must do so without any need to reduce its foreign trade in the least because of the reform. In his paper, Schmitt advocates a series of measures that, if implemented, would enable any net importing country not only to avoid getting indebted, but also to earn what it loses today in the double payment of its net imports.

Let us summarize them here and offer a concrete example showing how they would work. The pathologies affecting the non-system of international payments are of a macroeconomic nature, and derive from the lack of appreciation of this crucial aspect. It is therefore not surprising that Schmitt's first measure consists in creating a sovereign Bureau charged to represent the country as a whole. The aim of such measure is to transform domestic payments to the benefit of the rest of the world into payments carried out between residents.

As a rule, the Bureau would collect all the payments made by the importers and see to the payment of exporters. It follows that the Bureau would obtain, as a net gain, the difference between the sum paid by Spanish importers and that paid to Spanish exporters — a difference equal to Spain's net imports.

This should not come as surprise: by avoiding the double payment of net imports, the reform would prevent the loss of the domestic income spent by Spanish residents in the domestic payment of net imports. This second, all-important measure is difficult to understand. Indeed, Spain's Bureau has also to collect all the payments made by the rest of the world to the benefit of Spain, and to pay R's exporters, in MR, for their sales to Spain.

Even after the reform, this would require Spain its Bureau to borrow abroad a sum of MR equal to the difference between Spain's purchases and sales. However, if the reform envisaged nothing else, no major change would occur with respect to the present situation.

The payment of net imports would still be paid by Spain through a foreign loan, and the duplication discovered by Schmitt , could not be avoided. Under these conditions, the gain of the Bureau would not be net and final, but would be lost to Spain, whose Bureau would be reduced to an intermediary incapable to avoid the appropriation by R of part of Spain's domestic income. Hence, what the reform has to neutralize is the loan the Spanish Bureau must obtain from abroad.

This can be achieved thanks to the second measure envisaged by the reform, that is, thanks to the counter loan that the Bureau would grant to R. Let us make it clear at once that the two loans — from R to Spain and from Spain to R — are indeed two distinct loans, because the borrowers and lenders of each country are distinct residents. Thanks to the loan granted to R by the Spanish Bureau, the rest of the world would become the owner of part of Spain's current output, and would match its net exports by equivalent financial imports.

Indeed, in the same way as Spain acquires the ownership over part of R's current production because of the loan it obtains from R, the rest of the world acquires the ownership over an equivalent part of Spain's current output because of the loan granted to R by the Spanish Bureau. What calls for this measure is the need to offset the decrease in employment that would arise if the Bureau were to spend or redistribute its net gain for the purchase of Spain's domestic output.

The explanation is given by the fact that a net expenditure of foreign currency decreases the production of the national economy whose foreign imports are net. To avoid the loss of domestic income suffered by Spain because of the duplication of the payment of its net imports, it is essential to create a Bureau and channel through it all the payments concerning Spain's external transactions. Yet, this is not enough. The Bureau has to invest its gain in domestic income, resulting from the payment of Spain's net imports by its residents, in order to increase Spain's domestic production, thus avoiding the decrease in employment due to the payment of its net imports.

That third measure would benefit both Spain and its foreign partners. Indeed, it is almost redundant to note that it is in the interest of the rest of the world to trade with a country that pays for all its net purchases and whose domestic economy does not suffer from a rise in unemployment every time it pays its due.

A related argument can help us explain the reason why the Spanish Bureau would have to invest its net gain in a new production. The aim of the reform is to avoid the very formation of Spain's sovereign debt, while making sure that the country pays its foreign creditors their due.

The key to the solution is to conform the mechanism of international payments to the balance-of-payments identity between EX and IM.

This is achieved by balancing Spain's net imports with the financial transfer of an equivalent part of Spain's current production. Yet, in order for that to occur without reducing Spain's employment, it is necessary to increase Spain's production through the investment of its Bureau's net gain.

If Spain's Bureau did not invest its net gain of domestic income in a new production, Spain's domestic product would decrease as an effect of the payment of its net imports. Following the investment of the Bureau, Spain's production would remain at its previous level, because the new production would compensate the decrease due to the loan that would still be required for the payment of Spain's net imports, and the rest of the world would become the owner of a part of Spain's output equal in value to that exported to Spain.

A country alone cannot create a system of international payments. The reform suggested by Schmitt allows any country adopting it to avoid the shortcomings of a system like the present one, but not the need for the deficit country to borrow abroad the difference between its global imports and exports.

As the next section will show, even though Spain's sovereign debt would no longer build up, the Bureau would have to borrow in each period a sum equal to Spain's net imports.

In our numerical example, if Spain's net imports remain equal to 1 MR for an indefinite number of periods, Spain's external debt would merely be reproduced in each period and remain equal to 1 MR.

Hence, the investment of the Bureau's net gain in an additional domestic production is necessary to avoid a decrease in the level of Spain's domestic income i. As already mentioned, the main advantage would be to avoid the loss of Spain's domestic income that accompanies the payment of its net imports. Today, Spain recovers the domestic income spent by its residents in the payment of their net foreign purchases only through a macroeconomic loan that defines the country's sovereign debt.

Tomorrow, the Spanish Bureau would collect the net sum spent by Spain's residents and invest it domestically. At the same time, the Bureau would lend to R an amount of foreign currencies equal to the one borrowed from R, a measure that would make the formation of Spain's sovereign debt impossible in the first place. What is extremely important to observe is that none of the benefits that Spain would obtain from Schmitt's reform would damage the rest of the world, which, on the contrary, would obtain the full payment of its net exports and benefit from the advantage of having a reliable country as a foreign economic partner instead than an indebted one.

Today, R gives up part of its current production in exchange for an equivalent part of Spain's future product, and faces the impoverishment its trading partner suffers from any time its imports exceed its exports. As the reader will have noticed, the reform would not benefit Spain two times: once by avoiding the loss of part of its domestic income and once by avoiding the formation of its sovereign debt. Spain would indeed benefit from both these advantages, however this is because they are the joined effect of a single achievement: the reduction of the payments of Spain's net imports to a single payment.

The choice is between two alternatives: either 1. Spain pays only once its net purchases by exchanging foreign goods against the ownership over part of its current production, in which case it neither suffers from a loss of its national income, nor incurs a sovereign debt. Things would be radically different if the reform implied the non-payment of Spain's net imports. Yet, this is not at all the case. Indeed, according to the reform advocated here, Spain would pay for all its net imports, the only payment abolished being the second, pathological payment suffered by Spain to the benefit of the financial bubble.

Hence, the reform would not harm the rest of the world in the least, because it would guarantee the full payment of Spain's creditors. Statistical data at our disposal being limited and approximate, the use of the conditional tense is compulsory with respect to the gain in domestic currency that Spain's sovereign Bureau would derive from the implementation of Schmitt's reform.

The same caution is called for as far as Spain's sovereign debt is concerned. However, data concerning Spain's external debt are largely available see Table 1 , and it is safe to claim that the amount of unjustified increase in Spain's external debt from to billion dollars gives a hint of the debt that Spain would have avoided during that period. The figure advanced here does not provide more than an approximation of what Spain would have saved in interest payments if it had been able to avoid the formation of its sovereign debt in the period — As for the gain in domestic income, in order to calculate its amount we would have to know: a.

The sum of Spain's net commercial and financial imports during a given period of time, and. The sum of Spain's reimbursement of the foreign debts incurred both previously and during the considered period.

It is clear, indeed, that both these sums together determine the amount of Spain's net expenditures. Since the net foreign expenditures of Spain's residents measure the gain of Spain's Bureau in domestic currency, it is necessary to add a. Unfortunately, data concerning Spain's principal repayments are not officially available, and one can only guess what their amount could be if a series of conditions were to apply.

Let us examine a hypothetical, plausible example by assuming that, in the period —, Spain's external debt was repaid after a time interval of 6 years.

Taking into consideration the fact that statistical data concerning Spain's gross external debt position before are not available, one can calculate the amount that Spain would have paid back principal repayments under this assumption from to Given the statistical data officially published, and considering the 6 years interval we have assumed, in the amount of Spain's principal repayment of its sovereign debt would have been billion dollars where billion dollars is the amount of the unjustified or pathological increase in Spain's gross external debt in This is nothing more than the theoretical amount of its external debt that Spain would have paid back assuming that principal repayments were carried out in full 6 years after debt arose.

As long as the reform applies in a situation where Spain would still have to reimburse its previous sovereign debts, the gain of the Spanish Bureau would be equal to the sum of its current net imports and of its principal repayments.

As in Spain's current account balance was positive by 16 billion dollars, the gain of the Bureau would have been approximately of.

Our statistical exercise merely aims to hint at the sums involved, in particular, of the significant amount the Spanish Bureau would derive from the implementation of the reform proposed by Schmitt , and advocated here. Experts in analysing Spain's statistical data should be able to approximate the right figures to the best of their knowledge.

In the meantime, the indicative amount calculated here is enough to give a rough idea of the potential benefits for Spain's Bureau. It is easy to imagine the positive impact on Spanish unemployment if this amount of money had been invested by Spain's Bureau in the production of additional goods and services. Spain's domestic production would have increased accordingly, and the country would have paid its net global purchases by transferring to the rest of the world the ownership of a part of its domestic economy's output for the same value.

Spain as a country would have been spared an external debt additional to the one incurred by its residents, and its sovereign debt would not have increased one iota. One can provide the clearest presentation of all the payments involving Spain's Bureau by distinguishing between periods and assuming that the Bureau reimburses the external debt incurred in each period in the following one.

Since the Spanish Bureau would be in charge of carrying out all the payments relating to Spain's international transactions, it is clear that the Bureau would represent the country itself and would be in very close contact with the Spanish central bank. Indeed, nothing prevents the Bureau from being a special branch of the central bank. Moreover, Spain's official reserves defining the financial assets of the country as a whole, as set of its residents, an integration of official reserves into Spain's Bureau or the possibility for the Bureau to use part of Spain's official reserves as a revolving fund is easily conceivable.

Let us suppose once again that Spain's net imports, commercial and financial, are equal to 1 MR in each period. If we assumed that periods are months, and if the reform were implemented at the beginning of the year, Spain's Bureau would have to borrow 1 MR in January in order to pay for Spain's net imports.

Rather than borrowing this sum from R, it is simpler to assume that it would borrow it from Spain's official or international reserves. January's transactions and their result. Even though the reform would not yet fully operate in January, the situation would be remarkably better than the one we have today. Indeed, the net gain of the Spanish Bureau, 1 MR in Spain's domestic currency 1 , would be entirely new, and would compensate for the increase in Spain's external debt due to the decrease in its official reserves 2 since foreign reserve assets define a credit, it is clear that their decrease is tantamount to an increase in debt.

The transaction represented in 3 is one of the key operations in Schmitt's reform. It would allow for the payment of Spain's net imports by transferring to R the ownership over part of Spain's current production.

If it is true that, by lending part of its current domestic income to Spain, the rest of the world is paying for Spain's net imports, it is equally true that the loan granted by Spain to R would pay for an equivalent amount of R's imports. It is from February onward that the reform would work in full, because from then on the Bureau would pay back the loan obtained in the preceding period and would keep on lending an amount of foreign currency to R.

The various payments involving the Spanish Bureau are those represented in Table 3. Indebted to Spain's official reserves because of the loan obtained in January, the Spanish Bureau would cancel its previous debt, but it would also incur a new debt to R. Yet, the situation for Spain, considered as a whole, would not define an increase in its external debt: the increase in credit of Spain's official reserves would balance the Bureau's indebtedness.

What Spain's official reserves lend on the foreign exchange market would balance what R lends to the Spanish Bureau. Transaction 3 would guarantee the compliance with the balance-of-payments identity without depending on Spain's future production, as is the case today. By balancing the external loan obtained by Spain from R with an equivalent loan granted by Spain to R, the implementation of 3 would suffice to avoid the very formation of Spain's sovereign debt.

The last transaction, 4 , is required to enable Spain's Bureau to pay for its country's net imports of February. Despite the balance-of-payments identity, it remains true, in fact, that Spain's total imports, commercial and financial, in February amount to 11 MR, while its total exports are merely equal to 10 MR.

At the end of February, the situation would be as follows. The rest of the world is fully paid for its net exports. Spain's external debt, measured by the decrease in its official reserves, is again equal to 1 MR.

If Spain's foreign transactions were to remain unchanged over a number of periods months , its external debt would merely be reproduced: in the n th period, it would still be equal to 1 MR. The result of the reform would be to enable Spain to pay for the totality of its net imports, without getting indebted and without suffering from a loss of domestic income.

A mechanism that guarantees the full compensation of Spain's net imports by an equivalent financial transfer of its current output would achieve this.