In the last few days Spain has been again in the eye of the storm of the European economic crisis. What is really at stake is the unravelling of the deep crisis of Spanish capitalism with profound social and political consequences and its impact in the rest of European and world economy.
Frenzied movements in the markets sent yields (the interest rate Spain would have to pay to raise money on the debt markets) on Spanish bonds to 6%, the highest in the three months of office of the new right-wing government of Rajoy (falling back to 5.9% a couple of days later). The risk premium of Spanish debt (calculated as the differential with German bonds) reached 433 basis points (4.3%). These are all levels similar to those which led to the bailouts of Ireland, Greece and Portugal. The stock exchange plunged to its lowest level since March 2009.
The underlying reason for this, beyond the purely speculative element in the movement of the financial markets, is the parlous state of the Spanish economy which has still not fully paid the price for the excesses of the previous boom cycle, largely based on the housing bubble.
The deep crisis of Spanish capitalism has two main fault lines, the state’s finances and the banking system. On the one hand it is clear that the government will not be able to reach the targets imposed by the European Union on deficit reduction (from 8.5% of GDP in 2011 down to 3% in 2013). As a matter of fact, the starting figure of 8.5% in 2011 was already well over the previously agreed commitment of reducing the deficit to 6%.
The Popular Party government of Rajoy tried to bluff with the European institutions unilaterally setting a target of reducing the deficit to 5.8% in its 2012 budget, as against the previously agreed commitment of 4.4%. After much huffing and puffing, it finally agreed with the EU a target of 5.4%, but the impossible aim of cutting the deficit to 3% in 2013 remains. All it means is that any cuts which are not implemented this year will have to be made next year.
On the basis of this target, the Spanish government passed a budget, a day after the massive general strike on March 29, which included massive austerity cuts and tax increases worth 27 billion euro, the biggest attack on the working class for three decades. This budget includes cuts of an average of 17% in each ministry. However, this is not enough. What are being asked from Spain are cuts worth 5.5% of GDP over two years. Just for comparison’ sake, the latest draconian austerity package imposed on the Greek working people amounted to 4.7% of GDP over two years.
In this context, 27 billion euro worth of cuts are clearly not enough. Professor Luis Garicano, of the LSE, has calculated that in order to achieve the deficit reduction target for 2012 a total of 55 billion euro worth of cuts are needed.
Just a week after the 2012 budget was passed, president Rajoy, unilaterally announced an additional 10 billion euro cuts in health care and education budgets, which sent his own party and ministers into disarray.
In an attempt to reassure the markets, the government also passed a “fiscal stability law” which aims to completely eliminate and ban any budget deficit by 2020. Rajoy said that all of these measures are just the beginning of a long and painful programme of austerity lasting, at the very least, for the next eight years.
One of the weakest points of the state finances is the deficits of the regional autonomous governments. Valencia, where the right-wing regional government has already implemented brutal cuts leading to massive opposition and large scale protests, is all but bankrupt and already had to be helped by the national government in January. Catalonia’s bonds are just a notch above junk status, despite the right-wing nationalist government there having also implemented the most severe programme of cuts and austerity. A whole string of local authorities are already effectively bankrupt, not being able to pay wages or keep basic services running. Now, at least three or four regional autonomous governments risk being bailed out and see intervention by the central government if they are not able to implement massive cuts in their budgets.
The other side of the crisis lies in the banks and cajas (building societies) which have still not fully recovered from the impact of the collapse of the housing bubble. The Spanish banking system ended up being saddled with a massive amount of property (new built, in construction and also repossessed) on its balance sheets. As the collapse in house prices has not yet reached bottom, many of these “assets” are valued well above current market prices, and they are likely to become even more so.
To this unknown factor (the size of toxic assets the Spanish banking system still holds) we must add the fact that Spanish banks hold a large amount of Spanish state bonds but are also heavily exposed to Portuguese debt. This combination of factors makes the Spanish banking system particularly fragile.
Over the last three months the crisis in Spain has been masked by a massive injection of liquidity by the European Central Bank. Spanish financial institutions, unable to fund themselves in the market, borrowed a record €316.3bn from the ECB in March, almost double the already high figure of €169.8bn they borrowed in February. Had it not been for this cheap money from the ECB, the Spanish banking system would have already come to a halt. Spain's banks took up almost 63% of the total net ECB borrowing in March.
These are the underlying reasons for the market’s lack of confidence in the Spanish economy. The severe nature of Spain’s economic crisis (rooted in the character of the previous 18 year long boom) has lead to an unprecedented social and political crisis.
Even before the massive austerity cuts of the new PP government were announced we already saw wave after wave of strikes and regional and sector-wide mobilizations: the education sector in Madrid, civil servants in Catalonia and Valencia, the movement of the students in Valencia, the nationwide education sector movement, etc. The indignados movement, with mass demonstrations in May, June and October 2011 was also a reflection of this build up of anger and helped changed the general mood amongst the working class.
Then, the announcement by the government of an unprecedented assault on collective bargaining rights through the so-called “labour law reform”, pushed the trade union leaders of CCOO and UGT to call for a general strike on March 29. These are the same trade union leaders who only weeks before had signed a national wage restraint agreement with the bosses’ confederation which also included the easing of terms of collective bargaining agreements. Such was the build-up of anger and the seriousness of the attack, which put into question the role of the trade unions themselves, that they had no other option but to call the strike.
The strike was very militant, with massive demonstrations throughout the country. The workers were able to get a taste of their own strength. However, it did not shift the position of the government one single inch. In this particular context, as was shown in Greece over the last two years, even the most militant 24-hour general strikes, in and of themselves, fail to force any concessions from the capitalist class which is constrained by the depth of the crisis. This is likely to lead to a new round of mass mobilizations of the working class starting with the May 1st demonstrations.
On the political front, the PP, which got an overall majority in the November 2011 elections, has already been badly bruised by a sharp decrease in its votes in the regional elections in Andalucía and Asturias, on March 25, which they had expected to win. In fact, the PP government had delayed the announcement of the cuts contained in the budget until after these elections. But to no avail!
In the Spain-wide opinion polls, the PP has fallen from the 44.6% it got in the November 2011 elections to 38.1% now. The government has gone from 51% having a positive opinion about it three months ago to 64% having a negative opinion now. At the time of the general elections, some sections of the ruling class thought they had a strong government (with an overall majority in parliament) which would be able to implement the necessary attacks on the working class with relative ease. We explained that those election results were not so much a mandate for the PP, but rather the result of working class voters deserting the Socialist Party.
Interestingly, the Socialist Party (PSOE) has not capitalized on this. Despite its mild opposition to some of Rajoy’s measures, Spanish voters have not forgotten that it was the Zapatero PSOE government that actually started implementing austerity measures. The Socialists’ share of the vote has gone down from 28.7% at the general elections to 23% now.
Meanwhile, in Asturias as well as in Andalucía, it has been the Izquierda Unida (United Left) coalition – to the left of PSOE – around the Communist Party which has significantly increased its votes. In Andalucía it doubled its number of regional MPs from 6 to 12 increasing its votes by a third to 11.3%. This trend is replicated in the national opinion polls where IU has gone up from 6.9% in the November 2011 elections to 11.6% now.
For a whole layer of worker and youth activists, IU represents a clear alternative to the PP government but also to the social democratic PSOE leadership (which in power implemented austerity cuts). The Andalucian elections have created a very interesting situation in which United Left holds the balance of power. Some within the coalition have given in to understandable sectarian moods against the PSOE and argued that IU should abstain in the vote for the regional government, which would allow the PP to rule the region. The Marxists of Lucha de Clases have argued, and won the case in some IU assemblies, that IU should offer the PSOE an agreement based on a clear set of left wing policies and when the PSOE leadership rejects them (as would be likely), then it should vote for the PSOE government to be installed to prevent the PP from coming in, but not reach any permanent agreement with it and go immediately into opposition (both in the regional parliament and on the streets).
Perspectives in Spain are determined by the clash between what is necessary for the ruling class from an economic point of view and what can be accepted by the working class and the youth, which in Spain has certain revolutionary insurrectional traditions.
Already all economic experts warn that in the context of Spain going back into recession again this year (with a fall of 1.7% at least), the deficit reduction targets cannot be met. This is not just a purely economic matte, however. There is also the question of whether these measures can be imposed.
The Financial Times thinks they cannot without provoking a revolutionary explosion. An article signed by Wolfgang Münchau and entitled “Spain has accepted mission impossible”, puts it in stark terms: “Spain’s effort at deficit reduction is not just bad economics, it is physically impossible, so something else will have to give. Either Spain will miss the target, or the Spanish government will have to fire so many nurses and teachers that the result will be a political insurrection.” (our emphasis, FT, April 15.)
The IMF also agrees and is forecasting the Spanish budget deficit to be 6% of GDP this year (as opposed to the government target of 5.3%), 5.7% next year (as opposed to 3%) and to still be 4.1% in 2017, as a result of a sharp economic contraction.
There is nothing new in this. The experience of Greece is clear: massive austerity cuts lead to further deepening of the economic recession, which in turn makes deficit reduction targets impossible, increasing public debt and budget deficits, which are impossible to finance in the markets and as a result more austerity cuts are imposed, in a never ending vicious circle.
As in the case of Greece, this is also the direct result of being part of the single currency, which prevents countries faced with a deep economic crisis from devaluing their currency and attempting to export their way out of it. The only solution left is what is now called an “internal devaluation”, which means a sharp decrease (by at least 20%) of workers’ wages and living standards in order to regain competitiveness and restore the rate of profit.
The impact of the crisis on Spanish workers has already accumulated a lot of combustible material. Unemployment has jumped from 1.8 million in 2007 (8.3% of the active population) to 5.3 million now (over 24%) with youth unemployment reaching almost 50%. A massive 83% of the population now say that someone within their family circle is affected by unemployment and 40% of the unemployed no longer receive any subsidy. Hundreds of thousands of families have had their homes repossessed while hundreds of thousands of finished newly-built homes lay idle on the balance sheets of banks which cannot sell them in the market.
The capitalist system is extremely discredited from an economic but also a political point of view. The latest scandal of the King’s elephant hunting safari in Botswana (at the cost of 6,000 euro a night) just adds to the general discrediting of all the institutions of bourgeois democracy.
All these factors combine to create an extremely explosive situation, economically, socially and politically, in the coming weeks and months in Spain. The idea that the only alternative is to do away with capitalism potentially has a massive audience. The idea that the capitalist system can be regulated or tinkered with has been proven to be completely utopian. United Left should adopt a clear anti-capitalist programme which would connect with this mood.
The task of Marxists in Spain is to actively participate in all the battles which will take place in the next period while at the same time patiently arguing and explaining that the only way forward is the socialist transformation of society.