Disaster Capitalism Hits Europe (and the US is Next)

One thing should be made clear about the situation in the eurozone
economies that is not clear at all if we rely on most of the news
reports. This is not a situation where countries face a "dilemma"
because they have overspent and piled up too much public debt. They do
not face "tough choices" that will force them to cut spending and raise
taxes while the economy is weak or in recession, in order to "satisfy
financial markets".

What is really going on is that
powerful interests within these countries - including Spain, Greece,
Ireland and Portugal - are taking advantage of the situation to make
the changes that they want. Perhaps even more importantly, the European
authorities - including the European commission, the European central
bank and the IMF - who are holding the purse strings of any bailout
funds, are even more committed than the national governments to
rightwing policy changes. And they are further removed from any
accountability to any electorate.

In 13 Bankers,
by Simon Johnson (a former chief economist at the IMF) and James Kwak,
the authors describe the emerging market crises of the 1990s and note
that Washington used them to promote changes that it wanted: "When an
existing economic elite has led a country into a deep crisis, it is
time for a change. And the crisis itself presents a unique, but
short-lived opportunity for change." Naomi Klein, author of The Shock Doctrine,
provides an excellent history of how crises have been used to introduce
or consolidate regressive and unpopular economic "reforms".

This
is what is happening in the eurozone economies right now, although the
"crisis" is considerably exaggerated in most of them. Spain is a good
example. The story that Spain got into a mess because of government
overspending is not supported by the data. Spain reduced its gross
debt-to-GDP ratio sharply as the economy grew from 2000-2007, from 59
to 36% of GDP, and was running budget surpluses in the three years
prior to the 2008 crash. The crash was triggered by the collapse of a
large housing bubble in Spain, as well as the bursting of a big stock
market bubble: the value of stocks plunged from 125% of GDP in November
2007 to 54% of GDP a year later. The collapse of each of these bubbles
had a huge impact in reducing private spending. The world recession
added more external shocks to the Spanish economy.

Spain
now has just EUR61bn of debt coming due this year; the European
authorities could cover this very easily if they wanted to avoid the
potential for rising interest rates on Spain's debt. Without a sharp
rise in interest rates, Spain's debt is quite manageable, since they
started with a net debt of just 45.8% of GDP in 2009, and interest
payments of just 1.8% of GDP. (Most news reports use the country's
gross debt, but net debt is a better measure. The gross debt includes
debt that is held by the government itself, so the interest payments on
this debt accrue to the government and therefore do not add to the
country's debt burden.)

Of course, Spain is running a
large central government budget deficit of about 9% of GDP this year,
and this cannot go on indefinitely. But it won't: the deficit will
mostly shrink through the reverse process of how it got there: as the
economy grows, tax revenues will rise, spending on "automatic
stabilisers" such as unemployment compensation will decrease, and the
debt will fall relative to the economy, which is what matters. It makes
no sense to cut spending and raise taxes now, while the economy is
still very weak, inflation is negative and there is serious risk of
lapsing back into recession.

Unless the goal is to reduce
wages and benefits in the public sector, weaken labour, redistribute
income upward and reduce the size of government, then there is no time
like the present to push these things through. We have a similar,
although not yet as severe political problem, in the United States:
deficit hawks are mounting a campaign to cut social security, even though it can make all promised payments for the next 33 years.

Ironically,
the people who want to take advantage of the "crisis" in Spain are
actually increasing the risk of more serious debt problems, since the
debt burden will rise if the economy lapses into recession or years of
stagnation because of their fiscal tightening measures. But they are
willing to take these risks in order to accomplish their political
objectives.