Monday, June 27, 2016

Spain: further stalemate

by Michael Roberts

I flew back from Spain (where I was at a conference) just as the results of the second Spanish general election of the year came out.  The incumbent conservative People’s Party improved its number of seats, while the opposition Socialists managed to finish second ahead of the Podemos-UL leftist coalition.  The turnout was just under 70%, one of the lowest in the post-democratic period.  It was expected that Podemos would move into second place, but it appears that the rush to the left had faded at the last minute.  Nevertheless, the PP cannot form a majority government unless both the pro-market, pro-EU Citizens party (which lost ground) and the Socialists back PM Rajoy.  Last time, they refused to do so.


But last time, the Socialists also refused to join with Podemos to form a leftist government, because that would mean confrontation with the EU over public spending and budget deficits, would encourage separatism in Catalonia and the Basque country (where Podemos finished first) and also might mean they could be swallowed up by Podemos.  So it is political stalemate again.  The most likely outcome is that PM Rajoy will form a minority government with the tacit backing of the Citizens and the Socialists for a fixed period and on certain terms.  The uncertainty in Spanish politics may not match that of Britain after the Brexit vote, but it is still there big time.

Despite its well-documented corruption (party kickbacks for government contracts both national and local), enough people have been prepared to vote for the PP, partly because the rich know that they are the party of big business and the banks and will protect their interests and partly because they were expected to revive the economy after the miserable failure of the previous Socialist government.
But although there have been some signs of economic recovery under Rajoy, it has been mixed at best and, at worst, has offered no relief to the majority.  The Long Depression since the end of the global crash in 2009 has exerted its icy grip over the Spanish economy as well, at least for most people.

Despite a decline in 2015, the youth unemployment rate remains among the highest in the EU. Total unemployment is now 21% but still almost one out of two of active people aged between 15 and 24 remain unemployed. And long-term unemployment remains double that of 2008.  The unemployment rate would be even higher except that Spaniards have left the country to look for work elsewhere in Europe (the UK and Germany) or even Latin America. The rate of net emigration has reached 250,000 a year, draining the economy of some of the most educated and productive young citizens.

Indicators measuring poverty and social exclusion are very high compared to the EU average, and deteriorated further in 2014. The IMF reported that “the improved labour market conditions during 2013 and 2014 did not translate into an improvement in social indicators in those years. The crisis led to a sharp increase in the share of the population at-risk-of-poverty and at-risk-of poverty or social exclusion). These poverty indicators deteriorated even further in 2013 and 2014 despite the amelioration in labour market conditions. The rise in the proportion of workers in part-time (from 14.5 % in 2012 to 15.6 % in 2015) and temporary jobs (from 23.4% in 2012 to 25.7 % in 2015) in recent years went hand in hand with an increasing risk of poverty among part-time workers (from 18.7 % in 2013 to 22.9 % in 2014) and temporary workers (from 17.5 % in 2013 to 22.9 % in 2014). Together with moderate wage developments, this contributed to the overall increase in in-work poverty observed between these two years.”

And as the EU Commission put it: still high unemployment and the risk of labour market exclusion, affecting in particular young and low skilled people, hampers adjustment and implies high social costs. Furthermore, low productivity growth makes competitiveness gains hinge upon cost advantages, also affecting working conditions and social cohesion. If protracted, it hampers the transition of the economy to a more knowledge-intensive growth model.”  In other words, the only way things have improved for Spanish capital is by keeping wages down and employing cheap labour rather than making investments for new technology and higher productivity.

The EU Commission added that “Spain’s R&D intensity and innovation performance keeps declining, against the backdrop of a relatively low number of innovative firms…The average low skills’ level of the labour force hampers the transition of the Spanish economy towards higher-value activities. This in turn limits the capacity of the labour market to provide opportunities for the high number of tertiary education graduates in knowledge-intensive sectors.” That means no jobs even for those with degrees.

The IMF admits that economic growth in Spain during the last 15 years has been largely due to investment in property – fictitious capital, as Marx called it. Spain’s much-heralded economic boom saw 3.5 percent real growth a year during the 1990s; it stopped being based on productive investment for industry and exports in the 2000s and turned into a housing and real estate credit bubble, just like Ireland’s Celtic Tiger boom did. House prices to income peaked at 150 percent, nearly as high as in Ireland. It has fallen back to 120 percent, but Ireland has dropped to 85 percent. Housing construction doubled from 1995 to 2007, reaching 22 percent of GDP in 2007.

During the property boom, credit grew at 20 percent a year, much faster than nominal GDP at about 7 percent a year.  Household debt reached 90 percent of GDP. Nonfinancial corporate debt, including that of the developers, reached 200 percent of GDP, the highest in the OECD.

The financial crash exposed that big time.  Productive investment in technology was below the euro area average before the crisis and is still below the EU-28 average. The fall in investment between 2007 and 2015 entailed a drop in potential growth of nearly 1.5 pp. a year of GDP for Spain. The total stock of private sector debt amounted to around 175 % of GDP in non-consolidated terms in the third quarter of 2015 (68.6 % of GDP as household debt and 107.2 % of GDP as non-financial corporation debt).

While this remains above the euro area average, it is about some 40% of GDP lower than the peak observed in the second quarter of 2010. Most of the reduction is due to the fall in debt of non-financial corporations since the peak. However, this ‘deleveraging’ by both households and corporations has weighed on investment.  “In particular, high private and public debt, reflected in the very high level of net external liabilities, exposes the country to risks stemming from shifts in market sentiment and is a burden for the economy. While the still negative inflation environment supports households’ real disposable incomes and domestic demand, it also hinders faster deleveraging.” (IMF).

The Achilles heel of Spanish capitalism is the long-term decline in its profitability. Spanish capitalism was not a great success under the military rule of General Franco in the post-1945 period.

Profitability fell from the great heights of the golden age of postwar capitalism, as it did for all other capitalist economies from 1963 onward, in a classic manner, with the organic composition of capital rising nearly 30 percent while the rate of surplus value fell by about same.
Spain ROP
After the death of Franco, Spanish capitalism temporarily reversed the decline as foreign investment flooded in to set up new industries, relying on a sharp rise in the rate of exploitation brought about by plentiful surplus labor and a system of temporary employment contracts (while freezing permanent employment), the so-called dual labor policy.
Spain ROP change

The rate of exploitation rose over 50 percent to 1996, accompanied by the foreign-led investment boom in the 1990s. This drove up the ratio of capital to labor (by 19 percent), as German and other capitalist companies relocated to Spain in search of cheaper labor and higher profits. That eventually put renewed pressure on the rate of profit. From 1996, profitability dropped sharply as wages squeezed profits in the boom of the 2000s. Spanish capitalists switched to investing in property and riding on the cheap credit boom that disguised weakening profitability in the productive sector.

As the IMF summed it up: “The pre-crisis period was characterized by decreasing productivity of capital, measured as output per units of capital stock, both in absolute terms and relative to the euro area average. This is because capital flew to nontradable sectors, in particular construction and real estate, characterised by higher profitability but lower marginal returns. By contrast, investment in information and communication technologies or intellectual property remained below that of other euro area countries.”

This long depression is also beginning to break up the Spanish state. Regional governments are deeply in debt and are being asked to make huge cuts. Richer regional areas with their own nationalist interests, as in Catalonia and the Basque Country, are making noises about separation from Madrid.  The Spanish depression is a result of the collapse in capitalist investment. To reverse that requires a sharp rise in profitability. Until investment recovers, the depression will not end.  And there is the probability of a new economic recession in Europe ahead, while the political leadership of Spanish capital is still uncertain.

No comments: