Will Spain Reject Austerity?

Nacho Alvarez teaches applied economics at the Autonomous University of Madrid and serves as a senior advisor to Podemos, the Spanish anti-austerity party. In the following interview, he explains the party’s vision for addressing the challenges in Spain’s economy and society, including jobs, environmental problems, and the debt burden, both public and private. In his view, despite signs of economic recovery in Spain, austerity policies have hampered progress and must be abandoned in order to create a sustainable, prosperous future. Spain, he argues, is not like Greece, and has a better chance to negotiate with European powers for a shift in economic policy. In Spain’s December 20 election, voters will decide whether Podemos offers a viable path forward.

Lynn Parramore: What are the most important things to know about the vision for Podemos’s economic and social policy agenda?

Nacho Alvarez: Podemos wants to represent a break with the neoliberal approach developed over the past two decades by the two main Spanish parties (socialist and popular). That approach led us to the crisis, to a “lost decade” and continues to deepen the structural imbalances in our economy.

From our point of view, Spain has four major economic challenges that are not being solved and that need urgent attention. First, we need to create sufficient (and decent) jobs. We have to tackle the situation of those most affected by the economic crisis, reducing poverty and inequality. We also need to start the transition to a sustainable economic industrial model. Environmental sustainability is necessary, but also sustainability in relation to the external imbalances. Finally, we need to restructure the debt burden.

To properly address these challenges, the first thing we first need to end austerity. We propose softening the pace of deficit reduction and making it conditional to achieving other goals such as reducing unemployment. We must use an expansionary fiscal policy in order to strengthen basic welfare services (education, health system and care for dependents), but also to implement a public investment plan focused on innovation and energy transition.

We also need structural reforms in our economy that are very different from the ones implemented so far: we have to increase taxation on wealth, we need to restore collective bargaining, and we want to promote labor reform to enhance the work-life balance.

Finally, we want to open the debate on how to distribute the costs associated with the high indebtedness of the Spanish economy. To date, households and taxpayers have assumed the bulk of the costs related to both the bursting of the housing bubble and the rescue of financial institutions. We believe that these costs should be distributed more equitably. First, we propose a restructuring of the public debt linked to the European Union financial bailout, so that financial institutions participate in the payment of that debt. We also need to restructure the mortgage debt of households, based on a reduction of the nominal value of the mortgages.

LP: Some people look at the recent growth and signs of economic recovery in Spain as evidence that austerity has worked. What do you say to that?

NA: Austerity has not worked. On the contrary, it has prevented the Spanish economy to emerge from the crisis earlier and it has led our country to a lost decade. Spain has still a real GDP 4 percent lower than in 2007 and has only recovered 30 percent of the jobs lost during the crisis.

The current recovery in Spain is driven by other factors, most of them external. The purchase of government bonds by the European Central Bank has continued to reduce interest rates and contributed to the recovery of credit. The sharp drop in oil prices has and expansionary effect on private consumption, and the depreciation of the euro has pushed exports.

From the internal point of view, the gradual fall in the rate of household savings is having a positive impact on private consumption. In addition, the government has significantly relaxed the pace of austerity over the past year. We have even seen a 1 percent growth in government consumption. It’s interesting how the inflexible defense of austerity disappears just before elections.

However, these determinants suggest that the current growth is fragile. External factors could well disappear over the next year, while a return to austerity is put forth in the Stability Program submitted by the Spanish government to Brussels. That’s why we need to underpin this recovery with a change in economic policy, discarding once and for all fiscal austerity and wage devaluation.

LP: How is Spain different from Greece in terms of its economy and its situation with regard to the European Union, the European Central Bank, and the International Monetary Fund (the Troika)? What’s your leverage in dealing with them?

NA: Very different — which also means that we have different ways to maneuver in future negotiations with these entities.

Greece is under the program of the Troika, with no room to maneuver due to lack of alternative sources of financing other than the European Commission and international financial institutions.

But Spain is a country that is normally financed in international financial markets. In the case of a change of government in Spain, a possible shift in economic policy would not have to be negotiated on the same terms as happened in Greece with the Syriza government. Spain has much more scope for the application of a post-austerity policy to reverse the cuts made in recent years. This policy, since it would strengthen economic growth, would not be penalized by the international financial markets.

LP: Let’s discuss the banking system. How does Podemos assess the strength of the Spanish banking system and what are your plans for reforming it? Also, in your view, what is the appropriate relationship to the European Central Bank and the new European banking supervisory authority?

NA: The Spanish banking system has been recapitalized with the money of taxpayers. It has also experienced multiple types of state aid. So financial institutions have considerably strengthened their balance sheets and we think it’s time for these institutions to collaborate in returning what society has given them. They should collaborate in their own bailout, as it has happened in other European countries such as the Netherlands. Besides, as I mentioned earlier, we must move forward in household debt restructuring, now that the banks are able to do so.

Nationalized financial companies, such as Bankia and Banco Mare Nostrum, should become the basic infrastructure for a public banking system. This would mean renegotiating the terms of the Memorandum of Understanding in order to prevent these banks from being transferred to the private sector. The new public banking system should mainly focus its activity on public facility infrastructures, long-term business projects related to the new industrial model, and social groups who experience difficulty accessing the credit market, mainly those related to small and medium-sized enterprises.

The banking union reveals a crude reality: an interesting economic initiative, good for the European banking system, can create huge political problems. As long as there is a lack of democracy within the European institutions, all supranational transfers of sovereignty could be subsequently used against the national parliaments themselves to question their will, as has happened in Greece.

In Europe we need to build up truly democratic federal institutions that respond to national parliaments, both in banking and in the general governance.

LP: Is leaving the eurozone an option?

NA: The euro has proved to be an unsuccessful historical experiment, as well as an instrument of political domination among European countries. The monetary union may still survive for years, but if nothing changes, this will be at the expense of authoritarianism, loss of sovereignty and lack of democracy.

In any case, this question is not an easy to answer: to democratize the governance structures of the eurozone will be very difficult, while at the same time, the vast majority of the Spanish population rejects a unilateral exit from the single currency, as happens in other peripheral countries, due to the harsh consequences that this would have.

We have to consider several intermediate options, such as the possibility of a Euro Parliamentary Chamber where each eurozone country would be represented by a number of national parliament members, in proportion to its population. Simultaneously, we also need to consider possible currency readjustments among countries, leading even to several different euros.

This means that at this time, for a country like Spain, leaving the euro is not an option. But it is quite reasonable that the Greek government considers this option, given the situation triggered by the European institutions.

LP: How does Podemos propose to deal with the refugee and migrant issues now so hot in Europe? Elsewhere, this set of issues has worked to the advantage of the right.

NA: Spain receives only 1 percent of asylum applications in the European Union and last year promised to resettle just 130 Syrian people in the context of a conflict that has displaced more than 8 million. That shows that the government’s commitment to the right to asylum is basically nonexistent.

Podemos has urged Prime Minister Rajoy’s government and European institutions to set up legal and safe means for refugees to enter our country as the only effective way to fight against the mafias and networks of human trafficking.

The main way to do this should be to restore diplomatic asylum with direct access to all Spanish embassies. In order to do so, the government should reopen the possibility of requesting international protection in the Spanish embassies and consulates in the states of origin and transit.