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Globalization is stuck. Since 2008, as indicated by Chief Economics Commentator of Financial Times, Martin Wolf, we are seeing a real stagnation of international trade. The benefits greater trade integration through reductions in tariffs are becoming smaller and smaller -a third of 1% of GDP over 10 years for the whole world. Furthermore, in absence of institutions that can distribute the increased output of this integration -at European and global scale- there is no plausible globalist solution to the current crisis in a reasonable timing.

Europe has seen its economy running out of steam since the mid twentieth century. If we look at France and Germany, Europe's economic engines, we see that between 1951 and 1973 the growth of per capita GDP came close to 4.5%, while between 1973 and 1994 it only grew 1.8%, and after 1995 up until  the beginning of the crisis in 2008 it has been even lower. The following chart shows the rise and decline of capitalism accumulation in the second half of the twentieth century.

Evolution of economic growth. YoY variation (%) of per capita GDP (1950-2010)

 

Source: The Maddison-Project

There is a debate about the causes that have led us from the "Golden Age" (1950-1973) to “The long decline" (1973-2008). Today, however, we can verify some important trends that have conveyed this historic transformation. First, there has been a theoretical and ideological change in terms of economic policy, moving from the use of macroeconomic tools to boost state growth and full employment, toward a new direction based on the control of inflation and monetary and financial stability through fiscal restraint, wage containment and control of the money supply.

This new theoretical perspective -focused on monetary stability- emerged in the changes that occurred in the early seventies, when the Bretton Woods monetary agreements were abandoned and the stability of the dollar and European currencies became dependent on their ability to constantly find a balanced monetary and trade equilibrium, leaving it instead to competition through currency and labour devaluations.

At the centre of this phenomenon, the United States developed and spread their financial markets, attracting capitals that were not aimed at enhancing productivity, but that instead generated financial bubbles in various sectors of the economy and in other parts of the world. The much appreciated stability needed an ideology to support it. In the late seventies, neoliberalism was born, promoting the false virtues of labor flexibility and wage constraint, the greater efficiency of markets regarding the public provision of basic services, disapproving the management of the economy by elected politicians in democratic processes, and pleading for a reduction of state intervention in the economy and the independence of central banks. This has served to justify a series of reforms that have reduced the power of labor and unbalanced the structures of economies.

Consequences of entering the European market for Spain and Catalonia

The architecture of the euro and the harmonization of tariffs have imposed heavy limits to any public institution of the Spanish State that wanted to make changes in the production model. The narrow margins would force any public institution to engage in reindustrialization, without public policies or any reliance on the state, putting all hope on the performance of private capital.

It was not until the arrival of the eighties with the entry into the European Monetary System (1979) and the signature of the Single European Act (1986) that Spain retrieved the path of integration. Integration was designed to respond to the difficulties of the end of the post-war economic order: first, it tried to deepen trade integration -inside and outside Europe- to return to the path of macroeconomic convergence with the United States, and, secondly, it tried to establish Western Europe as a bloc in view of the crisis of the eastern bloc. These two paths were accelerated by a historical event that changed international politics: the fall of the Berlin Wall on November 9, 1989. This event was an unprecedented watershed on two debates: first, how to integrate Eastern Europe in the Atlantic project; and second, how to constrain an excessive German economic potential in case of a hypothetical reunification. This second element proved to be one of the triggers that led to the Maastricht Treaty and the creation of the euro.

Spain's history is not unconnected to these movements of recent decades. It is no coincidence that the two most important economic breakthroughs of the country's history are closely related to Europe: Spain's entry into the European Economic Community (EEC) in 1986 and the start of circulation of the euro in 2002. As Charles Powell draws broadly at "The long road to Europe: Spain and the European Community, 1957-1986" since the reformist period started in 1959, the Spanish authorities maintained a broadly positive consensus regarding the European project. To some extent, there was a pragmatic match between the Democratic Opposition who wanted to integrate into the European project, as a means of safeguarding democratic and social standards, and the business sectors -within and around the Franco Administration- which saw the European project as a way to accelerate the Westernization of the Spanish economy. Proof of this was the unanimous consensus generated by the official request to join the EEC in 1977.

There is still an intense debate about whether the illusions projected to Europe by Catalan and Spanish progressives originated from the founding values of the European project. What is clear, however, is that those progressive aspirations had no longer anything to do with the Europe that Spain joined in 1986. The process of tariff harmonization carried out the seven years following 1986, left companies with no protection in front of international competition, bringing the Spanish economy to a sharp deindustrialization and ever increasing imbalances in trade. These imbalances were generated by, first, the export sectors being abandoned to their own luck (even though the Preferential Agreement of 1970 regarding tariffs already facilitated exports in the same way as the EEC, the entry in the EEC forced the public sector to withdraw support to the export sector through subsidies), and second, the gradual reduction of the margins of manoeuvre of monetary policy by the Bank of Spain instigated a loss of competitiveness of the Spanish economy. This led to increases in domestic demand (given the sustained inflow of external funds encouraged by the stabilization of the peseta, initially with the European Monetary System and later the euro), openness and reforms to "modernize".

Foreign trade. Spain. Index (1950 = 100)

 

Source:  ‘Historia económica de la España contemporánea (1789-2009)’. Xavier Tafunell and Albert Carreras. Annex estadístic.

The euro is probably the most misguided policy decision of our recent history. The single currency has generated a system of perverse incentives, overheating domestic demand while undermining productive supply. The abdication on monetary and exchange-rate policies has removed all tools to address loss of competitiveness with respect to other Euro Area member states, except wage repression, which is being implemented now meaning an almost definitive attack to the social contract between work and capital reached at the end of the Second World War.

In short, the euro was a way to kick the can down the road for peripheral governments. It allowed postponement of the resolution of structural challenges through the unique opportunity of obtaining financing at very low cost and at the same time allowed to cover neoliberal policies under the pretext of community mandate.

The small or non-existent margin for national economic policy has led to paradoxical situations. For example, in one of the countries with the highest unemployment in the Eurozone, the degree of utilization of industrial production capacity is below the EU-28 average. In other words, there are available jobs and unemployed workforce, but there is no possibility of increasing the degree of utilization of production capacity, and this generates stagnation in GDP and unnecessary unemployment.

Degree of utilization of industrial production capacity (%)

 

Source: Eurostat and Idescat (Statistical Service of Catalonia)

In Catalonia, with no trade, monetary or exchange policies and under the obligation of maintaining balanced budgets, it is difficult to see the economic margin with which to change the productive model, which has been adrift for decades. However, floating currencies and free trade do not guarantee benefits by themselves. The return to a certain selective protection for sectors that are considered key in the new productive model, as well as protective measures with regard to international financial pressure, such as capital controls, are measures that should be incorporated if we want to effectively struggle against international pressure to impose the neoliberal agenda.

In 2007, the current account balance of Spain -an index that indicates whether a country has spent more or less in comparison to its domestic income- recorded a deficit of 10%, one of the largest in the OECD. This marked the end of a way of economic development. From that moment on, a series of policies were launched in Spain and elsewhere in the western economies to bail-out banks, while putting up an attempt of soft expansive fiscal policy.

As soon as the banking systems were stabilized there was a sudden change in tale. The unlawful inflation of the public deficit of Greece in late 2009 was used by the elites as a case example to attack governments across Europe for fiscal profligacy. The new story put the blame of the crisis on public expenditure and public debt, consequently aiming at reducing the welfare state. On the basis of this new story from May 2010 austerity was imposed across Europe with the strong recommendation of the European institutions.

Current account balance (% PIB)

 

Source:  ‘Historia económica de la España contemporánea (1789-2009)’. Xavier Tafunell and Albert Carreras. Annex estadístic.

Regarding the development of the Eurozone crisis, in the words of Barry Eichengreen, institutions in Europe have followed a strategy of 'stop-and-go'. These consist in implementing special monetary policies (such as SMP, LTRO, OMT and the APP) to protect banks by providing liquidity to the European banking system (which is technically insolvent and unable to function without such aid) and to a lesser extent to States (which has reduced the interest rates of sovereign debt of member states, who would have also faced default without the massive bond purchases by the BCE) to protect the integrity of the monetary area. The protection is enough to keep the states within the Eurozone in the medium term but no to eliminate the tool of threating with expulsion used by power States to impose debt repayment, austerity and structural reforms. This, since 2010, has placed governments of the Eurozone in the constant dilemma of assuming the economic and political costs of leaving the euro or accepting imposition of adjustment programs and austerity.

In the case of a break-up of the euro, the most likely revaluation of currencies in the countries with external surpluses and devaluation in countries with external deficits, would lead to a loss of competitiveness in richer countries and the opposite for the rest. As indicated by Sébastien Villemot and Cédric Durand in "Balance sheets After the EMU: An assessment of the redenomination risk" (2016), these adjustments would not be anecdotic, nor would the possible redenomination of debts to the new currency, which would open a new set of opportunities for economic policy. After the Greek disaster, the Left will have to face with full clarity the debate on how to achieve the democratic aspiration of implementing an economic program that can solve the current problems.

What are the possible strategies for the future?

There are only two possible strategies:

First, to subordinate these aspirations to the loss of economic competitiveness of the European centre. This issue would occur only if Germany abandoned its neo-mercantilist model, which vertebrates its geopolitical position in the world, and embarked itself on inflationary policies that reduced its own economic and political power, something for which Germany has very few incentives. This unlikely scenario could be accompanied or not by a deepening in the European integration. Our opinion is that current dynamics in the Euro Area do not guarantee that such integration would be in favour of the social majorities.

The second option, much more democratic and with deeper sovereign aspirations, would mean the recovery of certain state powers -monetary, exchange and trade- for Eurozone countries to begin implementing policies that address problems of economic development that so badly affect Spanish and Catalan societies in form of unemployment and inequality.

Read the article in Spanish here.