Guest post

A few days ago, I was contacted by a friend of mine, in New Zealand, who was concerned about the bad news affecting the economy and, particularly, Spain, where I currently work. In answering the two questions he asked me, I have tried to describe what seems to be the main problem of this country (and many others, but Spain is indeed a glaring example), and in doing so, hope to provide an alternative insight to counter the facile accounts of idle Mediterranean workers and “Club Med resorts lifestyle”, frequently advanced as the logic for Spain’s demise. As a regular reader of Paul Jorion’s blog, I asked him if he would do me the favour of reading my text. Not only did he kindly agree to do so; he also proposed that I publish it.

First Question : “It would be very interesting to hear your views on the economic situation in Spain.”

Answer : Well, in reality, it is a question of sorting through the views presented in the media. To go straight to the most covered subject, employment, one has to consider that there’ve always been a lot of “under the table” jobs in Southern European states, but this is not what can drive the public deficit to a critical point. Of course, tax inflows are reduced that way, but this didn’t prevent Spain from having a positive balance before the crisis, i.e. no deficit! On the contrary, this black market means the authorities still have some room to manoeuvre. In spite of this, many analysts say that this is too bad, that 20 % unemployment is unbearable. Well, shall I remind them that the unemployment in the USA is officially over 9 %, but if you add the part-time jobs of only a few hours per month, then you reach… 20 %! The only difference is that in Spain these part-time jobs are often undeclared. Gosh, this is such a “tradition” in the Mediterranean, that if what the mass media say were true, then Spain and consorts should have already collapsed at least ten times in the last 50 years!

No: the main problem is not underemployment. The real problem, which jeopardized public funding, is that there is tremendous speculation and that speculators, who do not even carry any debt from Spain, or any other Southern State, make money on default risk (CDS). Besides (and it’s all related), the interest rates rise and rise, so it becomes awfully expensive for these governments to borrow money. And the lucky guys (banks and speculators) who lend that money have found one of the highest returns possible in these times of crisis. Here is the heavy ball and chain for Spain! To which one must add the shock caused by the sudden, totally monstrous and atypical, collapse of the building trade, one of the main elements in the local economy. It is the consequence of years of aberrant growth, caused by much more investment than is sensible. That’s what one calls a bubble, and not a small one! In the last years, finance has indeed reached the capacity to exacerbate tendencies to critical levels.

I don’t say underemployment is not a problem, it is quite a serious crisis and a terrible time for the jobless. But Spain went through similar unemployment rates in the past and has the capacity to deal with it on the long term. On the other hand, one must admit there is an issue with household and business debt, which reached particularly high levels (respectively 130 and 90 % of the GDP in 2007) and limit consumption. This is approximately twice that of France, but fortunately the statistics have been dropping significantly in the last 4 years. Spanish households and businesses are a good example of the risk run by excessive credit exposure, and credit can very quickly become excessive and risky. Only a few years ago (in fact as recently as 2007), many of our leaders took the view that we were not borrowing enough, that we shouldn’t be so cautious about it as credit could help us to boost the economy! Now, of course, we can all see where this approach has taken us, and Spain in particular.

However that may be, what the speculators did (the bubble) and are doing right now (the trip up) is just nefarious. In fact, Spain had a fairly small public debt before the crisis reared its head (35% of its GDP) and, even now, it is far less than any major European State, 62%, against the 90% of France, Germany and no need to mention Italy, nor Britain where debt is paralleled by a big crash of the £.

Some analysts are firing a barrage against what they call “the careless Keynesian policies” which drove debt here. They probably try to pass on the responsibility of that mess, which in fact comes from their deregulation theories (the proof just after). While, quite unfortunately, public spending was not guided by Keynesian principles. This is a pity, as Spain could have been in a position (to take just one important area) to improve its balance of trade. So what is the key element in the actual imbalanced national accounts? Well, it’s simple. Spain is a case in hand of a vast transfer of private debt to public debt. The cautious and thrifty have to pay for the reckless! For what result?

And now, an unbelievable rise of interest rates (from creditors who benefited from this transfer, which guarantees their private debt!) is what Spain is really struggling with. The first week of August’s attack against Italy and Spain is a demonstration of it, again. Now that Greece, Ireland and Portugal are almost out of reach (because those three now deal directly with the IMF and the Euro Zone Fund), speculators try to make it up now on these bloody yummy beef steaks. They are insatiable. Escalation is their way. I know financial markets have always been quite frenzied, but never ever before they have exaggerated economic trends (up or down) to this extent, and all this has become far too hazardous. The damage done is boundless. I can’t believe our leaders are that much naïve after all the millions, billions, trillions of $, £ and € they spent in these attempts to “save” this or to “save” that (I’m not sure what that is, but it’s not jobs), as speculation won’t stop and will always try to get one better. Poor Spain… Here is what it is suffering from, first of all, right now.

Second question : “What about the large protests which have shut down the country?”

Answer : Well, the country did not shut down at all, we were not about to experience a revolution. But riots could still occur anytime, anywhere, as they have in the UK… However, we were very happy to see that the “Indignados”, the Spanish strikers, had the right words and demands. They not only attacked the government, but said that the opposition was equally bad and that it won’t be any better with them. They above all mentioned frequently the responsibility of the banking system and their allies (hypermarkets, volume retailing, major outlets, which pay less and less to the farmers and other producers, and charge more and more from the consumers). But deplorably, the PP (right wing opposition party, and when I say deplorably, it is not so much because they are right-wing, this is the opportunist attitude I denounce) succeeded to re-appropriate part of this strike for their own benefit, and now that the regional and municipal elections passed (and were won by the PP), a big part of the energy was lost… While in reality, none of the projects proposed by the PP echoed the demand.

That was however a great movement, much better than the French protests last year, where people only attacked Sarkozy and believed the French left was the messiah, when in fact the French socialists have always been best friends with major retail, big multi-national companies, banks and, of course, the IMF, controlled for decades, now, by the “school of Washington” economists. I hope the philosophy and lucid energy behind the Spanish strikes will not fade out.

I strongly wish Europeans will restrain speculation and propose a more sustainable system, inside the EU (which calls for some change in the Maastricht treaty), but also outside, which requires that as many leaders as possible accept to follow a rather radical but salutary option, and stop losing time (and money) trying to find an impossible compromise. But what happened during the week-end of the 6th and 7th of August shows that many of our leaders still haven’t learned anything. During this critical moment, the Group of Seven (G7) said that they were “ready to take action to ensure stability and liquidity in financial markets”. They are offering all the wood the house is built with, piece by piece, to the pyromaniacs! Billions and billions. Is it, once again, the price to pay for a little, insignificant delay? And now, with the ECB directly buying Spanish and Italian debt, we have, like the USA, reached the final, desperate act. The serpent is eating its own tail. It won’t last, we are playing with fire. Trichet resisted as much as he could (foolish leaders, like Barroso asked it for a long time), but politicians have been so unable to take the right decisions, that he had no choice in this black August. Poor Barroso. He even asked, recently, for an expansion of the European Support Fund. How can one be so incompetent?

I worry also because I’m not sure I can trust Mario Draghi, who has been chosen as the next President of the European Central Bank (ECB). I’m concerned because Draghi worked for Goldman Sachs as vice-chairman and managing director of GS International, responsible for the European states’ transactions. It’s not the ideal CV for such a position, I think. Besides, there were suspicions whereas Draghi was implicated in a very dirty deal: GS lent huge amounts of money to Greece before the crisis! He said he was not informed, stating he arrived just after it all happened. Shall we believe him? What is sure is that GS and friends vigorously encouraged Athens to borrow colossal sums of money, without daring to check if it could be repaid. This is criminal. But what is even worse, is that a major bank (which?) clearly helped the Greek government to disguise its country’s economic balance! Consequently, chaos arrived in Greece, partly because the debt eventually appeared bigger than expected, but mainly because Greece turned out to be untrustworthy, as accounts were fudged. And then the avalanche rolled on. Spain and other neighbours being right under. Good job…

The other interesting side of this story, is that by attacking so savagely the Euro zone, some speculators and their good allies, the credit rating agencies (especially the bunch of three, S&P, Fitch and Moody’s, which is extensively covered in the media) seemed to have something in mind :
− 1) Either accessing easy money, with the help of the “cliff” effect (involving lucrative CDS and rumours!). The fact that the interest may rise exceedingly and create worldwide instability doesn’t seem to matter that much.
− 2) Or trying to limit the disaster over the US $ and obligations. In other words, preserving the actual system (which took its current form in the 70’s) centred on the US $. It’s certainly not a matter of nationalism or chauvinism, as not only American but also quite a big number of French, German, Asian, Middle-Eastern and others from all over the world take part of it. Plus, we are in a global world now : such considerations are from distant times. It is, as I said, more a question of maintaining the actual, but unsteady, system. If they had not kicked that hard on the Euro-zone, the US $ would have probably gone below 0,60 € a while ago and then almost de facto lost its worldwide primacy. All their system could have cracked (but it’s eventually cracking, anyway). Besides, if the Euro zone obligations lose their value, the US obligations automatically appear more attractive. It can even compensate partially, or quite strongly if the attack is severe, the loss of the US’ AAA rating. I’m not pro-Euro (or, for that matter, against the Euro, money is money), it’s just a fact. They preferred dragging the Euro Zone down with them, rather than showing manifestly, to the whole planet, the total failure of their dearest laissez-faire ideology and US $-centred monetary system.

The best way to see it clear is to watch the ratings of a less famous, but generally more efficient rating company, because the ones mentioned before have honestly been so wrong when the 2007/2008 crisis approached, that it is revolting to see how much the media put the light on their ill-advised statements and have made them some of the most powerful institutions in the world. But again, there must be a meaning to it. This less famous rating company is the Chinese “Dagong”. During the first week of august, while only Standard & Poor’s dared to drop the USA’s AAA rating to AA+, Dagong, whilst it already had brought the USA’s rating down in the past, dropped it again, passing now from from A+ to A. S&P’s had to do something now, as keeping the AAA ranking while the country was on the edge of default (!!!) started to sound weird, even for the average TV viewer; and it was a long time now that several serious journalists thought it was patently inappropriate. Or was it because S&P’s resigned itself to the necessity of a change in the monetary system?

Time is a central element in this battle. If the economy in the USA does not succeed to start up again, on its own, in the next few months, we may all face another irresolvable problem, not only in the USA, but all around the world, by domino effect. While the US government asked to allow the federal debt to exceed its official limit, which should have given a painful dagger-bite to the US $ and obligations, the “investors” and the credit rating agencies once again attacked the “PIIGS” (what a -practical- name for Portugal, Italy, Ireland, Greece and Spain!) to compensate it… And as unbelievable as it may seem, it worked more or less… So happy to have a victim like the PIIGS that you can point out, while everybody is watching you. One last time, this consideration hasn’t got to do with a “pro-European” position (and surely not “anti-American” either). I could be Hawaiian, Korean or Argentinean, that would be all the same for me. It’s just mathematical… And merciless, I agree.

“Could the PIIGS blow the eurozone apart?” we are often asked in provocative newspaper headlines. So, are the PIIGS really responsible for all this mess? In my view, we should be looking elsewhere. Even if the eurozone wasn’t well finalized, it is unbelievable to see how some took advantage of the slightest crack to put the wedge in and speculate. We should never forget what is really just about to overturn Europe: the massive transfer of private investor debt to the public budget and brutal speculative attacks.

Speculation and irresponsible conduct have plagued financial markets since deregulation spread in the last forty years. They are now in a position to cause systemic crisis and ruin. The economy worked well from 1945 until the early 70s. After that, the oil crisis quickly imposed an abrupt limit on the new system that was based on excessive credit, yet the economy was still robust enough at that time to survive and move forward. No one should pretend the growth which started in 1945 happened thanks to the war. The First World War, though it was also synonym of prodigious technological progress, didn’t produce three decades of pretty smooth economic growth. On the contrary. Only responsible agreements, such as those signed at Bretton Woods in July 1944, can achieve that.

Even though we are now facing unfair competition, stubborn protectionism is not the answer. We need to set up equitable rules. We need to rethink the control and the issue of our money, lost in 1913 in the USA and in 1973 in France (but this doesn’t mean France or any other would have to leave its European partners, the ideal would be that they all decide the same wise change). And we need to urgently avoid the actual anarchy caused by deregulation. I wish to emphasize that I prefer liberty to excessive statism and am certainly not in favour of a Soviet-type system. However, I don’t believe lawlessness and disorder are what the world needs, either. Deregulation, praised by so many blind think-tanks and influential persons, can be compared to a road network without a highway code. Can we imagine road and street networks without stops, white lines, red lights, speed limits, etc.? Well, this is almost how the global financial system works today.

If we don’t do anything concrete and on a worldwide scale very quickly, and let almost all the flow of money in the hands of speculators, we may realize too late that they won’t change their habits and could well cause a planetary chaos. Every fluctuation is over-exaggerated now, and they won’t moralize. Limitations, prohibitions, well, international strict laws are a necessity. For the benefit of all.

After the 2008’s crash, our leaders couldn’t find an agreement over the idea of a new Bretton Woods, nor find a common ground on the separation of commercial (deposit) banks from investment (speculation) banks. About what followed, I’d like to include a paragraph by François Leclerc, translated from his contribution to Paul Jorion’s blog on August the 11th : “L’actualité de la crise : Les marchés ne s’en laissent pas compter”: “The idea was to allow further extension of time, in the hope of seeing the financial companies recuperating and then contributing towards a wider economical recovery. Although it may mean giving the horse the reins and ignoring their balance sheets (NB : notoriously unreliable stress-test). And creating, in the same time, a diversion concerning public debt, adopting a discourse about austerity measures for some, while exempting the (guilty) others. Plunging, in the end, the Western economy into a generalized recession, and crushing at the same time any realistic expectancy to reduce deficit as anticipated. The A plan is over. Piling up austerity measures is a perilous adventure, about which one can see the results in Great-Britain… This doesn’t mean it shouldn’t be attempted, for want of any better alternative.”

Ever since, confusion and division drove the planet to a desperate fuite en avant (a difficult to translate saying, something like a mad headlong rush, which you can see is driving you into a precipice). It is easy to criticize, of course. I understand our leaders couldn’t take global decisions separately… They needed a large agreement, and obviously some weren’t ready for it. But now we have played our last cards and there’s no room for hesitation, as we can witness a dangerous onslaught over what is not just a wooden wall, but the hull of a boat which, shall I remind us, carries everyone of us.

To demonstrate that we are talking about a real (economical) war, here is how the financial system tried to hush up its role, by menacing to cause chaos first in the country / zone which would ask officially for its accountability in that mess. You will notice that nobody wanted to take the risk to fall first. Indeed, while many European MPs started to talk loud about this vicious system and its responsibilities, pointing out many banks (Goldman Sachs being a recurrent name), and while they included the possibility that these financial entities may have to answer for the huge, tremendous consequences of their “games”, quite a few influential figures started a real offset attack, soundly covered by the media, and in a concrete way (while Europeans only talked, as usual), by threatening to proceed legally against Deutsche Bank’s responsibility in all that crap! That was a cold shower with an instant effect. Even just the fact to start legal proceedings against DB could have been enough to make it fall. Stock markets are ruthless. Of course, I never meant American banks, like GS, were exclusively responsible. I didn’t mean either Deutsche Bank was nice and friendly (and European, like me) and that what happened here was unfair. I’m sure you understood. Banks from all over the world took part in that game, and Deutsche Bank, although it “only” had a third of the volume of responsibility of GS’s, is still a heavyweight one. They shock me all, though I’m afraid every one of us could become a golden boy, speculating all day long, if we had the opportunity. This is why planetary regulation and limitations must be introduced, as soon as possible. All these “regional” strikes are lamentable. Again : We are all on the same boat!

Besides, China and many other major partners won’t accept to be taken for fools much longer. The fact that they are trapped by our debt may allow the system to carry on for a while. But this sick machinery can’t last and maintaining it, as it is, will make the outcome more and more explosive. It’s time for a big change, which could be inspired by the Bretton Woods agreements. But not towards gold and / or a single national currency, this time. While the second half of the 20th century was bipolar, and albeit we subsequently experienced a situation with one and only superpower, the USA, the next decades will most definitely confirm that we are in a multipolar world. The creation of an international currency is surely a difficult decision to take for the USA, but between two issues, I wish the American will choose the least inauspicious one, and this is the one. This doesn’t mean our national currencies would disappear and I’m sure that if we can avoid a global crash by insuring a new viable system, the USA (and Europe) will recover and have a great future.

When I mention Bretton Woods, I don’t mean we should simply copy and paste. In addition, even if the World Bank and the International Monetary Fund have survived (and have been quite altered), the best parts of the Bretton Woods’ system were lost between 1971’s “Nixon shock” and 1976’s Jamaica agreements. Only a completely new mechanism, involving all the major economies and not centred towards a single one (do not put all your eggs in one basket!), could allow the world to start on a new, sustainable basis. We need to stop this system based on debt. We are just talking about common sense.

Meanwhile, the population has to pay for “mistakes”: When speculators win at their “world casino game”, the money is for them and them alone. No crappy taxes, no public interference, and it all goes to a bank account in a tax haven. But oh, blimey, if they lose, it’s too deceptive… (Shall we cry?) There’s no way they could lose so much… So they always can dissolve the gigantic cost of their mess on the back of the somewhat permissive and ill-informed population (firstly American and European, but also Chinese, via the debt holding) to compensate. And if they can benefit from some fresh cash from the government, thanks to the injection of funds (you know, to “save” “this” and “that”), then they can use it to speculate on the crisis and make great profit! Spanish and Italian being the ones under special and unscrupulous pressure at the moment.

You wanted my opinion? You have it.

N.B.: I didn’t mention the local authorities’ debt, often cited as one of the criteria justifying the national rating’s downgrade. Why, you may ask, if the consequences are apparently so serious for the nation’s funding capacity. Presumably because it is again the same story.

During last spring’s municipal and regional elections in Spain (in which the ruling left-wing party was hammered at all levels), there were countless articles referring to hypothetical under-the-table bills, which could double the size of local debt; locals’ debt that would be even be bigger if the new authorities ever found that the balance sheets had been hedged! There are those who apparently seek to take maximum advantage of the Greek case, in order to spread the panic more widely through vague insinuations and unsubstantiated buzz, tactics that can produce very handsome rewards for speculators. On top of that, these allegations distract Northern Europeans, who complain about “lazy and schemer Mediterranean people”. Could it be a diversion in order to avoid us from nosing around and try do search deeper?

Even though I would not deny the existence of black market jobs and would never pretend that local authorities, in Spain, were run in exemplary fashion, these rumours and extrapolations sound rather suspicious. Especially if we realise that the milestone around the neck of the autonomous regions and city councils is in fact always the same: delusional investment projects and loans (badly organized by whom?) and, again and again, soaring interest rates due to the downgrading of the local authorities’ credit ratings (the top rating agencies certainly didn’t pull any punches!), which anticipated difficulties for funding… due to higher interest rates as a consequence of rating downgrades!


  1. That’s clear enough. This is the end of a system, the end of Friedman’s vision of the economy.

    So what else? what could be the next step? Revolution? Riots? or simply let the system fails?
    We dont have to help this bullshit system to survive. Anyway it’s too late…

    So sit on a good chair, and be there taking pleasure of the last show.

    All together we’ll think of the next people’s organization for human respect and earth health.

    • Is it really the end of Friedman’s vision or is it an economical war to go futher in the Fridman’s corporatism. What do we see today? Greece is selling all and everything to the private sector, UK is reinforcing the police, Guantanamo is still open. The goverment accross europe are held hostage from speculators and the piigs leave their sovereingty to IMF. The midle class has never been so individualist and unions are weaks.The social democracy is indeed falling appart but it seems that Chicago school is still well alive and the future could look like Pinochet Chili and have the middle class and the poorest paying the bill

      • The biggest mistake has been allowing neo-liberalism to take over a decent socially orientated society… the east block revolutions of the late eighties have left us with…the revival of wild west capitalism…..

        The shortsightedness of Reagan and Thatcher…or, better, the shortsightedness of the successors to Reagan and Thatcher.

        Policies should have changed around the turn of the century, I think we probably have left it too long now to be able to really improve the plight of our “lower” and middle classes.

    • The only answer is in my opinion curtailing the financial economy, there is a conflict of interest between the requirements of finance in business and the requirements to keep employment here, i.e. the possibility to raise sufficient taxes, enabling Europe/US to cut deficits.

      Before the currencies of the emerging markets will be revalued we must start to think about recapitalizing on home grown production, otherwise inflation in the prices for stuff that we import will create even more problems in our social economy (the HUMAN based economy as opposed to the money based society)

  2. About what the Spanish Government decided in the last Council of Ministers, it is incredible how irrelevant it is. They have to push the selling of 700.000 unsold new homes (supposing that the numbers are good and plus the non-new ones) by cutting VAT from 8 to 4%. We all know that houses are not sold because there are too many, in the wrong places, and on top of it, if you want to buy one no bank will give you a mortgage. The only solution is that a state agency “buys” (or takes in exchange of the capital injected in the banks) some of them, let’s say 150.000 to rent them cheaply. That is one of the “indignados” propositions. There is no “HLM” or any social housing to rent in Spain. This would take some pressure from the banks balance sheets and would give a use to these ghost houses and flats. Another solution is to charge a penalty on the bank who refuses a mortgate to a potencial buyer who is a regular customer and has 20% of the price.

    As they have been empty for a long time, some of these houses or flats are being “dismounted” by different criminal groups: one day the doors disappear, next week electric cable and appliances, next month roof tiles … It is incredible that something that in principle is an item of wealth, houses, has become a focus of poverty and insecurity.

    • I do not live in Spain, so I cannot give an answer based on personal experience, but I think this is a very good idea, let the government buy the houses at the minimal market value from the banks and rent them out, that will help the banks, the starters in life and….eventually…also the building industry.

      One problem, that would mean state ownership and that is not in line with the free market religion…which is really outdated.. by now, however, our politicians do not want to see the light!

  3. A very interesting analysis, thanks to Paul Jorion to allow us to read that !
    Just a brief comment. According to the law, when you are renting a flat in France, you do pay a tax called “habitation”, and the owner is supposed to pay a counterpart called “foncier” the tenant is paying as included in his rental cost. For those reasons you present your bills of electricity or water as a proof of your residence.
    In Spain, at least in Lanzarote where I live now, the story is different.
    1 – the rental agreement is not registered.
    2 – The owner pays for the electricity and water and the tenant gives him back the amount in cash.
    3 – No need to declare your new address to the town hall or other administrations.

    This obviously means that the existing laws have been organized before the death of Franco ( ! ) in such a way to promote home building (especially in touristic locations like Lanzarote) that it is a tremendous loss for the fiscal administration.
    I am pretty convinced that my owner does not pay any tax (equivalent to the french “habitation” and “foncier” taxes) on the flat I am living in as well as he does not pay any income tax on the rental I pay to him.
    This is the way it is in Spain !!!

  4. Thanks for your comments alkali, Colomba and henry38.
    I agree with you Colomba, it would be quite normal to organize a deal about these empty buildings. These edifices should indeed go to the central government and / or a regional or municipal council, in exchange for the kind and extremely generous help banks have benefited during the last few years. When I say “help”, I include all the different kind of help, direct or indirect. As we all know, the amount is astronomical. And as you judiciously suggest, these flats could become the equivalent of the French HLM. Isn’t it revolting to know that a huge number of adults, in Spain (even family with kids) live in their parents’ flat! I know this exists in France too, and elsewhere, but in Spain it reaches an even higher percentage. And it is particularly revolting when one knows that so many flats are empty and, above all, that the public budget was largely employed to help those who promoted these buildings.
    But be careful : some are so badly located that they haven’t got any future as lodgement. I just can’t believe they gave building licences for big projects right in the middle of nowhere. And there are quite a few examples, completely lost in the middle of the “desert” (not true desert, but quite dry, lost and bleak tablelands). Maybe they could be converted into almost-free offices for small business, but even this option is quite doubtful. As I first said, I am afraid some of these projects have no future and may finish like ghost towns. But those which are better located could well be HLM-type flats as you said!
    Henry38, I can only agree with you that a lot needs to be done. Back to the subject of empty flats, a special tax could be a good way to motivate owner to rent it and declare it. But these taxes should be only devoted to build or maintain social lodgement, otherwise, the money from the new tax could be embezzled and finish in a “plan of rescue” for you know what.
    Like for so many other subjects, I wish I could read some courageous, ethical and viable propositions from our main leaders. Once again, the Indignados are the ones who act like civilians and give us lots of hope, as some of their ideas are very pertinent on that subject.