Wednesday, 25 May 2011


In the past year, I have been asked what options do Greece, Portugal and Spain have other than following austerity measures under the International Monetary Fund (IMF), European Central Bank (ECB), and EU. The answer depends on what kind of society do citizens want for themselves, and to what degree are they able to prevail over the political elites to have something close to the society they want. Clearly, the political elites govern on behalf of finance capitalism and that means that the will of the people prevails only marginally on fiscal, monetary, trade, economic and social issues. Here are some scenarios for Spain, which scenarios can apply to Portugal and Greece with modifications.

Scenario #1: Go along with the IMF/EU. The result will not be very different than that of Greece. There will be continued downgrading of Spain's debt to the point that it will reach junk status and be unable to borrow from private sources. The euro would lose ground to other currencies, and Spain's unemployment will rise well above the current 21%, while living standards will drop and the prospects for downward mobility will be realistic for a large percentage of the population. However, to impoverish a nation and expect no reaction from the broader masses is unrealistic.
Scenario #2: Some type of debt renegotiation or restructuring that may or may not be, depending on the terms, a better deal than staying the course. This means that creditor accept the so-called 'hair cut' and lick their wounds along with the debtor nation, hoping the economy turns around in the next few years. If Spain wants to apply pressure on creditors, all it has to do is put the austerity measures on a ballot and let people vote YES or NO.
Scenario #3: Forging a political coalition of the leading parties that comes to an understanding with the national and foreign capitalists, with the EU and IMF, and creditors that own most of the assets in the country. This scenario is highly unlikely at this point, but it envisions postponing the pain of debt for future generations with unpleasant consequences for future development. The idea that a single party in Spain, and for that matter Greece or Portugal, can weather the austerity storm, entails pain for all, except those with deep pockets.
Scenario #4: Massive investment by national and foreign capitalists to prop up the economy, that would allow the state to begin paying debt obligations. Spain's economy is heavily integrated not just with the EU, but also Latin America and Africa to a lesser degree, which means that dependent capitalism for this 'semi-periphery' nation would have to rise to the level of Brazil to overcome its current problems down the road. Unlike Brazil, however, Spain has reached its potential with the help of massive northwest European investments, and does not hold the promise of immense growth of Brazil, which has a huge China-Japan investment river watering its fertile economic valley. Nevertheless, this scenario would mean steady economic living standards and holding the line on double-digit unemployment.

Scenario #5:
Government places a good deal of public property up as collateral to borrow from the European Central Bank at one percent or less, and uses the funds to pump liquidity into a cash-starving economy - both private enterprises and public, with the pre-condition that they invest in job-intensive projects and not use the funds to purchase securities the way that US and EU banks did when they received bailout money or to reward executives with extra payments. This package would work even better if under its implementation upper and middle management in both public and private sectors takes a salary cut (20-30%), to be followed by raises and bonuses as the economy bounces back.

Scenario #6:
Forge a regional coalition (something like an informal bloc) with Portugal, Ireland, Greece and perhaps other EU debtor members that are under the gun from the Franco-German informal creditor bloc that is determined to reduce the EU periphery into semi-colonies, depriving them of their national sovereignty and using them as markets to sell their products and services, and cheap labor.

Scenario #7:
JE is absolutely correct on Argentina, and if anyone has any doubt just contact any Argentinian to see what they have to say about the matter. If Argentina had not defaulted, it was headed for massive rise in poverty levels from which it is still trying to emerge. Short-term, default is worse than staying the course, but a much better option longer-term. Default to avoid social unrest or even revolt that causes shock waves across EU is a realistic option for Spain as it is for Portugal and Greece. Those that doubt this scenario, just check out how many people are speculating (shorting the market) that the MED-CLUB of debtor countries could be headed that way. This is where the country may be headed if the austerity regime lingers on and the Chinese water torture process continues as it has in Greece.

One could argue that Spain is closer to Ireland, which has fewer problems dealing with the IMF-EU austerity. Ireland negotiated a better deal from the outset than Greece, but it also did not start with 21% unemployment like Spain, and immense structural problems that exist in the Spanish economy. In case of social uprisings, anything is possible, from a military coup, to civil war, to a successful coalition of disparate progressive forces emerging to form a new government that defaults on the debt and begins the process of negotiating with foreign creditors for new loans as part of a deal to massively reduce past debt. 
This is also a scenario I predict for Greece is the status quo continues. The people hold many cards in their pocket but they, like investors, creditors, and EU governments are governed by fear and self interest that prevents them from doing anything risky. In this case, however, the status quo is risky.
1. Neo-liberalism has failed in so far as the middle class is shrinking and living standards are declining for the broader popular classes.
2. The IMF failed to warn governments about the considerable shortcomings of neo-liberalism, including various fraudulent schemes involving 'structured products' in which Lehman Brothers, Goldman Sachs, JP Morgan, Bear Stearns, Bank of America and a host of others were involved. (Those interested can go directly to the IMF web site to read its own internal review report).
3. IMF-ECB-EU have failed to reduce the public debt of Greece and move it toward solvency as they promised more than a year ago. On the contrary, the IMF is now questioning its own policies on two fronts: a) it claims that Greece did not move fast enough on privatization, but it was the IMF-ECB-EU advising Greece in any case; and b) it was a mistake not to have a 'development component' to austerity. 
As a result, the debt to GDP ration for Greece, despite massive IMF-ECB-EU loans, jumped sharply in the last year, the existing loans would either have to be substituted with a minimum of addition loans (estimates range from $60 to $100 billion), bringing the debt to GDP ratio above 200% within a couple of years from now. The result is that the country may be facing social unrest of some type, ranging from sporadic riots and demonstrations to popular revolt, given that more and more people will be experiencing downward living standards. This is will be Spain's fate if it follows the example of Greece. The Spaniards know that this is their future and they are searching for ways to avoid it, though there is no magic formula on which they agree.

Why are the advanced capitalist countries standing behind the IMF-ECB's current push for neo-liberalism to be implemented in even more orthodox manner than it was before the 2008 recession? What will the result be of the current neo-liberalism con game on the world economy and when will governments decide that it is too politically costly to perpetuate such a con game in order to benefit a tiny percentage of capitalists around the world.

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