By Aras Ural
Abstract:
The European debt crisis would forever shape the trajectory of European integration. This essay will seek to evaluate how the policy responses of crisis countries to the European debt crisis beginning in 2009 would lead to the rise and electoral success of populist parties in the European periphery. I analyze how the structure of the Eurozone would both simultaneously enable and severely constrain the policy options of crisis countries, requiring the governing establishment parties to instead rely on policies that would exacerbate and ultimately alienate a plurality of their citizens. The policies of austerity and readjustment, such as tax increases, labor market and pension reform, were advertised as the only solutions for recovery. However, these policies, while successful in achieving a positive current account balance for crisis countries, would inflict significant costs on household wealth, unemployment, and would fail to save small businesses. I illustrate this conclusion by exploring the electoral successes of Alexis Tsipras’ SYRIZA in Greece and Pablo Iglesias’ Podemos in Spain.
A Brief History of the Eurozone
The Maastricht Treaty established the European Union and granted citizenship to all people within the EU, continuing upon Europe’s earlier successes of eliminating barriers to the movement of people, goods, and services across national borders. The Maastricht Treaty led to the creation of the European Single Market, or Common Market. The cornerstone of this single market was the “Four Freedoms,” defined as the free movement of goods, capital, services, and persons across the union. The “Four Freedoms” were part of the original core objects of the 1957 Treaty of Rome’s establishing of the EEC in establishing the “abolition, as between Member States, of obstacles to freedom of movement for persons, services, and capital” to form a common market and customs union. Nations can be a part of the European Customs Union without being a member of the Eurozone, or even the EU. It serves as a customs union by harmonizing intra-member trade by eliminating tariffs or duties and by liberalizing non-tariff barriers such as import bans, quotas, or licenses. Under Article 30 of the Treaty on the Functioning of the European Union (TFEU), the Customs Union prohibits the levying of customs duties between member states. The customs union can then set a “common external tariff” that applies only to non-members for external trade. However, a single market goes further by further integrating the member countries and allowing for the free movement and mobility of capital and labor. The EEC, established earlier by the Treaty of Rome, became incorporated within the legal framework of the EU by the Maastricht Treaty. By its incorporation, all member states of the EU were granted the Four Freedoms. By enforcement of these “Four Freedoms,” as stated in TFEU article 63, “… all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited.” This effectively banned countries from imposing capital controls or restrictions on Members, including limits on buying currency, or corporate shares or financial assets.
To create a common currency, countries must necessarily give up monetary autonomy, or the ability to use national central banks to control the supply of money and credit. In order to coordinate monetary policy, the European Central Bank (ECB) was established in 1998 under the Treaty of Amsterdam. Through a compromise between German Chancellor Helmut Kohl and French President Francois Mitterrand, the institution of the ECB would be modelled to emulate the structure, organization, and monetary philosophy of the German Bundesbank; the supranational central bank would even be located in Frankfurt, the same city in which the Bundesbank was based (Oatley 2018, 294-296). The German Bundesbank policymakers additionally sought to ensure that the ECB would be an autonomous institution independent of politics (Feenstra and Taylor 2017, 837). The independence of the Central Bank was argued bearing in mind the economic dilemma of time inconsistency. If the bank is not autonomous and is politically controlled by the governing party, there is no way for the central bank to credibly commit to not engaging in a one-off “surprise” monetary expansion to boost short-term output at the expense of further increasing the deficit. The original role of the ECB was entirely singular: To maintain “price stability” by inflation targeting. Unlike the dual role of the Federal Reserve to lower unemployment as well as inflation, no mandate for employment existed under the ECB’s original charter. The ECB also departs from the Federal Reserve in that it was forbidden from financing members’ fiscal deficits and providing bailouts (laid out in the so-called bailout clause, article 125) (Magone 2019, 442). A corollary of this also meant that the ECB was forbidden to act as a lender of last resort “by extending credit to financial institutions in the Eurozone in the event of a banking crisis” (Feenstra and Taylor 2017, 834). The Great Recession of 2008 would expose the fragility of these constraints and would ultimately force European policymakers to rethink its founding institutions.
In order for the European and Monetary Union (EMU) to function, the Maastricht Treaty laid out a series of requirements that all members must follow and abide by. The “Maastricht criteria,” also referred to as “convergence criteria,” are fiscal and monetary requirements that all new entrants must fulfil in order to be accepted into the Euro zone. The criteria was developed to achieve price and exchange rate stability, ensure sound and sustainable public finances, and set long-term interest rates on a path for convergence. Specifically, the Maastricht Treaty (Section 104) laid out specific fiscal and monetary constraints to act as visible and strictly enforceable policy goalposts. The Maastricht Criteria’s fiscal criteria required that member states maintain deficits less than 3 percent GDP and debts less than 60 percent of GDP (Feenstra and Taylor 2017, 838). To ensure price stability, the criteria additionally state that a member’s inflation must not exceed 1.5 percent of the top three lowest inflation having countries in the Eurozone. The member must also monitor its long-term interest rates, which must not be more than 2 percent thanthose of the three most stable Member states. However, the framers of the EU Treaties also understood that there existed a credible commitment problem: what prevents member states from diverging from the criteria and overspending once they are accepted to the Euro? The answer to this was the Stability and Growth Pact (SGP), legally established in 1997 under Articles 121 and 126 of the TFEU. The SGP set up a “budgetary surveillance” program arrangement whereby members would submit their economic and policy data to the European Commission and the European Council (the Council consists of the 26 heads of state of the EU). However, for political monitoring arrangements to function, the coercive element must be sufficient to disincentive negative behavior. Indeed, most of the mechanisms of enforcement were informal “naming-and-shaming” and repeat offenders of the fiscal criteria were often unpunished, as most Member states did break the pact at some point (Magone 2019, 441). The obvious weaknesses and lack of any real oversight by the SGP would prove to be a major impetus for the failure of the Eurozone in 2008 to contain the economic crisis.
The Economics of the Euro Zone
To the major stakeholders of the Eurozone project, the prospect of building a pan-European common market yielded significant economic advantages for intra- and inter-industry trade, which applied in particular to larger, multinational firms. Trade liberalization allowed companies to more efficiently shape their global value chains. The literature suggests that exchange-rate stability reduces uncertainty, maintains relative price ratios between domestic and foreign exports/imports, and increases predictability with respect to input prices and profit margins. Anchoring inflation expectations incentivizes firms to engage in investment spending and bolster cross-border value chains (Frieden 2002). Under reduced barriers to trade, multinational companies (MNCs) have access to a much larger consumer market and can establish retailors or adopt new distribution chains to exploit this locational advantage (Oatley 2018, 166). On the supply-side, trade liberalization leads to changes in intra-industry trade whereby MCNs make efficiency-oriented investments to reallocate their supply chain across regions or countries to lower costs and increase firm productivity. For instance, the stage of computer assembly, which uses labor intensively, will be reallocated to countries where that factor is more abundant and cheaper; in converse, the chip design and innovation will likely be performed in the more capital-abundant country (Oatley 2018). The economy of trade by large MNCs is characterized by monopolistic competition in which each product produced is slightly different from all other similar products. A German-produced Mercedes is unique to Italy’s Fiat. Trade allows these monopolistic firms to achieve economies of scale, allowing the MNC to reduce its average cost of production as the quantity produced increases (Feenstra and Taylor 2017, 171).
Free trade, however, simultaneously produces the effect of harming local, comparatively disadvantaged firms that do not have the capacity to achieve scale and sell at the now lower prices. This liberalization results in all firms lowering their prices, leaving the unprofitable firms to exit the market. Only those firms that can operate at scale (maintaining low costs of production) can therefore survive (Feenstra and Taylor 193). This phenomenon is critical to understanding the rise of populism in countries like Greece where in the post-recession world, small Greek firms were overtaken by their German counterparts.
In the quest for further European economic integration, the founding leaders had believed that the adoption of a common currency would further increase efficiency not just for gains from trade, but for the coordination of monetary and fiscal policy more broadly. The Eurozone was designed to operate as an optimal currency area (OCA). The OCA theory posits under what circumstances the benefits of joining a currency union outweigh the costs. When countries adopt a common currency, the real exchange rate is fixed at one-to-one. As market integration increases, the “efficiency benefits of a common currency” increase. However, countries must also consider the level of economic symmetry amongst states. The more symmetrical member states are, the lower the stability costs associated with maintaining the common currency (Feenstra and Taylor 2017, 815). In exchange for exchange rate stability and lower transaction costs, countries must trade their monetary autonomy. However, while the Eurozone was envisioned as emulating an optimal currency area to a similar degree of that of the United States, the realities of labor immobility across countries and subsequent asymmetric shocks would prove otherwise. In the event of an asymmetric shock, such as a one-off shock in unemployment in Spain, it was thought that under a common market, labor would be able to migrate to a high labor -demand country of a non-recessionary economy such as Germany. Under this pretense, the labor market would adjust naturally as Spanish labor would move to Germany and the subsequent decrease in supply of workers would reduce the unemployment rate in Spain and allow for prices to adjust (Feenstra and Taylor 817). However, in reality, Europeans are far less likely to simply leave their family and friends behind and emigrate to another country that speaks an entirely differently language in search of a new job; in the US, on the other hand, it is not unlikely for one to move from one state to another for opportunity.
Another mechanism by which the Eurozone could serve as an OCI is through fiscal transfers. When one Member is hit by an adverse shock, a central authority can provide a large sum cash transfer to allow the state to use expansionary policy to “prime the pump” to spur recovery (Feenstra and Taylor 2017, 817). However, under the Treaties of the EU, the EU’s budget spending represents only a mere 1% of the total value of the EU economy, a plurality of which is allocated towards the Common Agricultural Policy (CAP) to provide support to agricultural farm interests across rural regions. As of 2018, CAP remains the most important budgetary item for the EU, comprising of “37.03 per cent of the total 160 Euro billion budget” (Magone 2019, 450). The EU Commission has also sought to increase funding for infrastructure projects in the less-developed regions in the EU, namely Poland (25%), Czech Republic (7%), and Hungary (7%) (Magone 2019, 449). However, it is apparent that the scale of these fiscal transfers is both far too small in magnitude and too broad in application to provide adjustment in response to asymmetric shocks. In summary, the labor market is too rigid and fiscal transfers too negligible for the Eurozone to truly emulate an OCA. The structural inability of the Eurozone to act as an OCA is a major theoretical contribution to understanding why the individual Members were almost entirely unprepared to deal with the crippling asymmetric shocks onset by the financial crisis of 2008.
The Build-up to the Financial Crisis
When Greece, Spain, and other countries in the European South had adopted the Euro at the turn of the century, the spread between Greek interest rates and German interest rates converged rather quickly, reflecting an overly optimistic risk outlook by investors that Greece was now financially sound; joining the Eurozone seemed to offer an impermeable shield against risk against default and the malaise of hyperinflation that historically ravaged Greece. With originally high interests in the periphery states and low interest rates in the center states, the periphery happily borrowed, and the center eagerly lent. Overconfident money flowed from investors unscrupulously into the periphery’s private sector, in particular to Spain, Greece, and Ireland. Despite the “no bail-out clause” of the Euro system, investors had bet that the “integrated nature of the single market and single currency made it inevitable” that the other Members would provide a bailout to maintain the peg. Creditor countries like Germany amassed a massive current account surplus at the expense of debtors like Spain and Greece. When the bubble burst, the housing industry in Spain and Ireland collapsed after a precipitous climb in the preceding decade (Stiglitz 2016, 82). In the aftermath of 2008, the private sector of countries like Spain and Portugal and the public sector in countries like Greece and Italy were left facing a debt repayment crisis, and their German creditors were left holding the debtors’ rapidly depreciating bonds and private assets.
On September 15, 2008, the banking giant Lehman Brothers filed for bankruptcy. After nearly a decade of cheap credit amidst high investor confidence and deregulation of the US financial sector, the American housing sector collapsed (Amadeo 2020). The American housing bubble, driven up by excess housing demand from cheap bank loans, finally popped in 2008 after foreclosure rates skyrocketed between 2006 and 2007. The real estate collapse sparked a contagion infecting large banks, hedge funds, pension funds, and other large institutional investors which had held large amounts of real-estate and mortgage derivatives (AFP 2007). As banks struggled against the tremendous losses on their balance sheet from sup-prime investments, petrifying fear over market uncertainty caused banks to cease interbank lending. The world had entered a liquidity crisis, and seemingly overnight, the river of foreign capital that had flooded into the European periphery came to a halt (Singh 2020). The collapse of Wall Street sent shockwaves that rocked not only the US housing market but created a cascade effect triggering other asset bubbles to implode across the Atlantic.
Policy Constraints under the Euro
Financial liberalization, in the absence of due diligence resulting from a lackluster regulatory environment, had created the forces that allowed for the periphery to become indebted (Stiglitz 2016, 96). In a currency union, such private excesses led to a trade deficit with Germany, the creditor nation. In a normal non-peg system, if there is an excess of imports from Germany to Greece, the Greek-German exchange rate would fall, adjusting externally such that “imports became more expensive and exports more attractive.” However, under the Euro system, German products, were artificially made cheaper relative to Greek goods. Under the fixed rate of the Euro, the excess of imports can only be financed by running a trade deficit. The high level of imports now weakens domestic demand, and the government must allocate tremendous amounts of revenue to financing the debt (Stiglitz 2016, 84). Constrained by the peg and loss of monetary autonomy, countries like Greece were unable to drop interest rates to spur demand. Germany has run an ardent current account surplus both before and in the years following the Recession. This current account imbalance generates highly negative externalities for the periphery states, mainly by “sucking up” European demand and foreign dollars from countries like Greece and Spain in exchange for German cars, medicine, and technology. This has the additional deleterious effect of simultaneously decreasing demand for local Greek products in Greece.
By further consequence, because the “Greek-Euro” cannot devalue externally to be more competitive against the “German-Euro”, Greece is similarly unable to rely on export-growth to prime its economy (Stiglitz 2016, 84). Indeed, under normal circumstances of monetary autonomy, Spain and Ireland, both of which were facing serious real estate bubbles, could have used capital gains taxes or enabled widespread capital controls early on to attempt to stop the bleeding by preventing lending by local banks whose capital was shouldering the bubble. However, under the “Four Freedoms” of the EMU which maintain the free movement of capital, capital controls of scale were no longer a policy option (Beck and Prinz 2012). Foreign investors engaged in rapid capital flight as investor confidence fell and money fled the weak countries, significantly diminishing the pool of loanable funds and available credit. This deeply starved struggling small- and medium- size enterprises (SMEs) of much needed capital (Stiglitz 2016, 94-5). It seemed that only the large banks would receive financial stimulus from the bailouts, leaving smaller lenders helpless. As domestic banks in crisis countries like Greece and Italy saw investors flee, the banks were forced to raise interest rates to attract investors. This, in turn, had the adverse effect of increasing costs of borrowing for consumption and investment which perpetuated a downward spiral of contraction. Absent the EMU, the banks would have instead been able to lower rates to spur demand (Stiglitz 2016, 96).
Capital flight is also in large part related to the regulatory governance of taxation. The EMU allowed for the free movement of capital without adequately designing a supranational regulatory structure to govern its allocation. As countries competed with each other to attract MNCs and capital investment, each country had an incentive to further deregulate its markets, known as a regulatory “race to the bottom” (Stiglitz 2016, 97). Rodrik (2017) states that “as capital becomes globally mobile, it becomes harder to tax. Governments increasingly have to fund themselves by taxing things that are less footloose – consumption or labor” (Rodrik 2017). The lack of coordination between members on developing a harmonized series of regulation for MNCs that operate across jurisdictions allows for systemic tax evasion by large companies and high net-worth individuals (Stiglitz 2016, 101). In order for countries like Greece to refinance their deficits, they would need to increase their tax revenues and cut down on expenditure. Manipulating the international rules of finance, the wealthy could simply move their wealth to banks in Luxembourg or Switzerland to avoid taxation, resulting in the brunt of debt financing to fall on the shoulders of SMEs and the middle class. By 2012, it had appeared that the Eurozone and the constraints imposed by the currency union had both created the preconditions for the asset bubbles to occur as well as had exacerbated the debt crisis by precluding the crisis countries from using monetary and fiscal “external” adjustment mechanisms to undergo countercyclical fiscal policy in response.
Response to the Sovereign Debt Crisis: Painful Readjustment
The Great Recession posed an unprecedented threat to the stability of the Eurozone and the project of European integration. Now, the Eurozone faced a sovereign debt crisis. In response, the European Commission and ECB, which had previously ruled out bail-outs, launched the European Economic Recovery Plan to allocate 200 Billion Euros in stimulus to boost investment and employment in the wake of mass layoffs. Spain had entered the Recession with a budget surplus of 2 percent of GDP in 2007. However, due to the irresponsible speculating in the real estate and construction sectors by the banks, Spain’s government was forced to provide steep bailouts to stabilize the banking sector, inflating its public debt balance sheet. For the most heavily hit crisis countries of the Eurozone, the question that confronted policymakers was: “Who should bear the costs of readjustment?” The European leadership headed by Germany and the creditor nations determined that it would be the debtor nations: those countries which they had deemed to be profligate and irresponsible borrowers. The ECB saw the crisis in Greece as a contagion; not only would credit agencies downgrade Greece, but they would downgrade Portugal and Italy as well, destroying investor confidence and triggering a sell-off in sovereign bonds across the EU. Equally dangerous was contagion spreading to EU banks, particularly those that were highly exposed to Greece. A sell-off on sovereign debt could destroy these financial institutions. As Greece, Ireland, and Portugal struggled to pay off their debt, European leaders abruptly developed an ad-hoc crisis mechanism called the European Financial Stability Facility (EFSF) to provide financial assistance. In May 2010, the IMF, European Commission, and ECB, collectively known as the Troika, approved the first bailout package, distributing 107.3 billion in financial assistance. Ireland would receive an 85 Billion Euro bailout in 2010. In 2012, Spain too would find itself overwhelmed and request a bailout package of 100 Billion Euros from the Troika and European Stability Mechanism. These hefty bailout packages however came with a hefty cost: austerity and adjustment.
Troika-led Reforms and the Populist Response
I. Greece
Austerity was designed to impose the costs of readjustment not simply onto the burden of debtor nations, but on the individual households of these nations. Austerity is a contractionary policy designed to shrink government expenditures, often meaning the gutting of social welfare programs, pension programs, and labor stabilization programs such as unemployment benefits (Stiglitz 2016, 140). The IMF believed that by forcefully reducing expenditures and costs, they could restore these nations’ balance of payments. The idea was that given a fixed external exchange rate, countries left up to market mechanisms would instead undergo “internal devaluation” in which higher unemployment would lead to lower wages, leading to lower prices which would ultimately restore the current account to equilibrium (Stiglitz 2016, 156). Under Keynesian economics, countries must spend their way out of recessions by increasing liquidity through targeted lending and lower rates, governments can prop up private consumption, government, and investment expenditure, which then yields a multiplier effect further accelerating recovery. Under the austerity conditions set forth by the Troika and financial and monetary constraints under the Euro, debtors were instead handtied to austerity.
The Economic Adjustment Programs, or Memoranda, were first signed in May 2010 by Papandreou on the one hand and the Troika on the other. The Troika, backed by powerful French and German banks, forced Greece – with the threat of expulsion from the Eurozone if it failed to comply – to adopt austerity programs and privatization policies, and design a system which sought to bail out private banks using Greek public funds. Papandreou’s PASOK government, in line with the austerity requirements of the Troika’s first bailout package, passed measures that primarily focused on cutting down the public sector, enacting pay freezes, slashing of wages and benefits, and dismantling the collective bargaining system to increase the “flexibility” of the labor market, which would allow firms to ignore the historically corporatist national labor arrangements of the past and fire previously protected workers. Pension cuts, wage cuts, decreased labor protections had led to double-digit unemployment and falling real income(GNI per capita). Social services were cut and rent subsidies were abolished leading to a massive swath of the population unprotected. Between October 2010 and 2013 the percentage of unemployed receiving unemployment benefits “declined from 26.5 percent to a mere 9 percent,” reflecting the loss of protection of millions of citizens (Zambarloukou 2015). Law 3863, which was introduced to re-calculate pension schemes in 2010, was designed as a quasi-universal pension that would simultaneously increase the amount given based on years in employment and occupation. As the pension reforms in countries like Italy, it was highly criticized for leading to lower pensions for poorer workers, higher retirement age, and harming most those who lacked stable employment or were underemployed (Zambarloukou 2015). In 2012 and 2013, the establishment parties once more passed austerity packages for spending cuts leading to the layoff of 25,000 civil servants, additional cuts to public pensions, and tax hikes in exchange for receiving the second round of bail-outs from the Troika (Stainburn 2012; Kitsantonis 2013). Despite these harsh cuts, from 2008 to 2015, a total of 244,712 Small and Medium enterprises had shuttered German products flooded Greek supermarkets. By August 2012, Greece’s unemployment rate had reached 25.4%, decimating Greece’s tax base, making it even more impossible for the government to build up its revenue to fulfil its debt obligations through taxation. Even despite the economy returning to growth in 2017 at 1.5 percent and primary fiscal surplus of 4.1 percent in 2017, under the conditions of austerity, “Greece will not return to its pre-crisis levels under the early 2030s” (Wolf 2019). Today, creditors hold 76 per cent of central government debt and use carrots and sticks to enforce Greece’s commitment to repaying its debts.
Under the pretext of balancing the budget, apart from reducing expenditures, the Troika-led directives also sought to increase tax revenues. Public assets were stripped and privatized. The value-added tax was increased to 23 percent for a variety of household items which, combined with “an income tax that even at very low levels of income is at around 22 percent,” led to an effective tax rate of around 40 percent (Stiglitz 2016, 136). The wealthy elite engaged in tax flight by exploiting EU law, leaving middle-class families footing the bill. While the middle-class was saddled with tax increases, the insider oligarchs of Greece were largely excluded from these structural reforms by successfully utilizing their longstanding clientelist networks with Saras’ New Democracy Party in government to resist progressive property taxes (Stiglitz 2016, 132, 162). The Troika – sponsored memoranda bail-out agreements put forth by Eurozone creditors allowed oligarchs, who largely dominate the banking sector, “to generate huge profits and avoid paying taxes” (Inman 2015). Within the chaos of readjustment and austerity, anti-austerity protests led by Leftist organizations and unions would envelop Greece in the following years.
In the years building to SYRIZA’s victory, there was a salient sense of helplessness, anger, and tremendous economic frustration with the Greek establishment marked by nearly endless street protests. High unemployment, growing inequality, and a sense of loss of sovereignty owing to the fiscal constraints imposed on Greece as per the bailout agreements and Maastricht Criteria had created a perfect storm. Finally, in 2015, a Leftist populist, anti-austerity party would finally come to power for the first time, marking the first time since 1974 that neither the center-left PASOK nor the center-right New Democracy Party have been in government. Alexis Tsiparis’ Syriza (Coalition of the Radical Left) had scored a near absolute majority in Parliament, winning 149 of 300 seats. PASOK, Papandreou’s centrist social democratic party, saw its representation in Parliament decimated to just 13 seats, a clear revolt against the party that had pushed through and dictated the deflationary policies of austerity reform (Kalyavs 2017). Tsipras’ SYRIZA ran on a platform of anti-austerity and anti-corruption, pledging to take on Greece’s powerful oligarchs and their tax evasion. SYRIZA also pledged to undo the major reforms undertaken by the previous government as part of the bail-out packages, promised to renegotiate the terms of its IMF loans to write-down their external date, and campaigned on increasing minimum wage and pension entitlements. While Tsipras’ SYRIZA was ultimately unsuccessful in ending the “blackmail” of the Troika, the electoral success of SYRIZA was a clear act of defiance by the Greek electorate against austerity and the Troika-sponsored policies of readjustment implemented by prior governments.
II. Spain
In Spain, austerity’s impact had remarkably similar outcomes on workers and economic growth. Unlike Greece, Spain did not have a current account deficit going into the crisis, – current account surplus of 2 percent of GDP in 2007 – however, there had been rumbling risks below the surface. The confidence inspired by the EMU and the Euro when Spain joined in 1999 had caused the risk premium on Spanish bonds to disappear as bond spreads converged between Germany and Spain. Much of that money went unscrupulously into the construction sector creating a pernicious inflation of the value of real estate. In 2009, Spain engaged in the bail-out of major institutionalregional lender Caja Castilla – La Mancha and created a bail-out fund known as the FROB to provide emergency credit to struggling banks. In 2010, under the dark cloud of exponentially increasing public debt, Spain’s public deficit was now significantly higher than the EU required 3 percent of GDP limit. Desperate to recapitulate its banks, defend its bonds from speculative attacks, facing capital flight, and running out of money, Spain was left in an impossible position to cut down its debt.
Beginning in 2010, facing increasing pressure from the Troika to adopt its austerity playbook, Zapatero’s PSOE (Socialist) government, and later Mariano Rajoy’s conservative Popular Party government in 2011 followed Greece’s footsteps and unveiled a similarly harsh and stringent policy playbook for austerity. Under Rajoy’s 2012 labor market reforms Real Decreto Ley 3/2012 and subsequent amendments, the government had ushered in reforms to increase the flexibility of the labor market to enhance competitiveness and adjustment to shocks. While devised under the auspices of economic growth, this had the impact of fragmenting collective bargaining from national to firm-level bargaining, hampered the power of labor unions to guarantee employment and wages by increasing the ease of firing workers, and did away with historically protected wage guarantees (OECD 2013). For instance, as reported by a Spanish news site, the reform had created “a new open-ended contract which can be used by small and medium size businesses for employees who are under the age of 30 which allows dismissals without justification during the first year of employment.” Collective bargaining systems were weakened and deregulated and were met with aggressive hostility by labor unions. The institutional, major labor unions (UGT and CCOO) were sidestepped with unilateral actions to impose new labor market regulations to make it easier to decentralize the labor arbitration process and let go workers (Picto and Tassinari 2017). The government ushered in sweeping tax increases and massive cuts to unemployment payments, delayed the eligible age for retirement, and cut civil service pay. In addition, the government led a liberalization campaign to privatize and sell-off public assets, including “ports, airports, and rail assets.” Even as the austerity measures has slowly helped Spain enter positive growth territory, unemployment remained in the high double-digits, with youth unemployment in 2015 at a staggering 48 percent.
Spanish populism emerged directly as a reactionary response to the painful austerity and adjustment reforms enacted by the establishment Spanish leadership and ECB, Commission, Eurogroup, and IMF. Although Zapatero, and later Rajoy in 2012, were praised by their European counterparts for ardently following the austerity reforms conditioned on the IMF loans, labor unions, youth demonstrations, and industry groups protested the labor market and austerity reforms vigorously. The story of the rise of Leftist populism in Spain echoes the events that had transpired in Greece. Spain had historically been a fairly majoritarian electoral political system, with its d’Hondt proportional representation, 3% electoral threshold, and small district magnitude, which historically resulted in a two-party system between the center-Right Popular Party (PP) and the center-Left Spanish Socialists (PSOE) (Magone 2018). However, this all changed in the election of 2015 with the rise of two outsider parties: Pablo Iglesias’ Podemos (Populist Leftist) and Ines Arrimadas’ Ciudadanos (Liberal Centrist). In 2016, Podemos would join forces with a smaller Communist party to form Podemos-Unidos (Together United) (Magone 2019, 318).
Unique to Spain is a cleavage of political identity along a unitary – regionalist dimension. Spain comprises of 17 autonomous communities, with the “historic” regions of Catalonia, Basque Country, Galicia in particular having their own non-Spanish languages, laws, and cultures. Regionalist parties, such as Republican Left (ERC - CatSi) in Catalonia and the Basque Nationalist Party (EAJ-PNV) mainly run on platforms fighting for greater autonomy and transfer of competencies to the regional governments, with the ERC – CatSi leading the independence movement from the Spanish state (Magone 2018).
The two main parties in Spain had for years been accused of corruption scandals stemming from their monopolistic control of the government and deep clientelist ties throughout the country. As the Spanish government was imposing strict austerity and fiscal centralization reforms, evidence of corruption from the PP and PSOE circulated like wildfire. In 2010, in the region of Andalucía, 19 PSOE government officials had engaged in mass graft, embezzling and redirecting of $752 million in public funds to cronies. In 2007, the PP had suffered its own “Watergate,” the Gurtel Scandal, a massive bribery, tax evasion, and cash-for-kickbacks scheme that saw multiple top Conservative brass resign. The highly publicized corruption scandals rocked the political establishment, and in the years following, a disillusioned public rocked by austerity and internal devaluation would flock to Podemos from PSOE. In the aftermath, Podemos, allying itself with small leftist regionalist parties such as En Marea in Galicia would sweep mayoral seats across the country. These corruption scandals served to exacerbate the public’s sense of divide between the “true people” and the “elite,” allowing populists to “supply” the message that they were the party of the people who alone could wrestle power back from the grips of the elite. PSOE, the establishment Socialists, were seen as lackeys of the global elites, having been Zapatero’s government which imposed some of the harshest fiscal adjustment measures (Zarzalejos 2016).
The fiscal adjustment, bank bailouts, and structural reform measures also reignited the regionalist, anti-Spanish social political movement, particularly in Catalan. This would feed into the rise of populist parties like Podemos. Unlike Greece, Spain had begun the Recession with a public surplus. The massive, unsustainable deficit arose from the private banking and real estate sector which, when collapsed, would ultimately put the public government in debt (Stiglitz 2016, 133; Suarez 2010). The autonomous communities, forced to meet new strict deficit targets, were also forced to make significant budget cuts in education, social services, and healthcare (Medina and Correa 2016). Under the conditions of falling real income, sluggish housing prices, and whopping double-digit unemployment, many regionalists in autonomous communities like Catalonia grew increasingly frustrated with what they perceived as a tremendous administrative failure of the central government to deal with the crisis. This would motivate the push by Catalan secessionists to push for controversial independence referendums in 2014 and 2017 (Vogel 2012). Podemos would take advantage of the regional dismay with Madrid’s government by adapting its populist discourse to the regional arena by “[embracing] the agenda of its regionalist allies” (LSE Blog). One particularly significant ticket was En Comun Podem, a regional party alliance between Podemos and mayor Ada Colau’s Catalunya en Comu (Magone 2018, 154). Mayor Ada Colau herself had rose to prominence as a “housing activist defending families who had defaulted on mortgages” through her work with the Platform of Those Affected by Mortgages, setting her up to win the mayoral election in 2015 (Aidi 2015). In the wake of fiscal adjustment reforms, staggering unemployment, and a wide-spread perception of corruption of the establishment elites, Podemos were able to win regional elections and propel themselves forward on an anti-corruption and anti-austerity ticket, leading finally to Podemos being coalition partner to PSOE in the new government formation in2019.
Concluding Remarks and Discussion
The Eurozone, in its imagining as a single currency union, was an economic project founded on the ideas of free market liberalism, enhancing competition, achieving economies of scale, and was optimistically propelled forward in spite of clear asymmetric differences in the economic needs, labor productivity, factor mobility, and social and welfare systems of the diverse member states. The absence of harmonized supranational regulation of credit markets would allow for billions of speculative investments to flow into financing dangerous bubbles in Southern real estate and construction. Meanwhile, Germany, exploiting the relative decrease in its products under a currency union, exploited its economic position by running a prolonged trade surplus at the expense of debtor nations like Greece, which subsequently would be unable to utilize natural exchange rate devaluations to prop up its economic growth through export growth. The Troika, motivated first and foremost with the goal of preserving the Euro, would prioritize the adherence of members to strict and often unreasonable fiscal guidelines, leading to policies of austerity and adjustment that imposed unbearable costs on the average household. After years of austerity, Greece and Spain were able to achieve current account surpluses eventually. However, while the banks and creditors would get repaid, the middle-class households would continue well after to suffer real income stagnation, staggeringly high unemployment, pension cuts, loss of secure employment, and cuts to health care. Ultimately, the use of tough austerity measures to reduce public-sector expenditure, the restructuring of longstanding labor markets and collective bargaining, and significant import-competition from Germany which outcompeted and bankrupted SMEs would lead to the economically precarious conditions ripe for Populist movements.
As the Euro exists in its current form, the socioeconomic conditions for populism will continue to persist. Currently, labor mobility between countries is too rigid to balance economic recovery in times of crisis. While the establishment of the European Stability Mechanism (ESM), Eurobonds, and tighter fiscal monitoring work towards this, without a banking union or a “common comprehensive deposit insurance for all banks in the eurozone,” there will continue to be a persistent incentive for money to flow from weak countries to the strong (Stiglitz 2016, 96). So long as this flow exists, the burden of taxation will continue to fall on the shoulders of the middle-class and poor. With the onset of the COVID-19 pandemic, Europe again is facing the very likely prospect of recession as businesses shuttered and exports and tourism grinded to a halt. With EU ministers suspending deficit limits to combat the Coronavirus, only time will tell if Eurozone leadership will learn from the lessons of the past.
