European Austerity Politics and its Effect on Spain and the Mondragon Experience

One Worker One Vote BlogMichael Pettis’ Syriza and the French indemnity of 1871-73 is worthy of a serious read because it is extremely well done and because it has implications for Spain, for Mondragon, and for what is attempting to build throughout the U.S.

My attempt at a partial summary of Michael Pettis’ key-statements supporting this observation follows (with the underlining of several of Mr. Pettis’ statements and their positioning below inserted at my discretion):

  1. “As long as a country has a large number of individuals, households, and business entities, it does not require uniform irresponsibility, or even majority irresponsibility, for the economy to misuse unlimited credit at excessively low interest rates. Every country under those conditions has done the same… Over and over we hear — often, ironically, from those most committed to the idea of a Europe that transcends national boundaries — that Spain must bear responsibility for its actions and must repay what it owes to Germany. But there is no “Spain” and there is no “Germany” in this story…”
  2. “Why didn’t Germans, rather than Spaniards, take advantage of the excess savings to fund a consumption boom. The standard response is to point to German prudence and Spanish irresponsibility, but it must be remembered that as German and Spanish interest rates converged (driven in large part by German capital flows into Spain), because they adopted a common currency at a time when Spanish inflation had been higher than German, the real interest rate in Spain was lower than that of Germany. As German money poured into Spain — with Spain importing capital equal to 10% of GDP at its peak — the massive capital inflows and declining interest rates ignited asset price bubbles, and even more inflation, setting off in Spain what Charles Kindleberger called a ‘displacement.’ This locked Spain into a classic self-reinforcing cycle of rising asset prices and declining interest rates…”
  3. “What is more, under normal (i.e. pre-euro) conditions the Spanish peseta would have dropped and Spanish interest rates risen, but the conditions of the euro prevented both adjustment mechanisms, and to make things worse this gave Berlin’s policies far more traction than anyone expected, locking Germany into an over-reliance on capital exports to Spain, the obverse of Germany’s current account surplus. German workers gave up wage growth in order to eke out employment growth, which itself depended on an ever rising surplus. Throughout it all there was little productivity growth as German companies reduced their investment share in the economy.”
  4. “Meanwhile German banks, flush with the higher savings that low wage growth, rising surpluses and growing corporate profits all but guaranteed, continued eagerly to export into Spain the savings they simply could not invest at home. So why didn’t “Spain” step in and put an end to this process by refusing to borrow German money? Because, again, there was no “Spain.” There were millions of households and business entities all of whom were offered unlimited amounts of lending at very low or even negative interest rates, and under the conditions of euro membership Madrid could not intervene. If German and Spanish banks blanketed the country with lending proposals, Madrid could do nothing to stop it (at least not without raising domestic unemployment and igniting the ire of Brussels and Berlin). As long as there were some greedy, overly optimistic or foolish borrowers (and in a country of 45-50 million people how could there not be?), German and Spanish banks fell over themselves to make loans. The money had to be absorbed by Spain and there was no mechanism to ensure the quality of its absorption.”
  5. Above all this is not a story about nations. Before the crisis German workers were forced to pay to inflate the Spanish bubble by accepting very low wage growth, even as the European economy boomed. After the crisis Spanish workers were forced to absorb the cost of deflating the bubble in the form of soaring unemployment.”
  6. “…German and Spanish banks — mainly the German banks who originally exported excess German savings — must take very large losses as these foolish investments, funded by foolish loans, fail to generate the necessary returns. It is no great secret that banking systems resolve losses with the cooperation of their governments by passing them on to middle class savers, either directly, in the form of failed deposits or higher taxes, or indirectly, in the form of financial repression. Both German and Spanish banks must be recapitalized in order that they can eventually recognize the inevitable losses, and this means either many years of artificially boosted profits on the back of middle class savers, or the direct transfer of losses onto the government balance sheets, with German and Spanish household taxpayers covering the debt repayments.”
  7. “There is overwhelming evidence — the US during the 19th Century most obviously — that trade and investment flow to countries with good future prospects, and not to countries with good track records. The main investment Spain is likely to see over the next few years is foreign purchases of existing apartments along the country’s beautiful beaches. Once its growth prospects improve, however, with among other things a manageable debt burden, foreign businesses and investors will fall over each other to regain the Spanish market regardless of its debt repayment history. This is one of those things about which the historical track record is quite unambiguous.”
  8. The financial crisis in Europe, like all financial crises, is ultimately a struggle about how the costs of the adjustment will be allocated, either to workers and middle class savers or to bankers, owners of real and financial assets, and the business elite… the major parties have refused to acknowledge the nature of this allocation process, and have turned it into a fight between a creditor Germany, on the one hand, and indebted peripheral European countries on the other…”
  9. “The ‘losers’ in this system have been German and Spanish workers, until now, and German and Spanish middle class savers and taxpayers in the future as European banks are directly or indirectly bailed out. The winners have been banks, owners of assets, and business owners, mainly in Germany, whose profits were much higher during the last decade than they could possibly have been otherwise.”
  10. “There is no question that a renegotiation of Spanish debt or of its status within the currency union would be accompanied by economic hardship and perhaps even a crisis. But compared to what? The Spanish economy is already in disastrous shape and there is compelling historical evidence that countries suffering under excessive debt burdens can never grow their way out of their debt no matter how radical and forceful the reforms… This means that by refusing to negotiate debt forgiveness, not only must Spain be prepared to live with unbearably high unemployment and slow growth for many years, which would undermine the social, political and financial institutions that are the real determinants of whether a country is economically advanced or economically backwards, but in the end after many years of suffering Spain would be forced into debt forgiveness anyway, only now with an economy in far worse shape. Historical precedents also suggest that while the real reforms Madrid has implemented seem to have failed, in fact it is the debt constraint that has prevented their impacts on productivity from showing up as economic growth.”

My conclusions:

  1. Europe desperately needs hybrid models showing how different, virtuous capitalism approaches free from radical political extremes can be morally and economically productive.
  2. Only by demonstrating and proving how labor as sovereign with capital in a supporting role using all of our developed strategies (i.e. multi-localization, one worker – one vote stakeholder democracy, and operational comfort with both increased decentralization and swarming critical mass when necessary and useful) can Mondragon prove its worth as a viable alternative.
  3. Economic class is not predestined. Instead, it is entirely man-made but, if left unchecked, increases inequalities of societal mobility, opportunity and wealth resulting in a rise in conflict and then an overall loss of systemic freedom because extremes are more easily reached than holding the middle ground.
  4. Mondragon, while an extreme solution compared only to today’s predatory capitalist practices, should be viewed instead as a return to balanced and sustaining equity compromise, to fairness through transparent rewards based on transparent merit that are made safe through democracy and which promote community, workplace, and societal solidarity through the basic enduring tenets of compassionate humanity strongly connected to economic outcomes.
  5. Mondragon can be viewed in this context as a sustaining “societal and financial middle class enabler.” Just like the sliding joints that hold bridges together in San Francisco and along California’s San Andreas fault when the earthquakes come, both Spain and Europe need more of these middle class reinforcing platforms to produce earned economic equality that transforms into social stability.
  6. Recent U.S. economic performance proves that austerity after a recession is a solution to benefit the one-percent. In Silicon Valley, capital now flows to consumer acquisition platforms with fewer and fewer workers benefitting. In this scenario, both the Wal-Mart consumption model and the Digital Interactive Economy compensation model become one and the same – rewarding a few at the expense of the many even though U.S. middle class consumption drives over 70 percent of U.S. GNP.

a. The U.S. 2016 presidential debate will be focused on how unsustainable this approach is for future civic cohesion, economic performance, and the functioning of a democracy.

7. What’s missing is “the enlightened middle” – where Mondragon should insist on its 60 years of experience and footprint. The burden now on Mondragon is to further self-enlighten based on recent events and incoming history and continue to prove itself as a way-shower so that that the Mondragon exception can become a rule for more interested and receptive geographies.

All comments welcome.