With an unemployment rate over 20% of the active population, a falling labor share in national income since the 1970s, and an estimated poverty rate of around 20% of the population, Spain is, along with Greece, Ireland and recently Portugal, a country where European austerity plans are attacking workers’ living standards most severely. Not only is Spain an interesting case due to the size of its economy (almost double the size of all the other European peripheral countries together), but also because its economic expansion was cited by many conventional economists inside and outside Spanish borders as a positive model.
How it all began
The origins of the current economic problems can be tracked back to the restoration of democracy. It was after the death of Franco when a fall in profit rates led to an offensive from capital, which was institutionalized in the so-called Pactos de la Moncloa (Moncloa Pacts) in 1977. This was an agreement between the main political forces, both on the right and on the left, that tried to put an end to the distributive conflict and the inflation it had triggered. With their signature, however, major unions effectively ceased to protect the interests of the workers they theoretically represented. As a result real compensation did not reach its level in 1979 until 1991. This downward trend in real wages was only partially offset by a rise in the indirect wage in the form of major improvements in the education system and the introduction of social security and universal healthcare in the first half of the 1980s. Nonetheless, at the end of the decade real social expenditure per capita was still 20% below the OECD average and 35% below the EU-15 average. The Moncloa Pacts signaled a dark chapter in the history of the labor movement in Spain, marking the beginning of the isolation of its most combative fractions and a new era in labor relations which forced unions to base their activity strictly in “delegationism” for the greater glory of representative democracy and to the detriment of organizations based in grassroots assemblies.
The attempt to escape from the 1970s crisis that those pacts represented –along with other macroeconomic measures aimed at restoration of profitability– was an unfortunate choice, and as in other OECD countries it created new problems giving rise to a growth pattern pregnant with new potential vulnerabilities. In the Spanish case, and as a part of capital’s offensive, the unemployment rate followed an upward trend that seemed to have no end. Dramatic shifts in production leading to new areas of specialization were already visible in the 1980s. The creation of a financial bubble immediately followed by a real-state bubble began to take place at the same time as new money entered the country when Spain joined the European Union (then called the European Community). This bubble was soon to burst, and the 1990s started with a crisis, followed by a recovery that was universally praised but contained dangerous trends that went unacknowledged.
In the mid-1990s the Spanish economy embarked on a growth spurt that particularly after 1997 became widely admired. However, the accumulation process was based in the same sectors that had pumped the air into the previous bubble in the second half of the 1980s. Apart from tourism, which was the sector allocated to Spain in the new European division of labor, the building sector came roaring back to rescue the economy from what otherwise would have been listless growth. Tourism and construction accounted for most of the growth the economy was able to generate during those years. Employment in tourism increased by 70% between 1997 and 2006, while employment in construction increased by almost 100%. One of the few old industries to survive was the automobile sector. Because tourism and construction are labor intensive the unemployment rate went down quickly, from above 24% in 1994 to 8.5% in 2006, but the low level of capitalization of both sectors helps explain why the capital intensity of the Spanish economy grew by just 8% during the same period — four points below the EU-15 average – and has only picked up slightly after 2002. This low capitalization contributes to explain why Spanish productivity growth was one of the lowest in Europe, and in fact declined –by 7%. At the same time real wages were falling while profits shot up. (Profitability, that is profits divided by capital stock, also went up, but when capital stock started to increase after 2002, it declined heralding the new economic debacle.) Obviously, the combination of low wages and a real estate bubble is dangerous since this can only be sustained by rising indebtedness. By 2006 households’ net worth had risen to 110% of their disposable income. And if we add non-financial corporate debt, total private debt rose to 200% of GDP in the fourth quarter of 2006 –while public debt was well below 50% of GDP.
When the international crisis led to a credit crunch, and the European Central Bank raised interest rates, these debts became bankruptcies. The high dependency on the building industry and its paralysis when credit was no longer available deprived the economy of its main engine of growth, and as a consequence unemployment grew quickly, first in those sectors which were most vulnerable –construction and services. But eventually falling employment in the two most dynamic sectors of the Spanish economy along with higher interest rates led to a drop in consumption and investment leading to the disastrous situation I described at the beginning of this article.
Austerity for the E.U. Periphery
Capitalist crisis have no solution but only re-stimulation of the living corpse which is the current economic system. The burden of re-stimulation strategies invariably fall on workers’ shoulders, and the current case of Spain is no exception. The adjustment plan includes three main axes:
1) Austerity plan: The Spanish government, in line with thirteen other European countries including all of the so-called PIGS, Portugal, Ireland, Greece and Spain, passed a decree by which retirement benefits are to be frozen, public employees’ wages will be cut by 5%, public investment will be dramatically reduced, and the value added tax, VAT, is increased. (The VAT is Europe’s version of what in the United States are called sales taxes, and like US sales taxes VATs are highly regressive since they fall disproportionately on those with lower incomes.)
2) Labor-market reforms: These reforms include (a) relaxing rules to classify layoffs as due to economic causes which has the effect of lowering severance payments which are subsided by the state; (b) promoting new employment contracts which lower severance pay from 45 days for each year of services to 33 days; (c) reducing the power of unions to participate in decisions regarding workplace issues; (d) reducing the coverage of centralized bargaining; and (e) increasing the duration of fixed-term contracts which effectively perpetuate temporality.
3) Pension reform: Proposals include postponement of the retirement age from 65 to 67 years, and extending the reference period for calculating retirement benefits from the 15 last years before retiring to the last 20 years.
In addition to these “counter-reforms” Parliament has passed reductions in social spending in the last budget plans. Furthermore, some months ago, in order to increase the banking sector solvency, it approved purchasing assets on the balance sheets of banks valued at 4.6% of GDP, and providing government guarantees for banks at risk worth up to 18.3% of GDP, although much of these guarantees have yet to be used. Part of this plan included masked privatization of savings banks which were previously semi-public.
The class implications of the “counter-reforms” are obvious. After direct, indirect, and deferred wages have all suffered from long-term erosion, the reforms amount to another turn of the screw further lowering workers’ living conditions. The increase in temporality that is promoted by these labor-market reforms is bad enough, but the overall trend is much worse when other considerations are taken into account. Temporality involves a reduction of seniority inside firms, and in turn, the elimination of pay raises linked to seniority. On the other hand, the changes that decrease pension benefits are a frontal assault on worker living standards.
Anxious to preserve a worker-friendly image, the “socialist” government has introduced a tax reform which includes an increase in the tax rate for all those who earn more than 120,000 euros. However, even if approved the richest Spaniards would still enjoy a lower tax rate than they had to pay in 2007. Moreover, the estimated increase in tax revenue from this proposal –between 170 and 200 million euros– is much less than the revenue that was lost in 2007 when the same Spanish government abolished the wealth tax –1,800 million euros in 2006 and 2,100 million euros in 2007. Furthermore, if we compare the fiscal treatment on those earning over 120,000 euros to similar measures elsewhere in Europe, the Spanish proposal is minimalist. For example, in 2009 the richest households in France paid 3,290 million due to the tax on their wealth that exists there.
All in all, the retrenchment seems to be here to stay, unless someone does something to stop it. And that will be the main topic on the continuation of this article.
[Part two is available here.]
Luis Buendía is a social researcher from Spain and member of the Institute for Economic Sciences and Self-Management (ICEA), http://iceautogestion.org. The author wants to thank Robin Hahnel as well as other ICEA members for their helpful comments on an earlier draft of this article.