Long Road Ahead for Spain

Prime Minister José Luis Rodríguez Zapatero of Spain speaks at the European Parliament, Brussels, July 6, 2010 (Pietro Naj-Oleari)
Prime Minister José Luis Rodríguez Zapatero of Spain speaks at the European Parliament, Brussels, July 6, 2010 (Pietro Naj-Oleari)

Spain is the last major economy of Europe still mired in recession as its government remained committed to socialist doctrine throughout 2009. Massive deficit spending has only worsened the country’s predicament however, forcing Prime Minister José Luis Rodríguez Zapatero to finally start reining in Spain’s mounting debt.

Last month, Professor Niall Ferguson of Harvard University warned that “the contagion” currently rocking Greece would spread to other eurozone members, Spain foremost among them. The markets had woken up, he announced, realizing that the fiscal policies of countries as Spain had not been “credible”.

In the wake of the economic turndown, the Spanish government maintained a deficit on its budget of so much as 10 percent, refusing to cut on expenditures. The country’s pre-crisis growth has largely been carried by a boom in real estate. When construction came to a standstill, nearly 20 percent of Spanish workers lost their jobs. The country as a whole continues to face an enormous trade deficit on top of that.

The government simply has got to start spending less. According Bob Holderith, CEO of Emerging Global Shares who appeared on the Fox Business Network on Tuesday, “They’re going to have to get their economy under control.”

Holderith’s solution is investment, which is exactly what Prime Minister Zapatero has been hoping for. But with literally millions of people out of a job and millions of homes unoccupied there is little incentive to invest in Spain right now. Holderith admitted that the road to recovery for Spain will be a long one.

There have been some encouraging signs from domestic demand and exports recently and the country’s economy minister is supposed to be working out an austerity package that will bring the deficit down to the European maximum of 3 percent by 2013. Zapatero said that his government is “committed to these projects,” although conservative opposition leader Mariano Rajoy suggested that both the prime minister and his proposals lack credibility.

“It’s not Spain that inspires lack of confidence,” Rajoy told Zapatero in parliament last month, “it’s you and your government’s way of handling the economy.”

The conservatives are especially resistant to a proposed increase in value-added taxes which will only diminish the slight surge in consumer demand, they warn. Household consumption was up by 0.3 percent in the quarter of last year — pretty much the only good news there has been for the Spanish economy in some time now.

Right Wing on the Rise in Dutch Elections

Dutch voters went to the polls on Wednesday to elect city councils in almost four hundred municipalities. In the wake of the government’s collapse two weeks ago, the local elections were closely watched as an indicator of which way the country will swing this summer.

Both of the resigning ruling parties, the Christian Democrats and Labor, suffered in the polls although the latter has managed to improve its poll numbers somewhat compared to when it was in government.

The opposition is emerging with vigor. Nationwide, both the anti-immigration Freedom Party of Geert Wilders and his nemesis, Alexander Pechtold, of the center-left Democrats are on the rise. Locally, the right-wing liberal party is expected to come out with most support.

The liberals, in part, have Wilders to thank for their comeback. His party competes in only two major cities. Many of his supporters in other parts of the country opt for the liberals because their immigration and security policy is similar to his, if less Islamophobic.

The progressive Democrats are also indebted to Wilders. Pechtold has positioned himself as the right-wing foreman’s staunchest critic in parliament, emphasizing the Netherlands’ traditionally open and cosmopolitan character as opposed to the nationalism of Wilders and his party.

Since he ran and won on his own ticket in 2006, Wilders has made a series of dramatic proposals to curb what he calls the Islamization of the Netherlands, including banning of the Quran and taxing Muslim women for wearing headscarfs. Wilders is awaiting trail for accusations of hate speech.

According to the polls, the Socialist Party will have to give up over half of its seats. The more moderate Green Party instead would nearly double its support.

Conservatives for Freer Schools

A novel idea from British Conservatives: allow schools to set their own standards. Tory Politico reports that the party intends to put an end to government interference with so-called A Level certificates: the internationally-recognized standard for entry into British universities.

The A Level’s reputation has been on the decline in recent years, leaving the prestige and performance of academics in Britain frustrated. In order to reverse the trend, the Conservative Party promises to take power away from the Department for Children, Schools and Families as well as the Qualifications and Curriculum Development Authority to allow experts with colleges, research institutes and exam boards to decide on the content and structure of exams. According to Shadow Secretary Michael Andrew Gove, they represent the “institutions with the greatest interest in maintaining standards at A level.”

The individuals with the keenest interest in ensuring A levels require the depth of knowledge necessary to flourish at university are our teaching academics.

The Current Problem in the Falklands

In 1982 the Buenos Aires government under General Galtieri invaded the Falkland Islands off the south coast of Argentina with a force of several thousand soldiers, overwhelming the garrison of Royal Marines stationed on the island. On the same day the Royal Navy was ordered to assemble a task force to reclaim the Falklands by force. The history of the conflict can be found in many books but despite a British victory exacting over six hundred Argentine lives the causes of the war persist to this day, at least in Argentina.

The claim to the Falkland Islands (or Malvinas as they are known to Argentinians) is one of proximity and historical claim; i.e., that they are much nearer to the Argentina than they are to Britain. Secondly Argentina, after gaining independence from Spain, sent a ship to use the islands as a penal colony. This was never accomplished due to a mutiny aboard the vessel. In 1833 a British force arrived and claimed the desolate islands. They have since seen the establishment of settlements, from which grew the current population of Falkland islanders. In the minds of Argentinians however, the islands are “rightfully” theirs. Read more “The Current Problem in the Falklands”

Rethinking NATO’s Future

It wasn’t too long ago that NATO’s post-Cold War purpose seemed perfectly clear. During the Clinton Administration, the United Stated led allies in humanitarian efforts around the world but in Europe’s backyard especially. Up to this very day, Western forces are actively engaged in peacekeeping in former Yugoslavia and, of course, in Afghanistan.

The Afghanistan mission however, within the context of counterterrorism and -insurgency, has cast doubt upon NATO’s proper role. European allies are increasingly weary about risking soldiers’ lives for the sake of ensuring peace and stability in regions far beyond their borders. Many countries contribute only modestly to ISAF; others, like Canada and the Netherlands, are preparing to pull out altogether while in the United States, traditionally the most supportive of military endeavors overseas, public support for the war is shrinking.

At the same time, former Cold War rival Russia isn’t at all enthusiastic about NATO’s eastward expansion. The Russian Bear roars anew, intend on safeguarding its former spheres of influence.

No wonder then that Secretary General Anders Fogh Rasmussen is planning for the NATO of tomorrow. He has invited former US Secretary of State Madeleine Albright to chair a panel that will make recommendations about the organization’s future. Albright is thrilled to do it. “NATO has been a thread throughout my life,” she told Politico last week.

Albright describes NATO’s challenge as follows: “How does an alliance that unifies peoples and values under a common defense, created to defend against a threat that no longer exists find relevance against a whole new set of threats?” Especially when at least part of that alliance doesn’t considering fighting wars in the Middle East directly in its own interest.

In NATO’s ill-defined twenty-first century role — serving as something of an international police force while trying to bring peace and democracy to other parts of the world — Western European member states, in spite of all their admiration for President Barack Obama, have been reluctant to pitch in. For a new Atlantic order to take shape, the alliance must find a way to get Europe more involved.

That is why current Secretary of State Hillary Clinton, speaking in Washington DC yesterday, stressed that the EU is no competitor of NATO. “We see a strong Europe as an essential partner,” she said.

“NATO’s success in providing a security foundation for Europe’s transformation is one of the great accomplishments not only of NATO but, as many of you also believe, of any political-military alliance in history.” The alliance has fostered political and economic reform and “helped create the stable, democratic Europe we see today,” according to Clinton. As such, the alliance should “continue to keep its door open to new members.”

Clinton is aware of Russia’s unease with NATO expansion. “While Russia faces challenges to its security,” she said, “NATO is not among them.” The secretary called on Russia to collaborate with the alliance on the missile defense of Europe and the fight against nuclear proliferation. “European security will benefit if NATO and Russia are more open about our armaments, our military facilities, and our exercises.”

As the United States see it, the original tenets of NATO’s mission — “defending our nations, strengthening transatlantic ties, and fostering European integration” — still hold. But in an interconnected world, the alliance cannot accomplish that mission by crouching behind its geographic boundaries. “Reality has redefined the area in which we operate.”

For the organization to survive into the twenty-first century, said Clinton, “we’ll need to ensure that the evolution of NATO’s political capabilities keeps pace with its operational capabilities.”

This means that it may also have to provide civilian capabilities, especially in the early phases of a crisis when it is the only institution in the field. For too long, our alliance has been hamstrung by those who argue that NATO is an exclusively military organization and oppose attempts to develop — or in some cases even to discuss — the alliance’s capacity to take on civilian responsibilities.

The war in Afghanistan has shown that NATO cannot fulfill its new, broader purpose without developing non-military means to resolve conflicts. “If we are going to succeed in counterinsurgency warfare,” said Clinton, “NATO must continue developing mechanisms to draw on the existing security-oriented civilian capacities of its member states.”

Dutch Government Collapses Over Afghanistan

The governing coalition in the Netherlands was brought down Saturday, unable to bridge a divide between Christian Democrats and socialists over whether or not to keep forces in Afghanistan after 2010.

For the fouth time, Prime Minister Jan Peter Balkenende had to announce that a government of his had come to its end prematurely. His previous three cabinets were all formed with the right-wing liberal party. After the general elections of November 2006, the prime minister was forced to come to a coalition with his primary political rival, Labor Party leader Wouter Bos. Repeated disagreements between both partnering factions were often fought out in public; specifically, over the raising of the retirement age and about how to cut on goverment spending after the recession struck the country in 2008.

Wouter Bos promised voters during the 2006 elections that he would bring the Dutch troops home and not extend participation in the ISAF mission beyond 2010. When President Barack Obama called upon NATO allies to pitch in, the Christian Democrats, the majority party, entertained the notion of remaining in Afghanistan, with fewer forces and in another part of the country than the province of Oruzgan where currently, about 1,500 Dutchmen are posted.

The Dutch were deployed to Oruzgan in 2006 and originally supposed to stay for two years. That mandate was extended another two years to August 2010 in spite of mounting public opposition against the mission.

Throughout the past several days, Balkenende tried to find a compromise which would allow the Dutch to extend their presence. The Labor Party, intent on keepings its promise, pulled out of the coalition after a sixteen-hour cabinet meeting Friday night failed to deliver any results. New elections must take place within fewer than twelve weeks.

There are also elections upcoming for local governments, March 3. The Labor Party hasn’t been polling well recently. Generally, voters blame it for compromising too much on traditional left-wing issues, allowing the center-right Christian Democrats to overshadow it. There is speculation that the elections played a part in Labor’s decision to pull out of the government which would allow the party to distance itself from some of the more unpopular policies recently enacted. Whether it will actually perform better soon seems doubtful however.

Euro Resentment Demands New Rules

Euroskepticism is abound anew. Where previously economist Paul Krugman argued that Greece could have weathered its fiscal crisis if it had retained its own currency, Judy Dempsey reports that Germans are increasingly nostalgic for their Deutsche Mark.

“For Germans,” writes Dempsey, “the mark was more than just currency.” It represented the country’s postwar recovery, the Wirtschaftswunder that made Germany within mere decades the strongest economy of Europe.

Should they be forced to bail out an ailing eurozone neighbor as Greece, Spain, maybe Portugal, “resentment against Europe and the common currency” would certainly intensify among most Germans.

Chancellor Angela Merkel is in a tough spot. “She knows that the euro has been good for Germany, despite the resentment.” Stable exchange rates have encouraged trade and growth. “But bailing out Greece would be terribly unpopular.” Read more “Euro Resentment Demands New Rules”

Bubbles, Deficits and European Arrogance

With Greece in despair and worries about mounting national debts rampant throughout Europe, it is easily presumed that those eurozone members still struggling with recession can all blame their troubles on deficit spending spun out of control. Paul Krugman notes however that there are different circumstances to be taken into account.

Spain, for instance, unlike Greece, is no victim of fiscal irresponsibility, opines Krugman. Its problems mainly stem from a decade-long housing bubble that ultimately burst in 2007. Up until then, its economy grew steadily with 4 percent a year, driven almost exclusively by a rapidly expanding real estate market. Now that construction has come to a standstill, millions of Spaniards are left unemployed with so much as two million of them living off unemployment benefits.

Krugman blames the situation on the euro. He cites the “arrogance” of the political establishment that “pushed Europe into adopting a single currency well before the continent was ready for such an experiment.”

If Spain still had its old currency, the peseta, it could remedy [its problems] quickly through devaluation — by, say, reducing the value of a peseta by 20 percent against other European currencies. But Spain no longer has its own money, which means that it can regain competitiveness only through a slow, grinding process of deflation.

The inflexibility of the euro, writes Krugman, “not deficit spending, lies at the heart of the crisis.” He doesn’t tell the whole story however. Although he is correct to point out that Spain’s massive deficit spending is more of a result than a cause of its current predicament, that same plunging into the red is doing very little to alleviate the crisis. Also, the supposed inflexibility of the euro deserves further attention.

Well before the euro went into circulation, European governments agreed, in 1997, to protect the stability of the Economic and Monetary Union through fiscal responsibility. Member states are bound by the Stability and Growth Pact to keep deficit spending under control. Greece and Space, however, among others, repeatedly violated this decade-old agreement. There is no mechanism in place to punish these countries or even stop them from doing so, which might be argued is a shortcoming of the European system.

Other member states are understandably reluctant to bail out Greece. Doing so would create the same moral hazard the banking sector, especially in the United States, is now confronted with: the expectation that if one screws up, a bailout will always be available.

This is not inflexibility; it is European countries looking after their own interests before anything else. If helping out Greece comes at considerable expense of their own prosperity, there is no reason why they should suffer for the sake of rescuing a neighbor that repeatedly disregarded treaty and behaved in an irresponsible matter that now threatens to harm all of the eurozone.

Just How Much Debt Are We In?

After The New York Times revealed on Saturday that Wall Street banks helped Greece keep its mounting debt off the books for many years, Edward Hugh at A Firstful of Euros explains how shady financial constructions allowed several European governments to hide part of their financial trouble.

Eurostat, the EU’s agency for statistics, has been grappling with asserting just how much in debt the union’s member states really are. In 2002, writes Hugh, they found themselves forced to change their accounting rules, in order to try to enforce the disclosure of off-balance sheet entities that had previously escaped detection. European governments responded by simply reformulated their suspect deals.

In 2008, Eurostat reported that, “in a number of instances, the observed securitization operations seem to have been purportedly designed to achieve a given accounting result, irrespective of the economic merit of the operation.”

Many European governments have been using a system known as “factoring” to finance public projects. Factoring is a financial transaction whereby a business sells its accounts receivable (or invoices) to a third party (which is called a factor) at a discount in exchange for immediate money with which to finance continued business. Unlike regular loans, this setup involved three parties which allows the financing of public projects without upfront public funds.

So-called private finance initiatives were originally developed by the Australian and British governments and are now common in Canada, the Czech Republic, Finland, France, India, Ireland, Israel, Japan, Malaysia, the Netherlands, Norway, Portugal, Singapore, and the United States, among others. These contracts are currently off-balance-sheet, meaning that they do not show up as part of a country’s national debt.

Hugh identifies at least three problems with this arrangements. First, they assume a certain level of headline GDP growth to furnish revenue growth to the public agencies committed to making the payments. “Following the crisis,” he notes, “these previous levels of assumed growth are now unlikely to be realized.”

Second, they assume a growing workforce in spite of Europe’s aging populations. And lastly, they assume unchanging dependency ratios between active and dependent populations, “but these assumptions,” according to Hugh, “are no longer valid, as our population pyramids steadily invert.”

Given all this, a very real danger exists that what were previously considered as obscure securitisation instruments, so obscure that few politicians really understood their implications, and few citizens actually knew of their existence, can suddenly find themselves converted into little better than a glorified Ponzi scheme.

Greece, he writes, is just the first state that can’t pay up anymore. Italy and Spain are both in a particularly precarious situation as well.

British economic historian Niall Ferguson agrees and suggests that “the contagion is going to spread” to Ireland, Portugal and Spain while Belgium and Italy “shouldn’t be entirely free from worry” either.

In an interview with Bloomberg Television on February 5, Ferguson stressed that, “a significant number of eurozone members have been plunging into the red with their fiscal policies in the wake of the financial crisis.” The markets have now woken up, he said, realizing “that these were not credible fiscal policies.”

Although European leaders pledged to support Greece if necessary, there is no European structure to effectively deal with sovereign bankruptcy. European budget rules allow deficit spending up to 3 percent of GDP but when a country as Greece, that struggles with a gap of so much as 13 percent on its budget, violates rules, “there is no bailout on offer.”

The United States, warned Ferguson, “is not that far behind Greece in terms of the size of its debt and the problem it’s going to have getting back into any kind of balance in the foreseeable future.”

Brown Is Human

In an interview with Piers Morgan broadcast on ITV1 last Sunday, British prime minister Gordon Brown spoke openly about the death of his daughter Jennifer, his son Fraser who suffers from cystic fibrosis, and the leadership deal that was struck with Tony Blair. More than four million Britons watched the show.

With his wife Sarah in the audience close to tears, the otherwise so reserved Prime Minister had difficulty hiding his emotions while talking about his daughter who died just ten days after childbirth.

Ahead of the program, Sarah Brown engaged with women on the popular website Mumsnet where she chatted candidly about her husband and their relationship. Brown, she noted, “is surprisingly romantic.” She also discussed Jennifer’s death, favorite television programs of hers, and the importance of family Sunday lunches.

Brown’s and his wife’s charm offensive are part of a Labour strategy meant to soften the Prime Minister’s image ahead of this year’s general election. He is generally perceived as cold, grumpy and boring; not exactly the sort of qualities that a socialist politician is likely to benefit from.

Asked whether the interview was indeed aimed at boosting his popularity in the polls, Brown told BBC News: “I do think people have a right to know who you are, where you come from, what you are trying to achieve.”

Reportedly the Conservative Party is in talks with ITV to secure a similar high-profile interview for David Cameron, although he will probably not sit down with Piers Morgan.