Europe’s Not So Shiny ‘Recovery’

Exclusive: The mainstream U.S. press explains the overwhelming Crimean vote to leave Ukraine as vote-rigging or coercion, but the reality is that “European aspirations” are not so attractive to people aware of the painful life for many in the EU’s “periphery,” from Spain to Greece, as Andrés Cala reports.

By Andrés Cala

As the West tries to lure crisis-stricken Ukraine into the European Union’s fold, a major selling point is the promise of a brighter economic future. But the reality for many Europeans – especially in countries pummeled the hardest by the Great Recession – isn’t all that appealing, even as some EU bureaucrats are touting a recovery.

It’s true that raw numbers show that the recession appears to have bottomed out, even in some of those hard-hit nations on Europe’s “periphery,” from Ireland in the west through Portugal, Spain and Italy in the south to Greece in the east. For instance, Spain’s economy contracted 1.2 percent in 2013, but most of that was in the first half of the year, and the EU projects 1 percent growth for Spain in 2014 and 1.7 percent in 2015. Plus, for the first time in years, Spain had positive net job creation in February.

Spain's Prime Minister Mariano Rajoy. (Screen shot from BBC)

Spain’s Prime Minister Mariano Rajoy. (Screen shot from BBC)

But that will translate into little relief for the nearly 27 percent of Spain’s population which is unemployed, or for the nearly 1.5 million who fell into extreme poverty during the crisis, according to a bellwether report in Spain. During the crisis — to meet EU “austerity” demands — pensions were frozen, the welfare state was slashed, and taxes ate away purchasing power. There’s little hope, too, for the millions more who lost their middle-class status.

At the street level, the “recovery” is nowhere to be seen, at least not for nine of every ten Spaniards who say this tepid economic growth has not trickled down to them. Almost three-quarters of Spaniards expect that conditions will remain the same or get worse in 2015, according to several recent polls.

When you walk around Spanish cities, what you see is a very noticeable increase in visible poverty, including people who until recently might have been considered middle class. You see middle-aged men in suits begging in the streets or waiting in charity lines. You see evicted families seeking refuge, immigrants on the move, and I’ll-work-for-food offers online.

Thus, while the Spanish government and the EU can tout the signs of a recovery, a sense of hopelessness still hovers over the many unemployed and real panic grips even people with jobs because they fear what may lie ahead.

One reason for the discrepancy between improving economic numbers and most people’s perceptions of their own situations is the spread of income inequality during the crisis. The wealthy few experienced significant improvements – thus bumping up the GDP numbers – while most everyone else either barely held steady or declined, sometimes sharply.

During the crisis, salaries rose for the biggest earners, but decreased 16 percent for the bottom brackets, according to official statistics. All that has left Spain with the EU’s second worst wealth distribution, according to the Gini coefficient, the most widely accepted barometer in the field.

Two Narratives

In Spain’s political world, the two conflicting narratives – one buoyant and one depressing – coexist with most of officialdom pushing the positive, but other political leaders noting the negative or what they would call the reality.

Antonio Argandoña, emeritus of economic and business ethics in IESE Business School, explained to me the logic of these diametrically opposed narratives: “If you eat a chicken and I don’t eat any, we have each eaten half. That’s the Spanish economy.”

So, when Spain’s Prime Minister Mariano Rajoy of the conservative People’s Party talked recovery in February’s parliamentary state of the union debate, opposition Socialist leader Alfredo Pérez Rubalcaba angrily asked, “What country do you live in?” He called the government’s policies the “apotheosis of inequality.”

But Rajoy answered with fury of his own. “Your apocalyptic speech does not correspond with reality,” Rajoy said. “We have reversed course, from declines to recovery, from peril to hope.”

Most agree that Spain did what it was ordered to do by the EU – and what it was given little choice to do by financial markets. As a result, Spain’s fragile economic recovery has drawn support from the European Central Bank, and investor appetite for investing in Spain and other countries on Europe’s “periphery” has improved as broader European risk perceptions have subsided.

Many Spaniards agree that some painful reforms were unavoidable because the economic model that had generated a boom in the previous two decades was artificial, much as it was in many other parts of the Western world. Cheap credit fueled rising home prices and a construction-driven economy, but the underlying economic pillars were weak.

A false sense of prosperity continued only as long as the bubble kept expanding. Millions of Spaniards enjoyed the good times, with wasteful spending on extravagant public projects, a swelling civil servant population and an inflated real-estate market.

Blue-collar workers bought homes, cars and vacation spots on cheap credit. Consumers spent and spent. People lived beyond their means as the cash kept flowing and the economy expanded. When the bubble burst – amid the Wall Street crash of 2008 – the illusion of prosperity disappeared quickly. Money and credit evaporated, but costs didn’t. Debt levels starting rising, along with defaults.

The EU’s central bankers responded with harsh demands for austerity to bring public spending in line with the reduced capacity of these suddenly shrunken economies, especially in the “periphery” nations, such as Ireland, Spain, Portugal, Italy and Greece. Spending was cut drastically and millions were thrown out of work.

Spain’s record high public deficit, which in essence shut out Spain from credit markets, has gradually shrunk and now stands at 7.2 percent of the gross domestic product, but that’s still more than twice the 3 percent ceiling mandated by the EU. Meanwhile, the total public debt as measured against the reduced GDP has soared to 100 percent, a record.

According to projections, the deficit will continue decreasing in coming years, but not as fast as the EU is demanding and the EU has warned Spain not to scale back on austerity because its raw numbers remain in the red zone, even if things are improving.

Beyond austerity, Spain needs to cheapen its economy to make it more competitive, but devaluing its currency by printing more money, as most countries have done, including the U.S. and Japan, is not an option because Spain uses the euro which is controlled by the EU’s central bank.

Economists agreed that the only option left – to both spur private investment and access cheap credit – was to force an internal devaluation, which translated into lowering labor costs by allowing companies to dismiss more workers and cut salaries of those who  remained.

Thus, labor statistics show average wages falling – hitting lower earners especially hard – and Spaniards working more, as expressed through increased labor hours. For 2014, the trend is expected to continue since this internal devaluation process is not complete.

Economic Remedies

With the worst part of the economic crisis now presumed to be over – not just in Spain but more broadly in Europe – the debate is now focused on how to distribute the benefits of the recovery so the growth can be more sustainable.

Last month, the International Monetary Fund published a paper that suggested that too much austerity is bad for long-term growth and stability, contradicting decades of dominant economic theories that policies designed to distribute wealth can hamper economic growth. The study challenged that “free-market” conventional wisdom:

“On average across countries and over time, the things that governments have typically done to redistribute do not seem to have led to bad growth outcomes. And quite apart from ethical, political, or broader social considerations, the resulting equality seems to have helped support faster and more durable growth.”

Along those lines, the Spanish government has promised tax cuts and other measures that it claims will ease austerity and create jobs. But the EU is keeping Spain on a tight leash, meaning that there may not be much relief for most Spaniards. Much will depend on the resilience of larger European economies.

Politically, Prime Minister Rajoy’s government has until 2015 before it faces regional and national elections. How painful the austerity still is could determine whether Rajoy and his party will gain another term.

But Spain’s unemployment rate is simply too high and the economic growth too slow to expect things to bounce back to where they were any time soon. In fact, they won’t. The most likely future for the average Spaniard, like other Europeans in the hardest-hit economies, is a painful and difficult one.

If Ukraine does decide to move toward integrating into the EU’s economy, Ukrainians, too, can expect a painful adjustment.

Andrés Cala is an award-winning Colombian journalist, columnist and analyst specializing in geopolitics and energy. He is the lead author of America’s Blind Spot: Chávez, Energy, and US Security.

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7 comments on “Europe’s Not So Shiny ‘Recovery’

  1. F. G. Sanford on said:

    Mr. Cala raises an interesting point: reality is the factor modern economists seem unable to grasp. Perhaps it’s too simple. They prefer to resort to convoluted analysis, verbally complex abstractions, esoteric calculations based on randomly selected indicators and abstruse theoretical interpretations intended to enhance not understanding but instead, their own academic status.

    Meanwhile, back in reality, a popular piece of Southern European internet humor is a picture of three blond, scantily clad, heavily made up young women walking along a city street. The caption reads, “You too can sponsor a Ukrainian refugee”. These prostitutes have become the bane of middle aged women in the south whose elderly husbands have safe European pensions or stable government jobs. It’s an economy unto itself.

    Meanwhile, in Spain and Italy, where leather working and tailoring were once noble professions, open air markets sell Chinese shoes for five euros a pair and Vietnamese shirts for seven. Ah, the benefits of “free” trade.

    In the United States, production is down, the trade deficit increases, but the stock market is up. How can that be? Simple: it’s internal devaluation, American style. Corporations have learned that with union busting and layoffs, they can afford to cut production, but the profit margin remains the same. Cheap money from “Quantitative Easing” allows them to use credit-free money to buy back their own stocks thereby artificially inflating market value.

    In all honesty, poverty in Europe doesn’t look anywhere near as bad as in America. It’s just that America has managed to segregate its poor so successfully that reality is deceptive. Compared to America, mortgages in Europe are actually rare. They are not saddled with a financial “house of cards” based on a phony real-estate market as are we.

    As the financial Ponzi scheme proliferates and wealth inequity escalates, economists seem oblivious to the most frightening trend which accompanies the disparity: rising neo-fascism. There seems to be much nostalgia for Franco and Mussolini of late. Nobody seems worried. In America, still waters run even deeper, and I am personally afraid of the brewing underclass awareness these pompous economic charlatans choose to ignore.

  2. bobzzz on said:

    I wonder. The trillions the fat cats have in off shore hoarding: is that to pay for private armies when the fat hits the fan? They have to know it will. Just wait until a critical mass of gun owners feel the pinch.

  3. >>> “On average across countries and over time, the things that governments have typically done to redistribute do not seem to have led to bad growth outcomes. And quite apart from ethical, political, or broader social considerations, the resulting equality seems to have helped support faster and more durable growth.”

    Along those lines, the Spanish government has promised tax cuts… <<<

    Is it just me or is Andrés's comment there not a non sequitur?

    Unfair taxation is a form of ongoing austerity that people everywhere where neoliberal capitalism operates are subjected to. The rich benefit, since they have more that can be saved. It's part of the neoliberal agenda of privatization and deregulation. You engineer a revenue problem (tax cuts mainly) that you then shamelessly label a social spending problem. And then you point to that as the need for austerity. Governments whine about deficits (they create, without prodding from the people) and plead poverty so that their friends in the private sector can more easily make the case for privatizing whatever publicly funded programs and services are now falling apart due to withheld spending by governments pleading poverty.

    And privatization translates into poverty wages, insecurity and slavery for workers. Not to mention a lack of democracy and the destruction of the environment, once free trade deals help to shift all political power over to corporations and cut the people out. Then corporations can continue to do planet-destroying, community-destroying business as usual. The costs are externalized, to an extreme, while the profits and the good life that they can ensure are privatized and benefit the iconic 1% only.

    • F. G. Sanford on said:

      That’s the big joke. The line always was, “Only workers pay taxes”. Doctors, lawyers, accountants, notaries and entrepreneurs simply don’t declare. Swiss banks helped them stash money, of course, but that’s getting more difficult. Buy twenty Euros of merchandise in a small establishment, and don’t be surprised if the receipt says eight Euros. The hidden economy is immense. The wealth is staggering, but invisible. Poverty is much worse in America, but American oligarchs insist on pointing at Europe’s defects to defend themselves. In Southern Europe, the Macedonians, Romanians, Ukrainians, Tunisians, Moroccans and Libyans just keep coming. Of course, they find the most miserable work, but employers avoid all those annoying taxes. Let’s be honest. If the European economy was as bad as they say it is, trucks would be making the rounds every day to pick up the emaciated dead bodies of all the refugees that starved to death. That just ain’t the case.

  4. bobzz on said:

    Now, now. There you guys go. Just look at all the jobs those tax cuts created for us. Still looking? Me too. Friedman’s economics have been a bust for the middle and lower classes wherever they have been executed…implemented.

  5. pessimist on said:

    The US is but the tool of the corporatist oligarchy, to be used to enslave the entire world for their personal aggrandizement. What larger ego boost can there be than to rule the world as a global Caesaar?

  6. Winston on said:

    Book about how working conditions stagnated or got worse after enlargement…

    http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=2913&context=ilrreview
    Social Failures of EU Enlargement: A Case of
    Workers Voting with Their Feet.

    “The oligarchic system,i.e. a system based on links between the newly formed big business and the political class, emerged several years after Ukraine re-gained independence in 1991. Although a similar phenomenon has also de-veloped in other former Soviet republics, first of all in Russia, big business at present does not have such a strong influence on politics in any other Eastern European country as it does in Ukraine.”

    http://www.osw.waw.pl/sites/default/files/prace_42_en.pdf
    THE OLIGARCHIC DEMOCRACY
    THE INFLUENCE OF BUSINESS GROUPS
    ON UKRAINIAN POLITICS

    http://www.nakedcapitalism.com/2014/03/wolf-richter-aid-ukraine-will-stolen-former-ukrainian-minister-economy.html
    Wolf Richter: Aid For The Ukraine “Will Be Stolen” – Former Ukrainian Minister Of Economy