By almost any conceivable indicator, Spain is worse off than it was six months ago. Mariano Rajoy has lost control of events. He thought that simply by taking office, the crisis would resolve itself. Reality has quickly dismissed his messianic delusions, but Rajoy is left without a Plan B. His steep cuts have not even managed to rein in the deficit. Austerity has undeniably failed, and yet it continues to be intensified.
Spain is in the midst of an economic downward spiral. The symptoms are obvious to behold: rising unemployment, plunging revenues, a collapsing financial sector, etc. The universality and quality of the welfare state are under severe attack. Young Spaniards are emigrating in increasing numbers; the sharpest cuts have fallen on the dreams of a better tomorrow. It gets worse. Spain’s democratic institutions are being systematically undermined: public liberties are being restricted, the media politicized, the judiciary degraded, the Congress disregarded, the party system discredited, and the unnecessary monarchy debauched. The country’s regression threatens to awake the ghosts of the past.
Maria Joao Rodrigues’ very interesting study has posited four different scenarios for the evolution of the crisis: Scenario A (muddling-through), Scenario B (break-up), Scenario C (core Europe), and Scenario D (fiscal union). Scenario A implies a continuation of the divergence in conditions across Europe. This divergence will result more from conditions further deteriorating in the periphery than on account of an improvement in the core. It remains to be discovered how bad things can get, but without growth and job creation, the situation will not stabilize. The periphery will be unable to pay its debts unless it returns to growth, and it will not return to growth if debt repayment remains a top priority.
George Soros, Christine Lagarde, Paul Krugman and our own Henning Meyer have signalled that we are heading into the crisis endgame. It is perhaps a mistake to underestimate the inventiveness of the measures that can be carried out (or imposed) to temporarily calm tensions, even if these false fixes are working for increasingly shorter periods of time. European leaders claiming victory against the crisis is a recurring theme of the past few years, so there probably remain new levels of perversity yet to be explored. Nevertheless, at some point Merkel’s back of tricks will run out.
Countries on the periphery are limited to choosing between Scenario A (muddling-through) and Scenario B (disintegration) as they pressure for a scenario D (fiscal union). Merkel prefers scenario A. But as time passes, muddling-through becomes less attractive. As conditions continue to get worse on the ground, the incentive for the different countries of the periphery to consider abandoning the euro grows by the day: desperate times call for desperate measures. The endgame consists of Merkel and her allies realizing they must eventually choose between Scenario B, Scenario C (a two-tier Europe) and Scenario D.
In Spain and Italy, it is leading figures on the political right, namely Silvio Berlusconi and Alvaro Nadal, head of Rajoy’s economic office, who are most vocal about deploying the threat of leaving the Euro. Their callous indifference to the plight of ordinary working people makes them more credible players of the high-stakes game of chicken currently taking place, but we should not forget that if no one backs down then everyone loses. Muddling-through for the whole requires the most badly affected parts of the eurozone to grin and bear it. Without growth, patience will run out sooner rather than later. And growth will not return to the periphery without a fundamental change in the direction of economic policy.
The institutional legitimacy of domestic and European institutions is being quickly eroded because of the glaring unfairness of the status quo. The brunt of the costs of the crisis continues to be shouldered by those that did not cause it. Spending on luxury goods rises at the same time as millions struggle to pay for their daily necessities. The reckless private bankers go unpunished and the heartless central bankers remain unmoved by common decency. The decades-old social pact between labour and capital has been unilaterally abrogated from above. Instead, we will have a fiscal pact that defies logic combined with a Stability and Growth Pact that delivers growth and stability in the same way that North Korea is a Democratic People’s Republic.
What is taking place is unjust and indecent. We must not forget this central fact. The survival of the austerity regime requires frightened and resigned citizens. Democracy does not flourish in this context. Entire national economies can be broken, but it is much harder to break the spirit of nations. The ratings agencies may downgrade the sovereigns, but they cannot force a downgrade in our conception of justice. Internal devaluations may be attempted, but that does not oblige a devaluation in our commitment to universal well-being. The status quo requires millions to tolerate the intolerable, which is why a scenario of muddling-through is a scenario of disintegration.
This column is part of the Eurozone Scenarios Project of the Friedrich-Ebert-Stiftung and Social Europe Journal. The long version of the scenarios paper can be downloaded here. A Statistical Annex is also available.