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Europe, Politics, Spain

The real causes of austerity

By Vincente Navarro

The measures being taken to streamline the financial system in the European Union are not resolving the  Great Recession in the European Union. According to the International Monetary Fund (IMF), the Spanish economy will decline by 1.5% of GDP, Italy by 2.3%, Portugal by 3%, Greece by 5.2%, the UK by 0.6%, Germany 0.9% and France 0.1%. For the European Union, forecasts are for zero growth on average, according to the European Commission. Indeed, it is estimated that the decline in the European economy will be 0.4% of GDP.

A bad present and a worse future. Financial reforms do not seem to be improving the situation. Rather, many of the measures that are being taken to improve the financial system, are worsening rather than improving, the economic situation. The emphasis of the European Central Bank (ECB) and the European Commission on continuing austerity policies is a clear example. It is argued that fiscal discipline (reducing public deficits) is key to restoring the confidence of the financial markets. Hence, more and more spending cuts to public services and the welfare state.

The vast majority of credible scientific studies show the profound error of such policies. Austerity policies have been responsible for deepening this Great Recession. And the reason why this is so is not difficult to understand. The large decline in labour income in most Western countries (and especially North America and Western Europe) has created a huge shortage of demand that, while it was mitigated, in part, because of the enormous debt built up by the population (debt benefiting banks), has reached a limit that has crippled economic growth.

But the decline in labour income has been at the expense of the tremendous growth of capital income and its concentration in a tiny section of the population (the famous 1% of Occupy Wall Street Movement). This brings us to the apparent paradox that we see, next to a huge growth in the amount of money in the hands of a few, a shortage of money that most people have to pay for goods and services needed to maintain living standards. Indeed, poverty is reaching epidemic proportions, reaching groups and social classes who had always been considered immune to limited resources.

What should be done and not done 

It would seem that the most logical thing would be to share out this enormous concentration of money, transferring it to the general population and allowing them to spend and address their needs, and so allow the economy to recover. The solution to this recession is extraordinarily easy to find, if scientific knowledge motivated policy making. Again, all existing credible scientific evidence indicates that such a concentration of income is hampering the resolution of the crisis. And how to correct the concentration is to redistribute this money. In the US alone, the money accumulated by the economic elite during these years of crisis is 2 trillion (U.S.) dollars. There is, therefore, no shortage of money. Redistribution of this wealth to the popular classes would quickly resolve the problem of lack of demand in the US.

That this has not happened is due to the enormous power of this 1% of the population in each country and the links across borders established between them. The arguments put forward, even by people from the Left to explain why there is no such redistribution and demand is not stimulated, is that economists who manage or advise on these austerity policies are incompetent or ignorant. But these arguments are not credible. Another argument that has been used is that these economists are imbued with an ideology, a neoliberal ideology that they practice and promote with a faith that lacks an empirical base. But this argument ignores the fact this faith exists because it benefits those that promote and sustain it. There are very powerful interests – for which such economists work – supporting austerity.

One is financial capital, as economic expansion that would result from redistributive policies would affect inflation. And the number one enemy of the bank is always inflation. If the reader has 100 euros and annual inflation is 10%, at the end of the year, his 100 euro banknote is worth only 90 euros. And banks have billions of euros. That means that slight variations in inflation can have an extremely negative impact on financial capital.

Hence, the austerity policies being imposed in the Eurozone (and I use the term imposed because in none of the countries where such policies have been carried out were they in the electoral programmes of the ruling parties), and that are damaging the welfare of the majority of the population, have been chosen by the governance of the euro (the European Central Bank and European Commission), greatly influenced by European financial capital (and especially German). These policies have been very successful in this financial capital. The average inflation in the Eurozone has been around 2% per year, the target set was designed when the euro (in November it was 2.2%).

Other causes of austerity policies

But there is another reason why they continue the austerity policies. And that is the huge amount of money that is being used by high risk speculative banking practices and the bank is well aware of is. And so they want to find new areas of investment that are not speculative, such as social security and public services. They therefore need austerity measures that reduce welfare (such as pensions) and services (such as health or education), and to encourage privatization. This offers new opportunities for banks and insurance companies to make large profits in less risky activities than speculation. This is the explanation of the austerity measures.

And if you do not believe it, look at those who are benefiting from the privatization of health care in Catalonia, the Autonomous Community of Madrid, where such privatization policies have been more pronounced. Among many financial interests, there are hedge funds, insurance companies, consulting firms linked to financial capital and so on. It is the ‘Americanization of health’, ie the extension of the US healthcare model managed by finance companies for profit, who have created the most expensive, inefficient and unpopular of existing health systems. In the US, the health sector is an expanding area for financial capital. And this is the goal of the austerity policies in Europe.

Another cause of the persistence of such policies is that austerity is weakening workers and unions. The Spanish is a clear case. For the first time in the democratic era, capital has a larger share of national income than wages. And the enormous influence of finance capital, together with employers, in the ruling political establishment, explains that, despite the decline in demand and low economic growth, returns on capital continue to grow, aided by tax policies that guarantee its extensive profits. The alliance between capital and the State guarantees the priority of policies that, while benefiting a minority of the population, greatly damage the welfare of the majority.

It’s not only the 1%

When I say a minority, I do not mean only the 1% to which Occupy Wall Street refers. This 1% (the owners and controllers of big capital) have a decisive and determining power. Indeed, their percentage of the population, both in the U.S. and Spain, is much less than 1%. But this group controls the means that make up what one of the sharpest analysts of capitalist societies, Gramsci, defined as ideological hegemony, ranging from schools and universities, to the media and other tools of persuasion. And this determines the conventional wisdom the country, that even today, after so much pain and damage in the population, continues to dominate: neoliberalism.

A whole battery of foundations, think tanks or research projects are funded by capital, and particularly by financial capital. The largest banks have think tanks, organize conferences, fund so-called scientific journals and magazines, where dogma is reproduced and promoted, and amplified on the radio, on television, or print media, which are in turn indebted and amenable to such powers. The 1%, in order to rule, need the ideological apparatus to support them. And that is why, despite the damage that their policies are causing, they continue to promote them.

Nueva Tribuna

Translation by Revolting Europe

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Writer on Europe's Left, trade union and social movements @tomgilltweets or email [email protected]

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