Spanish capital flight and ECB inertia

More than 10% of national GDP has flowed out of Spain
since Mariano Rajoy came to power in December 2011,
but it seems he was to busy inflicting brutal austerity
measures on his own countrymen to even notice.

Only a few days after one of Spain's biggest banking groups went cap in hand to the Spanish government to ask for a €19bn bailout, the Spanish Central Bank revealed the astonishing level of capital flight out of Spain for the first three months of the year. The figures revealed that €97bn flowed out of the country between January and March 2012, representing 9.2% of Spanish GDP (based on the 2011 figure of €1,051bn).

The data for April and May isn't even in yet, but given the absurd levels of economically destructive austerity being voluntarily inflicted by Mariano Rajoy's right-wing "Popular" Party (in order to prevent the national humiliation of accepting European Central Bank bailouts and austerity measures) and the enormous scale of the Spanish banking crisis it would come as no surprise at all if the scale of Spanish capital flight had intensified further over the last two months.

To put the mind-boggling level of wealth flowing out of Spain into perspective, is only two weeks since the Daily Telegraph described the €4 billion a week in capital flight out of Greece in the wake of the democratic uprising against austerity as a "tsunami". If the flow of €4bn a week out of the Greek economy over the course of a few weeks is being described as a "tsunami" what on Earth could be an appropriate metaphor for an average of €7.7bn a week pouring out of the Spanish economy over the course of an entire economic quarter? A "megathrust tsunami"? A "meteor impact tsunami"?

One of the most remarkable things about the Eurozone crisis is that economic difficulties in one or more of the Eurozone nations doesn't even seem to have been considered as a possibility by the ruling technocrats, hence the lack of coherent contingency planning. The traditional consequences of economic turmoil and large scale capital flight have been devaluation of the currency and depreciation of asset value, however the first consequence is not possible within the Eurozone economic area given the single currency. The ECB have repeatedly stated that they will not even consider a slight devaluation of the Euro through quantitative easing or changes in the extremely low interest rates they insist on maintaining in order to keep inflation down to the arbitrary "ideal level" of 2% they have set for themselves. Without currency devaluation, the socio-economic consequences of Spanish asset depreciation in combination for the brutal levels of self-inflicted austerity are going to be extremely severe.

A lot of economics commentators have drawn parallels between the Spanish situation and Britain and the gold standard in the 1920s, however a much more recent and apt comparison can be made with the former Spanish colony Argentina who spent the 1990s enacting neoliberal reforms at such a pace that they became the poster boys of the IMF and pegged their currency directly to the US Dollar, meaning a complete loss of monetary autonomy, which creates enormous constraints on fiscal policy.  The IMF admitted as much in their Lessons from the Argentine crisis review in which it was noted that  “A currency board [currency peg] puts much more stringent demands than other regimes on fiscal and financial policies, as well as on the flexibility of trade and the labor market.”.

Spain has undergone a similar process, the European Union is built on a foundation of "orthodox neoliberal" pseudo-economics and Spain effectively ceded their monetary autonomy to the ECB when they joined the Eurozone, meaning that their fiscal policy is heavily constrained by the monetary policy decisions of the ECB.

 Both experiments in neoliberalisation and loss of monetary and fiscal autonomy resulted in economic meltdowns. The Argentine economy tanked in 1999 leading to a vast scale of capital flight, the eventual breaking of the tie to the US Dollar and the biggest sovereign default in World history. The Spanish economy tanked in 2008 when the Spanish property crisis hit and the scale of capital flight is indicating that "the markets" are beginning to see a Spanish Eurozone exit and default as almost inevitable.

There are two positives to this comparison: Argentina managed to rebuild their economy by paying off the IMF and tearing up the IMF handbook of socially and economically destructive ideologically driven pseudo-economics they force upon recipients of their loans through neoliberal Structural adjustment conditions. Once they were rid of the toxic IMF ideology they could introduce tried and tested growth based strategies, such as taxing capital flight in order to reinvest in fiscal multipliers such as infrastructure projects, welfare payments, house building and education, resulting in a 9% of GDP per year growth rate between 2002 and 2009. The other positive is that the ECB are not a totally disinterested party like the United States Federal Reserve were in Argentina's case. There is still time for the ECB to come to their senses and adjust European economic policy to prevent the creation of a socio-economic catastrophe triggered by the economic annihilation of the fourth largest economy within their jurisdiction, resulting in the almost certain breakup of their Single European Currency dream.

Mario Draghi, head of the ECB. Who's interests is he serving
by sticking to austerity & bailouts instead of trying some
 coherent, tried and tested economic recovery strategies?

It was hardly surprising that the ECB refused to change pan-European economic policy because of the economic woes of Greece, a relatively small country (2.65% of Eurozone GDP) on the European periphery that "cheated their way in" by employing Goldman Sachs to "cook their books" in order to gain access to the Euro club in the first place. However failing to intervene to prevent a socio-economic catastrophe in Spain, the 4th largest economy in the Eurozone (almost twice the size of the Netherlands in fifth) which makes up almost 12% of Eurozone GDP and was actually outperforming Germany by many economic indicators as recently as 2007, is beginning to look like feeble minded political inertia.

Of course providing direct assistance to the Spanish when they refused to do so for smaller economies such as Ireland and Greece would be a very public u-turn which would be spectacularly unpopular with the the Irish and the Greeks who were made to suffer years of punishing austerity measures as the vast bailout funds were used almost exclusively to support the financial sector creditors of these countries. It would signal the end of the road in the careers of many an unelected European technocrat and for Angela Merkel, the most visible democratically accountable austerity pusher. On the other hand if they don't intervene directly and stick with their catastrophically unsuccessful strategy of inflicting neiliberal reforms under the guise of "austerity" and using vast bailout loans to fund payouts on what should have been losing financial sector bets (on Greek, Irish & Spanish government bonds) in order to prop up the utterly dysfunctional neoliberalised financial sector they have created, the Eurozone meltdown begins to look almost inevitable. It seems that by maintaining their policies of austerity and bailouts instead of direct investment and coherent economic growth strategies, the Eurozone technocrats may be only acting out of ideological determination to perpetuate their utterly discredited neoliberal pseudo-economic theories at the expense of everybody else in order to preserve their own short term career interests. Jobs they could hardly keep upon the admission that their entire strategy so far has been nothing more than a sequence of terrible economically destructive mistakes.

If worsening socio-economic conditions force Greece to bail out of the Euro, the scale of the economic damage has been estimated by the Institute of International Finance at a potential €1tn (or almost exactly three times the size of the entire Greek economy €329,9bn GDP). It is conceivable that the Eurozone could survive an economic catastrophe reducing the entire Eurozone GDP by over 8%, however using the same rule of thumb calculations to extrapolate the potential damage of a Spanish exit (three times Spanish GDP) gives us a ballpark figure of €3.153 trillion, or 25.3% of Eurozone GDP. Add this estimate to the estimated 8% of GDP annihilated by a Greek exit and we have a potential pan-European economic meltdown costing almost exactly one third of Eurozone GDP!

Providing direct assistance to Spain would be a massively controversial u-turn, but what does it say about the Euro tchnocrats at the ECB and European Commission if they are unwilling to intervene to protect the fourth largest economy in the Eurozone from socio-economic meltdown? It also provokes the question of who's interests they are actually serving or whether they are serving anyone's interests at all by sticking with their catastrophically broken neoliberal economic models?  If things do play out like this, resulting in the almost unimaginable socio-economic chaos of a full scale Eurozone meltdown, then the ECB's hard line stance against direct intervention is certain to be cited by future generations of economists and historians as a case study in unforgivable political inertia.

See Also

The Bankia bailout

Argentine Recovery Economics

Eurozone "austerity", neoliberalism rebranded

The Austerity Death Cycle

3D Economics

Squandered trillions and the Greek exit

After neither the pro nor the anti "austerity" factions of the Greek legislature could form a coalition government following the elections on 6 May 2012, the global stock markets predictably went into panic mode. The new Greek election is chalked in for the 17th of June and the predictions are that the anti-austerity parties will further increase their share of the vote. The stock markets are panicking because a victory for the diverse range of anti-austerity groups would signal an end to their favoured containment policy of huge bailouts from the European Central Bank and the IMF in return for the rapid neoliberalisation of the stricken Greek economy (via mass privatisations, welfare cuts and attacks on labour rights). If the next Greek government refuses to play ball, then the prospect of a Greek Eurozone exit and a return to the Drachma would seem like the most likely outcome.

The prospect of a Greek Euro exit has further intensified the shocking level of capital flight out of Greek banks as citizens and businesses attempt to withdraw everything they can in Euros before their savings get turned into Drachmas. Estimates put the scale of withdrawals at €75 billion over the last two years peaking at €3 billion Euros in a single week in the aftermath of the election. The idea of a Greek Eurozone exit has been floated for several years, but even when I first published a blog addressing the subject back in September 2011, the view that a Greek Eurozone exit would be desirable or even possible was still being criticised as unrealistic, speculative, stupid, dangerous and absurd. By May 2012 even heads of state and central banker bosses were openly discussing the prospect of a Greek withdrawal.

David Cameron, ever the political opportunist

The UK Prime Minister David Cameron waded into the debate by trying to blame the woeful state of the UK economy on the Eurozone crisis and the threat of a Greek exit, however he failed to draw the obvious link between the £40 billion that the Tory led Coalition government had handed over to the IMF economic blackmail fund (that could have been better used to support British industry and British jobs) and the IMF imposed economically destructive neoliberalism dressed up as "austerity" that has worsened the Eurozone crisis and triggered the Greek electoral backlash.

It is the harsh economically destructive "structural adjustments" that the IMF and ECB have set as conditions on the Greek bailout deals that have intensified the Greek economic crisis and caused the huge political backlash that is panicking the global financial markets, making Cameron's comments that the Eurozone should "make up or break up" particularly hard faced, since it is the UK backed IMF and their insistence upon harsh austerity measures that intensified the crisis to this level in the first place.

The head of the Bank of England Mervyn King also joined in with the Euro doom-mongering by claiming that the Eurozone is "tearing itself apart with no obvious solution". An economic analyst called Doug McWilliams made widely publicised claims that a disorderly Greek exit from the Euro could result in a 5% drop in Eurozone output, equivalent to a $1trillion loss. Coincidentally another chief central banker Mario Draghi of the ECB has spent even more than $1 trillion in ultra-low interest "giveaway loans" to the debt riddled European banks in the last six months alone.

If nothing else, this estimate of $1 trillion in lost productivity from a "worst case scenario" chaotic initiation of the Eurozone breakup puts the vast scale of financial "support" being poured into the black holes of debt created by the reckless gambling of the neoliberalised European financial sector into perspective. Many of these reckless bets were made in Greece, hence the need for the ECB and the IMF to provide numerous huge bailouts so that the Greek government could pay out on what should have been losing bets. The whole cycle of "worsening economic conditions - bailouts - austerity - worsening economic conditions" can be seen as an exercise in protecting European banks from the consequences of their own bad Greek bets. What has made the situation so much worse than it could have been, is the insistence from the ECB, the IMF and German Chancellor Angela Merkel that ordinary Greek citizens must suffer the consequences of socially and economically destructive ideologically driven neoliberalisation reforms in order that their government can borrow money to pay out on the bad bets of the German banks.

Given the fact that the ECB's €1,000,000,000,000 in secretive LTRO loans and €100,000,000,000s more in Greek bailouts have had no discernible effect in preventing this economic chaos, surely the European Central Bank (and the Bank of England for that matter) will have to stop squandering such vast sums on propping up the dysfunctional neoliberalised financial sector and willfully inflicting economically destructive self-defeating austerity in order to pay for it.

After handing out €1tn in ultra-low interest loans to the
 the debt riddled European financial sector in the last
 6 months alone, Mario Draghi can expect them to come
squealing again in the wake of this latest "crisis".

If the central banks are going to make these kind of Keynesian style economic interventions by providing these kind of ultra-low interest loans and vast bailouts, they must provide them directly to the "real economy" of jobs, manufacturing, industry, research, modernisation, infrastructure development, education and training instead of using them to protect the parasitic European banks from the consequences of their bad Greek bets

Had the ECB intervened with direct loans to help Greek businesses to expand and modernise and to the Greek government to improve national infrastructure (instead of intervening with bailouts and punishing austerity measures), I'm absolutely certain that the situation in Greece would not have got so badly out of hand.

Even though the pan-European anti-austerity backlash has begun, I fear we're going to be stuck with this kind of privatise the profits, nationalise the losses, bailouts for the super-rich and austerity for the masses economic rubbish for a good while longer, especially in Britain where all three of the establishment parties are wedded to the ideas of "austerity" or "austerity-lite".

See also

Eurozone austerity, neoliberalism rebranded

Austerity and the double-dip

Angela Merkel, dead woman walking

Argentine Recovery Economics
 

The Greek revolt against neoliberal austerity

The Greek communist party and other left-wing groups
have consistently opposed "austerity".

Stock markets are once again in chaos, this time over the increased likelihood that the crazy Eurozone experiment in mass abandonment of fiscal autonomy is on the verge of collapse. The Greek voters have shown that they don't want "austerity" and the bankers and technocrats of the Eurozone have retorted by saying that they don't want Greece unless they swallow all of the toxic austerity medicine that they have been prescribed.

The important question is why have the voters of Greece comprehensively rejected "austerity"?

The problem with "austerity" is that it is just the same toxic, ideologically driven neoliberalism that caused the economic meltdown rebranded with a new name. Neoliberalism is defunct, it died of terminal hypocrisy when the deregulated financial sector had to go squealing to the state sector for the biggest state subsidies in history in order to save them from the consequences of their own reckless gambling.


Yet the unelected bankers and technocrats that run the European Union have decided that they are going to continue to prop up the debt riddled neoliberal experiment in deregulated finance with €Trillions in secretive ultra-low interest central bank loans, whilst making the ordinary working people of Europe pay the price of it through mass redundancies, wage freezes, pension attacks, the fire sale of state infrastructure, welfare destruction and the reduction of labour rights.

People from across the political spectrum are beginning to realise that the left wing anti-austerity groups were correct when they said that all of this misery is being inflicted simply in order to save the bankers from the consequences of their own stupidity. Instead of letting the banks that recklessly over-leveraged themselves go bust, re-regulating the system to prevent recurrences and allowing the responsible institutions that survived the chaos to make huge gains in market share, the Western leaders have decided to bail out the reckless gamblers to save them from the bankruptcy they deserve and paying for it by mercilessly squeezing €trillions out of the "real economy" under the guise of "austerity".

Not only is this state intervention to save the financial sector gamblers inflicting severe damage on the "real economy" of jobs, manufacturing and industry, it is also an ongoing demonstration that the neoliberal experiment in deregulated finance is fundamentally invalidated, because it is only able to continue through massive and repeated interventions of state.

Members of the right wing Greek right wing have defected
to create a new right-wing anti-austerity party that have
claimed an impressive 33 parliamentary seats at the first attempt.

In Greece it was not just the left-wing groups (Syriza & the communists) and the fascist New Dawn party that made gains due to the politic establishment's compliance with "austerity", the new centre right anti-austerity party Independent Greeks took 33 seats at their very first attempt. The party is led by Panos Kammenos, who was thrown out of the once dominant centre-right New Democracy party for opposing more bailouts and austerity. This surge in support for a centre-right anti-austerity party exposes the popular media line that "it is only "far-right" and "far-left" parties that made gains in the Greek elections" as an outright lie.

People from across the political spectrum are realising that now is the time to ditch the broken ideology of toxic corporatist fundamentalism, yet the political establishment of the west know nothing else. They are unable to conceive an alternative to the orthodox neoliberal economic model, and have neither the wit nor the will to develop an alternative strategy to repeatedly bailing out their failed experiment at the expense of the majority of ordinary working people. To admit that their experiments in ceding state power to corporate interests have been abject failures and attempting a return to the last functional model (the mixed economy) would reflect badly on their competence and also harm their vested financial interests, so they just plough on regardless of the suffering they are inflicting on millions, in order to maintain the economic status quo.

It is up to the relatively tiny European anti-austerity block to explain that it is precisely because of this weak willed and self interested adherence to transparently defunct economic dogma by the political establishments of Europe, the US and many of the other western economies that China's ascendancy as the economic global superpower looks completely assured.

The case for a National Investment Bank

"The Case For...." series

As an economic recovery strategy austerity is not working. Defenders of the "orthodox neoliberal" response to the ongoing economic crisis often demand to know what the alternatives are to their favoured cut-now think later strategies. In this series I'm going to explore what some of these economic alternatives could be.

Decades of orthodox neoliberal politics meant that huge sectors
of the UK economy went to ruin for lack of state intervention,
however when the neoliberal financial sector elite got into trouble
the state immediately tore up the neoliberal rule book to provide the
biggest state subsidies in UK history to their financial sector mates.

The UK economy is stagnating in the wake of the neoliberal economic meltdown because corporate banks are too busy deleveraging and gambling on the unregulated derivatives market to make loans to people and businesses in the "real economy". Without finance, small and medium sized businesses are unable to expand and create employment, while many larger businesses are being forced to downsize due to lack of credit and the weakness of the wider economy.

For decades the UK political establishment concentrated on turning the UK into a London centric financial services based economy, leaving large sectors of the real productive economy (manufacturing, mining, steel, ships, train building, HGV production) to decline and ruination for the lack of government support. What makes this neglect so much worse is that when their beloved neoliberal financial sector experiment collapsed under a landslide of debt, the Neo-Labour government of the day piled in to save the financial sector elite with the largest state subsidies in British history (90%+ of GDP on bank bailouts and the nationalisation of debt riddled institutions). After sitting on their hands and allowing British industry to fall into desperate decline in compliance with the neoliberal mantra that "state intervention is bad", they immediately ditched the principle in order to bail out the financial sector temples of neoliberalism that had so enthusiastically supported the government's destructive hands off economic approach.

The financial sector lapped up the government cash, took hundreds of billions more in secretive ultra low interest loans from the Bank of England and the US Federal Reserve and another £325 billion in freshly printed quantitative easing cash from the Bank of England, yet virtually all of this cash was simply used to pay down their extraordinary gambling debts (deleveraging), with little of it filtering through to the "real economy". Any money that did filter through to the "real economy" came in the form of loans with interest rates way above the minimalist rates of the secretive central bank loans. It is quite clear that the financial sector simply set about profiteering with their bailout funds rather than using them for the best interests of the wider economy.

It is a widely accepted economic theory that at times of economic crisis the government (and central bank) need to stimulate the economy, however in the wake of the neoliberal economic meltdown, virtually all of the economic stimuli have been gobbled up by the very same financial institutions that caused the crisis in the first place. What is worse is that the ideologically driven Conservatives have spent the last two years extracting the cost of these stimuli from the genuinely productive economy in the form of austerity measures and welfare cuts, using the great neoliberal lie that welfare spending rather than financial sector incompetence caused the economic crisis as their justification.

It is quite clear that these policies of economic stimuli for private financial sector institutions and austerity for the wider economy have resulted in stagflation and economic chaos. The policy needs to be reversed, economic stimuli should go to the "real economy" and the financial sector that created the crisis should suffer the austerity measures.

The state owns an 84% stake in RBS
and subsidiaries such as NatWest. This infrastructure
could be used to establish a National Investment Bank.

The state should should step in to provide economic support to the "real economy" and with the nationalisation of several debt stricken financial institutions during the financial sector meltdown the United Kingdom government has already acquired the infrastructure to operate a National Investment Bank.

The role of the National Investment Bank should be to make low interest loans to projects that further the national economic interests. If corporate banks are too busy deleveraging and gambling on the unregulated derivatives market to make economically beneficial loans, the National Investment Bank should step in to finance entrepreneurs, wealth creators, research and development, employment providers, economically valuable public services (healthy & educated workers are productive workers) and infrastructure development.

The National Investment Bank should also invest in affordable housing construction and provide low interest finance to hard working families, lowering the absurd cost of housing in the UK and creating a stream of disposable income to stimulate the economy.

The National Investment Bank could also be used as a tool to counter the economically destructive practices of tax dodging by making sure that any recipients of low interest NIB loans pass a financial fair play assessment by demonstrating that they avoid using offshore tax avoidance structures or non-dom statuses. If companies and individuals are not prepared to pay their fair share of UK tax, they should not be allowed to access the benefits of low interest NIB loans.

Imagine how much better the economic outlook could have been if the £325 billion in quantitative easing cash and £1 trillion in financial sector bailouts had gone directly to the real economy of jobs, manufacturing, education, research and services instead of being used just to prop up the debt riddled, tax dodging, derivatives gambling, financial sector elite.

Recurring questions: Do stock market gains equate to economic recovery?

Do gains in World stock markets mean that the long awaited economic recovery is underway?

If you choose to believe the reaction of economics "experts" in the mainstream media, then the gains are really positive news meaning that the global economy is finally coming out of recession and that the recent falls can be forgotten about.

If however, you are disinclined to believe the media "experts" that were incapable of spotting the sub-prime mortgage scam for what it was and ignored the pre-2007 warnings that reckless borrowing to fuel property price inflation was going to end in economic disaster, perhaps you should ask another question:

Who are the beneficiaries of increasingly dramatic fluctuations in the money markets?

Hint: The unregulated speculative derivatives market is estimated to be worth 20x the GDP of the entire World. Nowadays there's vastly more money invested in bets about whether stocks are going to go up or down than is invested in actually making or doing things in the "real economy".

To take the UK as an example, the much hyped national debt of 876 billion (58% of GDP) was borrowed to spend on all kinds of beneficial stuff like universal healthcare, universal education, the military, infrastructure projects, science, research subsidies, policing, welfare, local services, libraries, foreign aid, industrial support and even a few ill advised and not very beneficial foreign invasions, while the sum just unconditionally handed over to the banks to pay down their appalling gambling debts (which is misleadingly excluded from the national debt calculations) is £1,376 billion (91% of GDP), this figure doesn't even take into account the economically destructive consequences of holding interest rates artificially low for years, a £325bn money printing scam (quantitative easing) and the countless $trillions in secretive ultra low interest loans to British banks from the US Federal Reserve.

Meanwhile neoliberal politicians are queueing up to shaft ordinary working & taxpaying people with their "austerity measures" based on the great neoliberal lie that "the state has been spending too much on welfare, healthcare, education and other services" when they know full well that the state has borrowed far more in order to prop up the corruption riddled, unstable and transparently defective neoliberal economic system.

The uber-rich neoliberal financial services clique are laughing all the way to the bank. They have benefited from taxpayer funded bailouts to kept their reckless money making scams from collapsing into the chasm of debt they had created. Now they are enriching themselves in the game of short selling sovereign debt before their self fulfilling prophecies about imminent downgrades come true, then brazenly chelping away that ordinary people need to suffer more "austerity" because their governments have too many unaffordable debts.

The $1.2 quadrillion speculative derivatives market dwarfs all of the real economies of the World, (it is 80x the size of the much hyped US government debt). The reason for this is that it is far easier to make money in unregulated financial speculation than it is to invest in employing anyone in the real (and regulated) economy to actually make things or to provide real services. The unregulated and unstable debt fuelled behemoth of the speculative derivatives market leaks it's inherent instability into the comparatively tiny real economy. The tendency to look for causal factors in the real economy is the same kind of futile outdated thinking as maintaining traditional twentieth century tribal political allegiances when all of the mainstream political parties have been infiltrated by followers of hardline neoliberal orthodoxy. Claims that worries about the Greek sovereign debt crisis caused the latest global market collapse are not so much "tail wagging the dog" theories as "flea wagging the dog" theories.

In order to make their obscene amounts of money, the speculative derivatives traders need to create unstable market conditions in order to maximise their gambling yields. All the talk about market confidence is as meaningless as the jumbled post hoc list of factors media "experts" like to espouse as reasons for the latest market surge/market collapse. Derivatives traders want the stock market to rise in order that it can crash again, they want it to crash again in order that it can rise.