Tue May 3rd, 2011 at 07:26:24 AM EST
Last week, an interview with Spanish Prime Minister Zapatero was released by YouTube, in which ZP spoke mainly but not exclusively about economics. The headline chosen by El Pais says it all.
|Zapatero: "Para que te presten dinero hay que hacer recortes" · ELPAÍS.com
|Zapatero: "To be lent money one has to make cuts" - ElPais.com
| "12 de octubre de 2008. París. Sede de la Presidencia de la República Francesa. Todos los líderes europeos viendo cómo se hundía el sistema financiero y la economía mundial". Esta es, para el presidente del Gobierno, José Luis Rodríguez Zapatero, la experiencia que hizo que cambiara su forma de ver el mundo, según ha revelado en una entrevista concedida a YouTube en la que las preguntas las han formulado internautas de todo el mundo. La crisis financiera y la economía han centrado el 50% de las cuestiones recibidas, aunque la educación, el futuro nuclear y el sistema democrático también han estado sobre la mesa.
|"12 October 2008, Paris, site of the Presidency of the French Republic. All the European leaders watching the world financial and aconomic system founder". This is, for the [Spanish] Prime Minister, Jose Luis Rodriguez Zapatero, the experience that made him change his view of the world, as he has revealed in an interview given to YouTube in which netizens from around the worl have made the questions. The financial crisis and the economy have concentrated 50% of the questions, though education, the future of nukes, or the democratic system have also been on the table.
|El jefe del Ejecutivo ha defendido también el fondo de rescate de la UE que ya ha sido concedido a Grecia, Irlanda y Portugal. El presidente ha asegurado que es un mecanismo solidario "con quien pasa momentos difíciles". Y ha recuperado uno de sus momentos más difíciles al frente del Gobierno: "Sé que es muy duro porque para que te presten dinero hay que hacer recortes", ha asegurado Zapatero, que en mayo del año pasado defendió en el Congreso las medidas de ajuste aprobadas por el Consejo de Ministros.
|The [Spanish] chief executive has also defended the EU's rescue fund which has already been awarded to Greece, Ireland and Portugal. The President assured that this is a mechanism of solidarity "with those goung through hard times". And has recalled one of his hardest moments at the Government's helm: "I know it is very tough because to be lent to one has to make cuts", assured Zapatero, who in may last year defended before the [Spanish] Congress the adjustment measures approved by the Council of Ministerd.
After recently announcing he would not run for reelection in 2012, Zapatero has gone on a media blitz, coinciding with the campaign for the upcoming local and regional elections in Spain, in which he intends to explain the decisions that have been taken by his government on the economy. The most important sitting Social Democratic leader in the EU becomes an evangelist for Aust[e]rian economics.
Bumped, essential discussions - afew
For at least the last 30 years, and definitely since the Reagan/Thatcher revolution got going, a frequent mantra of right wing politics has been that "the state must be run like a private firm". In the Europe in the 1990s the right wing, enabled by third-way social democrats, managed the spectacular feat of structuring the Eurozone around rules that make it all but impossible to run the state in any other way, to the point that Zapatero now freely admits and preaches that the state needs to fund itself in the capital markets (or borrowing from other states) and that in order to access credit it has to be thrifty. So the fourth largest Eurozone member state must run its financial affairs just like a private firm, or a local government, and this is the message coming from a Social-Democratic leader. How the mighty have fallen.
The main distinction between a State and a local/regional government used to be that the State had monetary sovereignty. This was especially true in the post-Bretton-Woods floating-exchange-rate fiat-currency regime. Monetary sovereignty means that the state can create money by spending it into its economy or, under financial convention, selling newly issued bonds to its central bank in exchange for newly created fiat money. In this way, the Treasury/Central Bank system enjoyed access to seigniorage income. Local and regional governments lacked this ability and depended on a combination of local taxes and central government funding. Similarly, private firms needed to rely on their operating income exceeding, on average, their expenses.
The Eurozone rules, enshrined in the Maastricht Treaty (now part of the Lisbon Treaty), explicitly bar the ECB from giving credit to public entities or buying their bonds. This, quite simply, means the Eurozone member states now operate as local/regional governments under them used to. Lacking funding from a supranational entity since the European Union does not have its own fiscal resources, all states can rely on is their own tax income and they must run balanced budgets like a private firm or a local government in order to retain access to private credit. In the Eurozone, therefore, the State must be run like a private firm. What used to be a political slogan is now the only way to function consistently with the institutional framework. Even the Social Democrats admit it and propagate it. Now let's look at the consequences.
The most important consequence of running the state like a private firm is that the state should not be in the business of providing free or implicit guarantees of any kind, as these are large "contingent liabilities" threatening to bankrupt the state. The threat of bankruptcy is real, as the state must fund itself by borrowing from private lenders, unable as it is to create money to fund necessary expenses deriving from the exercising of implicit guarantees. One alternative to bankruptcy is default, but this is considered unthinkable as defaulting on obligations to fellow EU member states is "uneuropean". In addition, countries with a large primary trade deficit may find it impossible even to default.
So, what kinds of implicit guarantees are Eurozone governments providing that they shouldn't be in the business of providing? I can think of half a dozen off the top of my head:
- deposit insurance for banks
- granting limited liability to businesses
- disaster relief
- access to health care
- access to education
- access to legal redress
- public safety
All of these are implicit guarantees that every citizen in Europe expects to enjoy relatively free of charge. These are large contingent liabilities of the state. Any and all of them could not be undertaken by a private entity that didn't charge hefty fees up front and wasn't adequately capitalised in case a particularly large claim presented itself. Would you pay a savings deposit insurance premium to an inadequately capitalised insurance company? (not that "sophisticated investors" didn't do exactly that when they bought CDS "protection" over the past 10 years) Would you incur risks with a full-liability entity having less capital than your potential loss? Would you trust you can be rescued from a disaster by an entity without the capital and operating income to actually fund a rescue operation? How about health insurance from an entity without the resources to pay for the treatment? How about your right to file a complaint to an entity without the necessary money to operate a grievance handling system? How about contracting physical security or firefighting services from an entity without the operating income to actually deploy security or firefighters?
So, seriously, Mr. Zapatero, if "to be lent to you need to make cuts", how about cutting the 100,000-per-person-and-bank deposit guarantee, which is currently underfunded and undercapitalised? How about declaring that the government will no longer pay for damages caused by private firms over and above their capital according to limited liability laws? How about announcing that the government is undercapitalised and underfunded to carry out disaster relief? How about announcing that the government can no longer make good on the "right to health and education, access to the justice system, or public safety and security"?
If we're really going to run the state like a private firm, how do we fire the citizens so they no longer represent a net expense? I challenge you, Mr. Zapatero, to balance Spain's books by declaring the 5 million unemployed Spaniards "undocumented aliens" and deporting them. After all, that's the kind of personnel "cuts" that private firms make "in order to be lent to" by private lenders.