The socialist prime minister of Spain, Jose Luis Rodriquez Zapatero — apparently at the suggestion of German Chancellor Angela Merkel — has proposed amending the Spanish constitution to ensure that the government never runs a deficit larger than 0.4 percent of GDP. The proposal, which the Spanish right-wing opposition Popular Party has embraced, would be an unambiguous economic disaster for Spain.
If enacted, the measure would take away Spain’s only remaining macroeconomic policy lever, leaving the country’s economic future entirely in the hands of the European Central Bank and the continent’s financial sector, both of which have already shown incredible indifference to the country’s 20-plus percent unemployment rate.
When Spain entered the euro, the country signed away the ability to manage macroeconomic fluctuations through the exchange rate (a devaluation would be one typical way out of the current crisis) or monetary policy (by lowering interest rates or engaging in some U.S.-style quantitative easing). The Zapatero proposal would go one step farther, leaving Spain completely at the mercy of the ECB and "the markets."
As David Lizoain emphasizes, the proposed amendment is extreme. Over the last two decades, among the G-7 countries, Japan, France and Italy never met the proposed target. Germany hit the mark only once; the United States, three times; the United Kingdom, four times; and, Canada, 12 times.
As Vicente Navarro argues, in a Spanish context where raising revenue is politically difficult, the amendment represents a significant threat to the country’s welfare state (which is already weak by European standards). Ideally, Spain should be taxing and investing in expanded social services so as to close the gap in social spending between Spain and the rest of the EU-15.
As Andrew Watt writes, the constitutional amendment is, in any event, a complete misdiagnosis of how Spain ended up in its current mess. Spain was running surpluses in the years immediately before the 2008 crisis, but these surpluses did exactly nothing to prevent the crisis from happening. (Watt’s well-reasoned critique also manages to get the language right: "inane," "sheer madness," and "outrageous.")
And, lastly, as Paul Krugman has written on many occasions over the last couple of years, in the current crisis at least, the financial markets have generally not responded too well to fiscal austerity, which means that all the social sacrifice will not actually improve national economic prospects.
Fortunately, the Spanish government is facing some pushback, including a call for a national referendum on the amendment. Despite the support of the leadership of Spain’s two largest political parties, widespread popular opposition to austerity would likely send the proposed amendment to defeat.
This post originally appeared on John Schmitt's blog, No Apparent Motive.
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