Why elections are less important than we think

Ignacio de la Torre. Professor. IE Business School

24 June 2015

I have always said that the capacity of a politician to take bad decisions is inversely proportional to a country’s debt as a percentage of GDP. And Spain currently owes more than ever before in its history…

Spain went from living in a state of irrational euphoria from 2000 to 2008, to falling into a state of depressive contrition from 2009 to 2013.  During the first period there was no railing against the looming tsunami, nor, during the second, were we capable of seeing how we had created a model that could pull us out of the crisis via exports.  Worse still is the fact that we tend to simplify highly complex processes by looking for looking for someone to blame, useless scapegoats which having been hailed during the euphoric period, were then reviled once depression set in.

Economic reality goes much deeper than that, and although the search for random scapegoats may quench the thirst of the more gullible amongst us, it does not provide any sort of diagnosis for the illness, it does not treat the symptoms, and it does not help restructure the economy on a solid base. In the course of 2014 we saw how little by little the recovery which had started in the export sector brought an improvement in consumption and investment. These parameters were then joined by the return of funding, provided by banks and non-banking organizations. All of these factors helped to overturn the terrible cycle that had taken hold, and which had led to the horrendous figures of an additional 3.7 million unemployed, a 7% fall in GDP, and a 19% drop in internal demand. 

It has to be said that just as the private sector was as guilty as the public sector for the crisis, along with the series of world events, these three factors have also played a key role in the recovery. In my opinion, the private sector and world events have played a bigger role than the public sector.  And that is why I see the bout of collective hysteria seen in many circles of debate about the local elections, amid claims that the results of said elections could lead to economic paralysis, is totally unfounded. 

First, it is important to remember that the vast majority of public spending is pre-assigned to five segments - pensions, education, health, unemployment and interest on debt. The margin for different lines of action in these areas is very small, which is why marginal policy is reserved for the rest of public spending (discretional spending).  The problem is that marginal spending is negligible compared to that of pre-assigned segments.

Second, I have always said that the capacity of a politician to take bad decisions is inversely proportional to debt as a percentage of GDP. It is like when a family or a company have big debts. The creditor has a great deal to say about how they administrate their income, and the same happens with a territory, be it national, regional or local. Spain today has the highest debt levels in its history, from which our creditors (including the ECB) deduct their dues, and they therefore have a big say in our policies.  Anyone who wants total sovereignty has to first make sure that all their debts are paid off.

Third, many people are not aware of how European political union has strengthened during the crisis. The single currency is responsible for this, just as the founding fathers of the European Community envisaged. For better or for worse, we are heading toward, at least in practice, a union of sovereign assets and liabilities, and that is only possible through political union. We are there, and this infers that a government has a limited margin for action due to previously signed agreements that form part of the EU framework.  If an electorate gives a mandate to a government on the basis that they want to stay in the euro but they do not want to honor the commitments made previously in terms of fiscal responsibility, this gives rise to a contradiction that can only be resolved by jumping through hoops (honoring commitments reform) or by abandoning the euro. There are no third ways, even if the electorate might believe it because they have read it in false programs. Spain is no exception to the rule, quite the opposite in fact. That is why Spain will never go the same way as some of our sister countries in Latin America.

Fourth, in order to carry out a “shock” policy, Greek style, (which is as impracticable as it is suicidal) we would need a parliamentary majority. In Greece’s case they managed to do this in spite of the fact that only 36% of voters opted for Syriza, thanks to two factors: a) 50 seats are given away to the winner of the elections and b) the support of an extreme right-wing popular party (just to make things more coherent…).  Although in Spain one option may generate more votes than another, practically nobody is in the position to be able to carry out anti-system “shock” policies. In Barcelona 11 councilors out of 41… What is municipal power for big decisions based on? On a plenary session.  With these absolute majorities or minorities the capacity for populist action is minimum.

Fifth, any incremental spending policy has to go hand in hand with an income policy.   In Holland the parties that want to promise spending measures are obliged to explain how they would fund them, and the independent fiscal authority has to guarantee that the numbers are feasible. In Spain we haven’t yet reached that level of maturity, and until we do, we all have to bear in mind an unpleasant truth – that the difference is paid by the poorest and most vulnerable, namely our children, by way of an accumulated and growing debt as a consequence of historical fiscal deficits, for which the main political parties have been responsible. Children are precisely the only part of the population that have not yet had the opportunity to vote, but it is they who will pay our debts. The political system has made things worse with labor laws that protect middle-aged workers with fixed contracts, and this hypocrisy has resulted in a level of youth unemployment of over 50%, and very depressed levels of pay among the young, in order to compensate the enormous labor costs for workers who have the advantage afforded by their age.  It should come as no surprise that young people reject the system. The causes have to be addressed.

The recent local and regional elections in Spain have been a big wake-up call for Spanish political parties and the way they do politics, and this could be a good thing. It has got people talking about politics again. Nevertheless the key to recuperating credibility lies in telling the truth, and the fact is that many of the proposals being put forward are just not possible to implement.   

Politics is the art of the possible, and the only thing possible here is that outlined in the five parameters examined in this article.

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