The Keynesian economic policies of irrational debt taking are leading to a somber future.
Living beyond our means and having future generations pay for our high quality of life will not only cause a generation fracture, but it may also entail the end of the building of the European project while only half finished.
“Debtocracy” is a political and economic concept that has been leading the way, century by century, millennium by millennium, as it has elements of historical recurrence that are not explicitly manifested in its causes, but rather, on the contrary, in its terrible consequences of economic, political, and social desolation.
“Debtocracy” is behind the fall of the Roman Empire, along with other equally serious causes that drove incredible development for the period to its end. However, where we can best analyze the impact of this concept is in the breakdown of Hispanic American unity at the beginning of the 19th century.
Hispanic America went from being the richest and most prosperous region of the world on the basis of vigorous trade and unlimited natural resources to a politically divided area, which, due to the large debts created by the newly created nations, deteriorated into a metastructural and recurrent economic standstill that persists today, as well as a dependency on other nations that make use of its wealth.
I have published several articles on this matter   for prestigious think tanks and have participated in a number of international conferences  to discuss this topic and now that the 200th anniversary of the independence of Latin America is around the corner, it is time to recapitulate these little known facts and warn that the same thing may happen to Spain and the European project represented by the EU if we do not put a stop to such levels of debt.
Public debt was used as a tool to divide Hispanic America through usurious loans that made victims out of the new Hispanic states, debts that bankrupted the first of these states between 1826 and 1828 and then led to their cruel face off in civil wars that further worsened their situation in the following decades. Only Brazil managed to escape bankruptcy and division, thanks to having following a prudent public debt policy.
Therefore, public debt is the Achilles heel of any economic, political, and social development of nations, as it was for Hispanic America.
Today, Spain and Europe have surpassed tolerable levels of public debt. The line of 100% of the gross domestic product (GDP) is a Rubicon for Spain sounding all economic, social, and political alarms.
However, if we analyze existing defaults on private debt, the data can even seem disheartening, as Greece defaults on more than 45% of this kind of debt, in Portugal this figure is 18%, and in Italy 12%, according to data from the second quarter of 2017 (Source: ECB).
- With such disquieting data, any economic integration seems impossible.
- There cannot be a common responsibility at the European level with regard to public debt, as first, the wealthiest states (Germany and France) would never accept it; and second, because each state must be responsible for manging and decreasing its own debt. The salvation of each of us as a state begins with ourselves and we cannot continue to insist on the weak thinking that the strongest states should takeover the debt of the weakest, as the result of said policy would result in submission and dominion.
- A few weeks ago a Russian professor asked me what could be done to improve such a degree of public debt and I gave him the following points that would revert the situation back to normal:
- Buy back public debt at the price of its transfer, enabling debtors to repurchase it at the sale price on the secondary market. What the wise Romans referred to as a “credit buyback.” This way the debt is adjusted automatically, which also clearly combats inflation.
- Renegotiate the interest rates on the most onerous bond issuance, contractually stipulating its reduction when the surplus budgetary targets are not reached or when strains on the liquidity of the states so merit. Create a win-win negotiation framework where creditors (public debt subscribers) win when the debtor (the state requiring funding) makes enough to pay them back without harming its most vulnerable social sectors.
- Ambitious five-year plans to gradually reduce the debt and a team of experts dedicated to constantly monitoring it and making strategic objectives for the most disadvantaged nations based on their observations.
- Close all administrative units that do not have an economic or social purpose and that involve a public burden.
- Legally prohibit local and regional administrations from taking on debt, allowing only Member States to have the authority to do so, to thus prevent a division in its issuance and control.
- Free capital markets from having to finance budgetary deficits, aiming for an association with national operators to finance them with tax incentives for said purpose, as occurs in Japan and France.
- Set secondary liability to contribute funds for political and administrative managers that have poorly managed the economy and its public liabilities.
Gradually increase private banks’ required reserves from the current 1% within the framework of the EU to 20% over a period of 19 years, by adding 1% each year to strengthen their solvency and avoid new collapses like those of the savings banks whose bailout is one of the leading reasons for Spain’s current debt. A non-fragmented banking environment must be developed guaranteeing its customers the full safety of their deposits.
A new and urgent culture of debt reduction is therefore required, one that combines all kinds of legal measures (economic, fiscal, punitive, and administrative) so that all national projects and regional integration projects currently overindebted are viable in the nearest possible future.
Renegotiation with creditors is an arduous task requiring clear ideas and an iron will to carry it out. It must be done on the basis that a default is the worst-case scenario, not just for debtors but also for creditors, because entering into escalating defaults will affect the entire international financial structure and its marked pyramidal and fragmented essence.
This is Spain and Europe’s great economic challenge of the third millennium: counteract public and private debt.