YES to the European Constitution!

Montaner Report

Challenges for the Europe of the 25

The enlargement of the European Union symbolises the political commitment of 25 sovereign countries to reach a shared economic goal. Nothing else. At no time can we speak of a union between the 25 nations. The aim is to unify economic interests, which have varying degrees of wealth, in order to achieve collective development that is dependent on the internal circumstances existing in each sovereign nation. This political sovereignty is capable of destabilising the harmonization of the whole if the internal circumstances of any country so warrant. The approval of the European Constitution has involved arduous negotiations whose goal was to share out power, an achievement that does not directly benefit the ordinary citizen. This is the first stage, which in itself is fragile not only because ratification was ruled out by certain political interests, but also because of low citizen turnout, since they were asked to endorse a constitutional text that nobody had explained to them.

The only political similarity shared by all 25 States of the EU is the fact that they are democracies. This is not a lot, but it is the starting point for negotiating within diversity.

Attention is currently focused on the Community budgets and how the Cohesion Fund is to be distributed, allocating aid and deciding on the beneficiaries. The limited amounts available means that some needs and expectations will not be met, which suggests that in the future the political unit should start off by developing a new type of economic power that is collective, coherent and cohesive, where each of the 25 countries contributes in a real way and in proportion to their capacity to participate. This unique economic block should base itself on a sector that is permanent, on a branch of goods that are required everywhere, for which there is a need, are long-lasting, certain to appreciate in value and transferable.

I consider that the only sectoral branch capable of bringing about the economic unity of the Europe of the 25, based on the collective interest, is the construction of self-financing housing, an innovative project that would become a driving force for job creation, directly and indirectly, would generate ample resources for selective investments and would not require any type of borrowing.

European citizens should be offered an economic programme, to be implemented in all 25 countries, which would arouse their interest and assuage their reservations. The project I refer to is ideal for such purposes, and would provide the European Community with a unitary philosophy based on separate economic outlooks and not on vague political possibilities.

This project can in no way be considered to be a spur of the moment idea. In 1984 I described it in my book “La Tercera Vía. Acceso de los Trabajadores a la Propiedad de las Empresas” (The Third Way: Worker access to company ownership) whose aim was twofold: firstly, to gradually convert labour contracts into company contracts so that capital and labour would collaborate 50% in capital share and profits, a vision of labour relations in the XXI century; in the second proposal I explained how to finance the capital share of the workers by using resources generated by the construction of housing; thus certifying their rights in the company.

Since 1984, the governments in power in Spain have distorted the company contract concept, have ignored it and preferred to foster SMEs instead, since they are incapable of understanding self-financing housing, in contrast to banks and savings banks that do use mortgage and credit self-financing intelligently and successfully.

Self-financing as an instrument of economic expansion

The EU needs permanent financing sources because the present ones are insufficient. They should look for complementary ways to increase the amounts available and execute projects that consolidate the Welfare State. If this is not done, and if the European Commission has to decrease aid to some members of the 15 to partially meet the needs of the 10 new members, where will the resources come from?

The answer lies in self-financing without borrowing, which allows the housing needed to be built at zero cost.
Self-financing focuses on the problem involved in producing and having the money, a large amount of money, to achieve full employment in the first place and also for investment. Money that does not involve any direct or indirect charge on society. Money proceeding from an economic project that can be implemented in a single country or can encompass the 25 Community countries, and will result in efficiency and strength through implementation by national organisations.

The aims are to create distributive wealth for the whole, starting with an economic proposal that has no political agenda, whereby the State, in collaboration with business, executes a housing project to raise money, part of which is paid into the public coffers in the areas where construction takes place.
The construction of self-financing housing is not a utopia. Planning, execution and results are comprehensively explained in the “Contents” of this web page.

The stages of self-financing are: a) Purchaser census to find out how much housing should be built. b) Calculation of quarterly revenues by sales. c) Issue of mortgage bonds whose quarterly repayments coincide with the payments made by the beneficiaries of the housing. d) We build with the nominal face value of the bonds issued. e) There is an operating margin between the costs paid and the selling price of the housing that I have denominated ordinary reserves.

The risk-free financing is set up by co-ordinating asset side and liability side obligations and, in addition, the first issue of bonds opens the way for successive issues that are net revenues, making up the financial reserves and the surpluses, which do not require borrowing and can be invested.

That self-financing is viable is attested to by a headline in “La Vanguardia” of Barcelona on 24 May, 2004. “Banks and Saving Banks flood the European financial market with government mortgage bonds to finance the real estate boom”. These are seven-year securities at an interest rate of 3.5%, and over 6,000 million euros in mortgage securities were put into circulation during the first quarter. They are self-financing mortgages.

Saving banks and banks conform to the stages described for the construction of housing. The differential in their favour, between asset side and liability side accounts, is equivalent to the ordinary reserves, but they are aware that the financial reserves, which are the exclusive domain of the State, are not an option for them since they are linked to exceptional taxes in the future, collected in an ongoing way, that enable resources that do not require borrowing to be used now.

The revenues from self-financing that are allocated to investments means that public finance can be kept down, which is compensated for by productivity and growth, which in turns leads to full employment. For the citizens, productivity, growth and full employment mean work – housing – production – consumption – savings. For the State it means it can reinforce tax collection by increasing tax bases instead of tariffs. Full employment will allow the Social Security to base retirements on actuarial calculations, with the setting up of technical reserves to guarantee pensions.

The economic potential of self-financing is demonstrated in this page by executing a simple construction programme for 500 flats. I will use this to verify the process and the veracity of the results. I will only use round figures here.
Flats: 500 100 m2 flats, average of 1,200 euros per m2, initial contribution 15%, thirty-year mortgage at an interest rate of 6.75 %, monthly payments of 663 euros, construction price 1,056 euros per m2 (88% selling price).

Thirty-year mortgage bonds at an interest rate of 7%, final repayment with a 30% premium equivalent to a 7% fixed annual rate plus the 1% annual cumulative rate to be paid in 30 years time.

All the components of the system are proportional to each other. If any of them are varied, only the results will be quantitatively different.

Explaining the mortgages at 6.75 % and bonds at 7%

The 6.75 is invariable. It includes interest, a life insurance policy that guarantees that the mortgage will be paid in full if the titular dies and options for any members of a family unit who are under 30, which will enable them to become independent and contract a 70 m2 flat that has a maximum rent of 450 euros a month and title deeds at 20 years.

The bonds issued at 7 % are unique and unbeatable. Repayable in 30 years time with premium. Quarterly interest. Since they are profitable EU citizens who have savings in banks and savings banks at a low interest rate are certain to subscribe to them. This is also true for savings accumulated in the so-called investment funds, many of which perform negatively. Taken together they add up to many billions of euros.

The self-financing process is as follows:

The 500 flats provide three sources of free resources: ordinary reserves, financial reserves and surpluses.

Ordinary reserves. They will receive, for the sale of the 500 flats, 994,072 euros quarterly from the mortgages for 30 years, an amount that we will earmark for the repayment due on the FIRST issue of thirty-year bonds at an interest rate of 7%, for a nominal value of 49,720,596 euros. The construction costs of the 500 flats are 45,000,000 euros, so that 4,720,596 euros will be left as ordinary reserves, allocated preferably to health cover and education.

Financial reserves. Since the bonds make final repayments, the repayments due and the quarterly interest remain stable (in Spain the income tax that taxes interest stands at 15%. I have taken the EU average to be 12%). The difference between the repayment due and the interests also remains stable, a share that would correspond to the repayment of the principal, that I call surpluses. (You can find a step-by-step breakdown of all the figures I have cited in the web page).

In concrete terms we have: bonds issue 49,720,596. Quarterly repayment due 994,072, of which 870,110 corresponds to interest and 123,962 to surpluses. 15% retained income tax 130,516. The retentions are exceptional, autonomous fiscal revenues, self-generated by the construction of the 500 flats and should be excluded from the budgets. As they are not liable to any tax obligation, we can allocate them to a quarterly repayment due on a SECOND issue of bonds with a nominal face value of 6,528,055 euros, which constitutes the first part of the financial reserves.

In euros: Nominal value of the SECOND issue 6,528,055. Quarterly repayment due 130,516. Quarterly interest 114,241. Retained income tax 15%, 17,136. Surpluses 16,275.

By following the same process we will effect a THIRD issue whose figures would be: bonds issued 857,092, second part of the financial reserves. Quarterly repayment 17,136. Quarterly interest 14,999. Retained income tax 15% 2,250, surpluses 2,137.

SUMMARY. 500 100 m2 flats, FINAL repayment in 30 years. In euros
FIRST issue of BONDS 49,720,596
Construction costs 45,000,000
Ordinary reserves >>>> 4,720,596 4,720,596
SECOND issue 6,528,055
THIRD issue 857,092
Financial reserves >>>> 7,385,147
Total reserves. Programme for 500 flats
12,105,743 euros

With a programme for 50,000 flats in each country in the EU, 1,250,000 flats would be built for a population of nearly 400 million, and over 30,000,000,000 euros in reserves would be generated.

The third source for the generation of funds is the surpluses, summarised as:
Nominal Quaterly Interest Surpluses
Euros Bonds repayment
First issue 49,720,596 994,072 870,110 123,962
Second issue 6,528,055 130,516 114,241 16,275
Third issue 857,092 17,136 14,999 2,137
Totals 57,105,743 1,141,724 999,350 142,374

The last column shows that over 30 years 142,374 euros would be available each quarter for investment, and if there were 50,000 flats per country, the surpluses would total 355,935,000 euros each quarter.

There is a fourth source of free resources that far exceeds the three previous ones. There is no point in giving it until this project is started.

What could be and what will be, or the heads or tails of a project.

I already know what the fate of this project will be in the hands of narrow-minded, unyielding politicians.

What I have proposed in the project is what could be. I have already shown what will be in “The Third Way” in 1984, when I wrote:

“It is possible – I should say probable – that neither the State, that is to say those in power, nor the business sector, will pay the slightest attention to my suggestions and will prefer to leave things as they are; but this does not mean that the idea will be consigned to oblivion”.

My Third Way is still alive and it is the hope of the workers of the XXI century, in contrast to the subsequent third way put forward by Blair and Giddens, that has deteriorated and lost momentum over the years because it fails to provide specific actions for the collective good; or the recent invention of the Spanish lecturer on the subject-matter of “social democracy and the challenges of the XXI century”, announcing an ethereal third way between neo-liberalism and classic social democracy, where he does not make any concrete suggestions but limits himself to defining it with the ambiguous statement “modern socialism must involve and foster socially sustainable companies”, although he fails to explain how this is to be achieved, nor when, nor the measures needed. My Third Way described these concepts 20 years ago in the Company Contract, giving all the variations, details and means of financing it, which I repeated in the 1999 edition, and again in this web page in three articles, available to anyone who wishes to visit since I conceive this project as a common good free from misrepresentations.

The workers have a whole century to overcome lacklustre politics and achieve a production system shared in common between work and capital, and will be able to participate directly in the benefits brought by economic growth. This would be a validation of the words of Pope Leo XIII in his encyclical Rerum Novarum of 1891, where he affirmed: “Men always work harder and more readily when they work on that which belongs to them”.

The legacy of the encyclical Rerum Novarum can be seen in the desire of the Popes, when they refer to workers rights in their encyclicals, for workers to have something more than a wage for their work, which is a matter that still needs to be resolved. We now have the means to achieve this in social peace; with a large enough margin to fight against poverty, famine and disease in vast global areas.

A rather disconcerting comment

The Spanish government, acting, I imagine, on a proposal by the Ministry for Housing, approved a measure to give 6,000 euros to owners who refurbish a flat in order to rent it. It is estimated that in the Spanish untenanted housing sector there are 7 million empty flats. If only 1% of owners accept the offer, this will be 70,000 options to collect 6,000 euros, that is to say, a payment of 420 million euros that will never be recovered. The figures do not add up, if you compare this payment with the 12 million in reserves that are left after having built 500 flats without investing 1 euro. It does not make any sense. Mr. President: it is good to change the commitment, but it is better to choose the talent.

The upper echelons of the European Commission and members of the European Parliament are aware of this project, as is borne out by the registered mail in my possession. They cannot deny it, they do not have any excuses to explain why they have ignored it or to justify why they have not taken advantage of resources to provide full employment, solve the housing problem, the health deficit, ensure the continuity of the Welfare State throughout the EU and invest in R&D, among other things.
What is lacking is political commitment, financial audacity and an economic vision for the future. As a consequence, what I wrote in the aforementioned Third Way of 1984, p.222 still holds true: “Those in power who could achieve social progress by applying new ideas, that a priori can be seen to be beneficial, and do not accept them because they are too proud, or are suspicious of ideas and projects that have been presented by strangers, or because they are not in their programmes or have not been proposed by the party they represent, must accept, even if only in their own consciences, that they are pompous fools.
If this report does not strike a cord, it means that we are living in a community of autistic politicians.

I recommend you to print and study the article on this web page

“La emancipación de los Sindicatos. Ha llegado la hora del protagonismo sindical. Creación del Partido de los Trabajadores” (The emancipation of the Trade Unions. The time has come for the unions to take centre stage. Creation of the Workers Party) that can be found in Spanish, French, English and German and which advocates that the Company Contract should be the flag that presides over labour relations in the XXI century. This will be possible by uniting the vote of the workers on economic objectives, with leadership styles that have been freed from the Byzantine discussions of traditional politics that are based on obsolete, out-dated concepts.
The risks incurred by referendums would be minimised with this project
September 2004
Francisco Montaner Farré

Francisco Montaner

Globalizing housing with zero cost