The Lesson of ‘Brexit’: Where Populism Leads Us

The Lesson of ‘Brexit’: Where Populism Leads Us

Last week, I went to London for a meeting organized by the London School of Economics with my former doctoral colleagues in Political Science. The main topic circulating in all the discussions was Brexit and the traumatic departure of the United Kingdom from the European Union. Ninety percent of the attendees at that meeting were not British.

I understand that the letter by which the United Kingdom triggers the mechanism to leave the EU, delivered on March 29 to the President of the European Council, Donald Tusk, will represent the greatest sacrifice of British sovereignty in history. And I reached this conclusion after listening to the conversations it sparked among my British friends.

“What will happen is that the Europeans will tell us the conditions under which we can trade with our largest neighboring market, and this will become evident when we start losing things. The supposed increase in our level of sovereignty that all those Europhobes, nationalists, and populists talked about will be exposed, and we will realize how hypocritical those who only sowed hatred to reap these storms are,” one told me.

“Our exit from Europe is and will be the end of the period of the highest benefits in British history.”

“What will really happen when Brexit is executed in two years?” others wondered. “Well, what will happen is what Margaret Thatcher feared most—and it wasn’t the Argentinians (laughs). She feared losing control over the conditions in which British companies operate, harming our trade and industry, which have their largest market in Europe.”

And another colleague, a bit of a Eurosceptic, interjected: “Suppose you’re wrong. What will happen then?” “Well, if I’m wrong,” a colleague replied, “future events will tell me I’m wrong. But what will really happen with the worn-out story of the money that left our coffers and now seems to be back, what will happen with the famous 350 million dollars that could be invested every day in our public health service, what will happen with those buses that roamed London loaded with false slogans and lies is that they will disappear, and we will face reality.”

And the Eurosceptic replied: “Many believe that Europe was, in reality, an elitist operation.” To which an eminent professor responded: “Our exit from Europe is and will be the end of the period of the highest political, economic, and social benefits enjoyed by the British people, and it will be more perceptible for each of us when we feel it in our pockets and freedoms. I have an idea of what this country was like, and how, even though we have had a decade of frozen living standards, our present cannot be compared to the conditions we lived in all of Europe during the 1920s, 30s, or 40s.”

The Spanish Parliament is turning into the famous and successful Telecinco program Sálvame.

“It is evident that European unity has provided the longest period of peace in the history of our continent, has achieved democracy in all latitudes, got rid of fascism in Spain and Portugal, ended the colonels in Greece, buried the Iron Curtain, and ended communism. Why do you think all these immigrants come here? Because we are among the most prosperous parts of the world,” he concluded.

And now, to watch with sorrow, how one of the most influential countries in history, with the greatest cultural wealth, owner of the language of business, creator of parliamentary democracy and the father of hundreds of nations and peoples, dissolves like a sugar cube in coffee, with the fissures beginning to emerge among the English, Scots, Welsh, and Northern Irish, who are already in open and legitimate dispute over how to abandon the once-thriving ship of the United Kingdom to swim, like castaways, to the shores of our beloved and denigrated Europe.

As I was flying back, I fell into a state of semi-wakefulness and dreamed of how the bloody British scenario extrapolated to my country, and at one point, I saw how the tyrannical hordes of the sowers of hatred and populism reaped the anger of the discontented with the sole purpose of destroying Spain.

The Spanish Parliament is turning into the famous and successful Telecinco program Sálvame, where the commentators/deputies throw questions and answers at each other on topics that no longer matter to anyone, dress in ridiculous t-shirts, carry stupid banners, and demonstrate their pauper level every day. What selection processes have they undergone? To whom are they accountable? What free press faithfully scrutinizes their work? Atresmedia or Mediaset?



A debate on the value of an apology is attributed to Francisco de Quevedo and King Philip IV. The monarch argued that any offense was washed away by an apology. The writer claimed that a dishonest or poorly framed apology could be worse than the act for which forgiveness is sought. The king challenged Quevedo to offend him and find an apology that would be worse than the offense itself. As soon as the king turned around, the poet placed his hands on the king’s buttocks. Before recovering from the surprise, Philip IV heard the following words: «Forgive me, Lord, I thought you were the queen.»

I couldn’t stop thinking about this anecdote while sitting in front of the TV, watching some politician giving explanations on television about the pandemic. The level of mockery and frustration is so great that I have almost reduced my daily dose of news to zero, trying to channel my energy elsewhere. Quarantine also has its benefits. One of the problems you always face during vacations is how to intensely coexist with family for one or two weeks. After five or six weeks without leaving the house, you realize that the human being, in difficult situations, brings out the best and exceeds previously set resistance limits. You adapt to whatever comes much faster than you thought, and it seems to return to those first weeks of courtship where you become creative, understanding, thinking of the other above yourself. «Not too bad,» as my daughter would say! Time is better spent; you can read all those books you had in the pit lane and which the speed of everyday life continuously postponed. Right now, for example, I have five books scattered around the living room that I alternate according to my mood. «The Rise and Fall of Adam and Eve» by Stephen Greenblatt, «The Son of the Century» by Antonio Scurati, about the rise of fascism to power in Italy, «Crash» by Adam Tooze about the 2008 crisis, «A Little History of Economics» by Niall Kishtainy (very easy to read and relatively short for those who want to get started in the world of economics), and some novel for light reading. You combine this with looking at stock charts, playing some chess, watching a series, the typical culinary learning, and a nightly family card game, and time passes without you noticing or missing having a dog.

It also makes us reflect on everything that is happening and, above all, how the world will be when we return. The financial world remains a curious one. The image of the week could be an instant recorded on CNBC. In the background, a large screen with a brutal headline: «The best week for the Dow Jones since 1938.» Below in small print: «More than 16 million Americans have lost their jobs in the last three weeks.» A piece of news that can be scandalous to the uninitiated but not so surprising to those who permanently «sing» the workings of financial markets. The gap between the real economic world and the financial matrix continues to expand. It comes with an interesting fact: Since 1990, the top 1% of Americans by wealth have bought $1.2 trillion in stocks and mutual funds, while the remaining 99% have sold a trillion dollars. Each new «saving» intervention by Central Banks immediately reflects in the pockets of the usual suspects. The Central Banks’ measures instantly spill over in the form of money printing and liquidity that always ends up going to financial assets, while fiscal measures take months to implement. While the American government will deliver $1,200 to each citizen, the 43,000 taxpayers earning more than a million dollars annually will each receive an average of $1.7 million in tax benefits in the package approved by Trump. If we recall the years before the Great Depression of 1929, we have similar examples: During Coolidge’s administration, Andrew Mellon served as Secretary of the Treasury, spending most of his working life authorizing tax cuts that conveniently increased his personal wealth. According to historian Arthur Schlesinger, with a single change in legislation, Mellon allowed a tax cut that saved him as much money as the entire population of Nebraska enjoyed. Mellon would request the IRS to send him the best workers to prepare his tax returns so that he would have to pay as little as possible.

In the face of a severe financial crisis threatening systemic interests, it has been revealed that we live in an era of large, unlimited governments, of large-scale executive measures, of interventionism that has much more in common with military operations than with governance subject to the law. This highlights an essential truth, whose denial had determined the entire development of economic policy since the 1970s. The foundations of the modern monetary system are irreducibly political. When we think in economic terms about some decisions made in high spheres, we are permanently wrong. The political and propaganda interests of power are above economic laws, and unfortunately, above the rest of the laws that govern their legal systems. And this conclusion can be drawn worldwide, regardless of the political sign of the ruler. Central Banks are operating outside their legal framework, and no one can say anything. The American Federal Reserve (which we must never forget is a private institution, whose main shareholders are the commercial banks themselves) is attributing things to itself for which it is not statutorily qualified. The phrase attributed to Machiavelli, which he did not write, «The end justifies the means» prevails above all. Always the urgent over the important. And since the transatlantic ship has set a course that seems unchangeable, fueled by debt and money printing, it seems that the only thing that can be done to overcome the wave coming our way is to double the fuel to the boilers. Nothing else matters. Just look at the statements of the FED governor of Cleveland, Loretta Mester: «The FED does not have to worry about moral hazard right now.» The harsh truth about the political history of Ben Bernanke’s global liquidity injection was that it involved handing out trillions of dollars in loans to a cabal of banks that had caused the crisis, to their shareholders, and to their executives with scandalous remuneration.

Regarding the market, there is little more to add. Investment banks keep changing their opinion every week and continue attributing to themselves the necromantic powers of knowing what will happen. They are always certain. Three weeks ago, we were going to hell, and now, everything is going to be fine. Is there anyone left who pays to receive these people’s reports? Our vision has not changed. We have no vision. The world has not changed in these two weeks, nor has the fog lifted. We only have the attempts of many governments to return to normal as if nothing had happened, but we do not know what effects it will have on the subsequent spread of the pandemic. Saying that the curve of infected people is decreasing when everyone is locked up at home is still a shot in the dark. The aid that governments are giving (mainly lines of credit and guarantees) will not prevent insolvency and closure of many businesses. Nor will it prevent a spike in bank delinquencies. In these two weeks, we have seen disparate things in the markets. While Europe, after a rebound prior to the United States, is slightly above three weeks ago, the recovery in American markets has been quite significant, recovering 61% of the drop in the S&P 500 and the Nasdaq returning to positive territory for the year. The bet on technology remains tremendous, while banks have returned to March lows, and oil in the USA is today marking levels below $15. Twenty-two percent of the capitalization of the American market is concentrated in just five technology companies. But despite all that «technology,» their main source of income is still the advertising market. It seems complicated that when many advertisers are small and medium-sized companies eager for positioning, who paid handsomely for it, are going through a survival crisis, these big companies can show themselves invulnerable despite the disappearance of many competitors, as may be the case for Amazon. The market is, despite the drops, at its highest valuation level of the year. I can understand that the results of a single year are only a part of a company’s valuation, but I am also deeply skeptical of many analyses that do not adjust future earnings, considering the situation as temporary and easily recoverable. Many things will not (cannot) be the same as before.

Every time there has been a crisis, it has been paid for in two ways, either with tax increases or with inflation. The measures being implemented will not come free. As an Indian sage says: «He who throws his filth into the river, the river awaits his return with thirst.»

Pedro Muñoz



When Mozart was still a teenager, although already a virtuoso, a young man of his age approached him and asked how to compose a symphony. Mozart replied that he needed to study for many years before even attempting it. The young man, upset by the answer, said: «But you were composing at ten years old.» Mozart, without changing his expression, replied: «Yes, but I didn’t have to ask how.»

Just as with people, we also find genius in companies. Sometimes, it’s the «juniors» who challenge the masters. One of the most controversial discussions we’ve been seeing in the markets in recent years is the apparent struggle between value and growth. The winner by KO is growth. But the boxer in red shorts, with his eyes closed and swollen, sitting in his corner trying to catch his breath and, like in the joke, saying he’s got the opponent where he wants him, still seems unwilling to surrender.

One of the biggest mistakes often made with investments is thinking that things don’t really change completely. And that the traditional companies we have in our portfolio, the national champions, will continue to be so forever. And that in the face of any new development in their sector, they will have the ability to adapt and overcome any new rival, based on the knowledge acquired over years, if not decades. And that they usually have a strong current balance sheet picture, with solid cash positions and growing sales. Warren Buffet gave a talk a long time ago about the advent of the automobile at the beginning of the 20th century. The main investment conclusion was not so much to buy car companies, but to short horses.

We can have this discussion by looking at the disparity in the performance of Tesla and the rest of the automakers or seeing how Telefónica continues to drag itself down in the stock market.

Not too long ago, we had many cases that should serve as examples, if not warnings. We have the example of Nokia. In 2008, when the iPhone 3G hit the market, the Finnish company was the world’s largest mobile phone manufacturer. What we didn’t know then was that Nokia would ultimately be the world’s largest manufacturer of dumb phones, and Apple was about to become the manufacturer of smart phones. We did not clearly know that smartphones would dominate the world. And the problem often lies in semantics. The problem is that we kept talking about phones when what we had in our hands was a computer that also made phone calls and did many other things.

In theory, no one knows more about making cars than the traditional brands, those that have been making cars for over a hundred years, and that history leads us to believe that they will be the same companies sending cars to the streets within a decade, even if they are electric instead of gasoline. The natural continuity to what we know may be the easiest cognitive model, but not the most appropriate.

If we continue with Nokia, a little before the appearance of the iPhone, it had a first crisis from which it recovered. It was when it missed the wave of flip phones released by Motorola. It had a few bad quarters, but it could adapt to the new trends. It was a slight technological change, but Nokia adapted without problems. Something it could not do with Apple. Nokia was a very efficient phone designer, with very little software and limited functionality, and knew little about interfaces. It reacted the way it knew how, tweaking its Symbian system, but failed miserably. Knowledge is not always an asset. When you are in the middle of a transition from one domain to another, knowledge of the past domain can cloud your vision, and you see things through the lenses you used to use.

Another example from the automotive industry. When the first cars were made, they did not have a steering wheel but used a kind of ship’s tiller because the manufacturers were former carriage makers. Although it was possible to transition from horse-drawn carriages to combustion cars, most companies did not and were stuck in the old technology. And here comes another problem companies have to face. When your current and main business works like a cash cow that you keep milking, it is difficult to create another business that may be fantastic in the future but penalizes your current business. We can give another example with Amazon and Barnes & Noble. The latter sold more books in a day than Amazon did in months but did not want to switch to online sales to avoid losing margins in its traditional business. We have the opposite case with Walmart, which did not hesitate to pay a lot of money for and has managed to adapt to the competition from Jeff Bezos, although it is still light-years away from Amazon in efficiency in product delivery (Amazon’s autonomous couriers in Madrid are charging 40 cents per package) and speed.

Regarding the markets, we warned last week about the excessive negative positioning of many players in the market, and that this can always cause a counter-movement. Letting ourselves be carried away by the numbers has these problems. The markets have been compensating for any drop in earnings per share by raising valuations. That’s how markets are. In real life, however, there are people so primitive that they can’t think of any other method to make money than working… The gap is widening between what happens to the man on the street and the man on Wall Street. Over the last eight weeks, there has been a rise of 38 million unemployed in the United States, accompanied by a global GDP loss of around 10 trillion dollars, which has been offset by a purchase of 4 trillion dollars in assets, resulting in a rise of 15 trillion dollars in global stock market capitalization.

And what can happen now? For now, we are in the same modus operandi as during the last quarter of last year. Back then, every day there was news that the trade pact was about to be signed in a few hours, and just that kept the markets on an upward trend (that nothing was eventually resolved does not matter). Now, that signature has been replaced by the almost daily arrival of a new vaccine or the successful reopening of the economy. There is an interesting study published by Carnegie Mellon University this week. The study identifies Twitter as the most used source to push for the reopening of the American economy. The study finds that about half of the 200 million tweets discussing COVID-19 since January 19 have been initiated by bots (machines), and of the 50 most influential accounts, 82% are bots. So, as long as we move from phase to phase, this trend can be maintained. That said, the market has reached the targets we had set in the broad trading range, and we see few gains right now in staying long. The markets have recovered between 50 and 61.8 percent of the drop, and it will be hard for them to rise from here. In other instances of drops exceeding 50%, (1929, 1938, or 1974) they stopped at these levels and started a bearish turn. We think more in sectoral terms than indices at the moment. Over the past few days, for example, we have built a bullish position in the banking sector, a sector we had not touched in the last three years. It seems that the banking sector in Europe, which still hit lows last week, is building an attractive floor around 50, and the technical requirements for a bet are met (sector punished and hated by investors). From the fixed income markets, nothing to say. The Central Banks have decided to set the prices of government and corporate bonds, and their yields no longer provide any information about risk. Let them play among themselves!

As a great historian said, many of the problems the world faces today are the result of short-term measures taken in the last century.

Have a good week,

What is Liberal Politics?

What is Liberal Politics?

Why Does Liberalism as a Political Ideology Influence the Good Practice of a Lawyer?

Liberalism is a political theory that defines the way of life for some individuals, who base their existence on a series of concrete ideals in their relationships with others and with the state. A liberal citizen generally defends individual rights (such as freedom of expression and freedom of the press), the free market and capitalism, secularism, gender equality, racial equality, private property, democracy, the rule of law, an open society, and internationalism. Therefore, they identify with values such as meritocracy and individualism. From a legal standpoint, a liberal advocates for legal positivism, and a lawyer with these ideals would be a positivist lawyer.

On the opposite end of the liberal and positivist vision, we find the natural law notion of law, which is defined as the ethical and legal doctrine that postulates the existence of fundamental rights determined by human nature. Legal naturalism points to the existence of a set of universal rights, prior to, superior to, and independent of written, positive, and customary law. Natural law, thus, refers to a set of norms or precepts that arise from the very nature or human conscience.

For example, a lawyer with a deep Christian conscience could not fully defend a woman accused of abortion; nor could a communist lawyer defend a businessman accused of violating occupational safety regulations.

The underlying idea in Kelsen’s Pure Theory of Law is the autonomization of law from politics, sociology, morality, and ideology. Ultimately, it seeks to grant law unity and scientific character, establishing it as a positivist discipline. Thus, the Austrian jurist and philosopher opposes legal positivism to natural law, giving a primary and predominant place to positive law as a normative order. Moreover, the author denies known dualisms such as natural/positive law, public/private law, law/state, etc.

In his work, Kelsen pursues scientific analysis, extracting any notion unrelated to the legal production or that goes beyond the strictly legal (also called metajuridical). The scientific character comes from means such as law and administrative acts.

The purpose pursued with the Pure Theory of Law is the scientification of the study of law and its de-ideologization. “By thus discarding all ethical or political value judgments, the theory of law becomes an analysis as exact as possible of the structure of positive law.” Hans Kelsen, Pure Theory of Law, 1982, Ed. EUDEBA, Argentina, p. 134

Furthermore, the renowned jurist points out that the legal system is based on a normative hierarchy (i.e., norms derive their validity from a higher norm). And, like any hierarchy, it has a peak; in this case, the Constitution, which may still have a prior basis in the Basic Founding Norm (which, for Kelsen, would be an abstract concept referring to a positive law that exists above the Constitution). Thus, the supreme norm of the hierarchy refers to a hypothetical basic norm, with a presupposed and unquestioned value. In this way, Kelsen declares:

“A legal norm is not valid because it has a determined content; that is, it is not valid because its content can be inferred, through a logical deductive argument, from a presupposed basic fundamental norm, but because it has been produced in a certain way, and ultimately, because it has been produced in the manner determined by a presupposed basic founding norm. Therefore, and only therefore, does the norm belong to the legal order.” Hans Kelsen, Pure Theory of Law, 1993, Ed. Porrúa, Mexico, p. 205

This grants a scientific character to law, beyond the margins of morality, ethics, politics, or sociology. Consequently, and following deductive logic, in the practical exercise of law, belief in any material ethics implies prioritizing the rights of an insubstantial and non-existent entity over the positive basis of the rights that assist a client.

As a result, the liberal lawyer will be the only one capable of defending with ethical, philosophical, and complete support, while materialist lawyers, whether left or right, will only be able to attend to their clients in a limited manner, as they do not have a comprehensive legal basis like the one Kelsen advocates in his Pure Theory of Law. Therefore, the liberal lawyer is the only one capable of doing an objective and loyal job for their client, as they will have to apply a pure and de-ideologized law.

Additional Elements for Good Practice

For a proper defense, the lawyer must have a positive view of law, but there are also other issues related to the firm that must be taken into account to achieve success in the profession.

Thus, the law firm must be a space of affiliation between disciple and master, with the latter providing the former with personal and emotional tools to always offer the client effective judicial protection. The lawyer must ensure the prevalence of the principle of independence and conscience regarding modes of collaboration and criminal association with the client, so that the freedom of the jurist is not prioritized over the right to legitimate defense. The head of the firm must organize human resources freely, allowing the lawyer to object and comply with the prevailing ideological elements. Likewise, the head must prevent the pupil’s moral qualms from becoming an obstacle to the effective defense of the client, enshrined in the supreme norm (in its article 24.2).

Additionally, it is necessary to maintain and mentor young lawyers so they can become familiar with the firm’s norms and decide, from a position of job continuity, if they feel comfortable with the head of the firm or if, alternatively, they believe it necessary to move to other firms where their concerns or holistic view of the practice are better received.

Understanding the policy of the firm’s head, managing emotional intelligence well, knowing that service provision must be executed with all available legal tools, and with some touches of liberal and positivist ideology, only then can a law graduate become a great lawyer.

Miss Winslow

Miss Winslow

How did mothers manage to reduce their children’s fever more than a century ago? With Miss Winslow’s syrup. This remedy was brought to us by Charlotte Winslow, who marketed it in the mid-19th century. Its calming effect was much faster and more effective than current antipyretics, probably because it contained pure morphine. In 1910, The New York Times published an article exposing these calmatives that contained morphine sulfate, chloroform, and heroin. Indeed, you know what follows. Miss Winslow’s syrup is the pharmaceutical equivalent of Central Bank liquidity injections. The same effective short-term impact, but we’ll soon see if it has any long-term side effects.

Although our capacity for surprise regarding market movements is generally low, what we are seeing these days does provoke at least a slight raise of our left eyebrow. For example, seeing how Apple, despite having its production plants closed in China, has increased its capitalization by $100 billion since the coronavirus started, approaches my likelihood of spending a night reciting Calderón de la Barca beside Olivia Wilde. But all this reinforces our main idea that markets are solely guided by liquidity. Forget analyzing whether Coca Cola can increase its sales figures in West Africa, or if Inditex will improve margins in its children’s clothing section; there is an almost perfect correlation (almost is a literary figure) between the size of central banks’ balance sheets and stock market capitalization. In the last fifteen days, as stock prices rose, long-term interest rates fell. The widespread belief remains that Central Bank protection is unbreakable and in any economic doubt, the response will be to flood the market with money. Money that we already know will go to financial assets more than to investment. At the end of January, the volume in the aggregate balance of all American commercial banks, in the section related to mortgage loans, showed a figure of $317 billion, almost 50% less than the peak in April 2009, and similar figures to those in 2004. Families have mainly been focused on paying off debt rather than taking on new debt as the monetary authorities would like. It can also have a second reading, which is that bank balance sheets have fewer assets considered «safer» and more loans with fewer guarantees such as consumer loans for car purchases, credit card refinancing, or student loans. If we look at a part of these loans (credit cards), we find a curious fact. While this week a new historic low was reached for the set of investment grade bonds in dollars, at 2.62% (with an inflation rate of 2.3%, it is almost free money in real terms), the average rate on credit card loans was 16.9%, rising from levels below 13% that it had between 2011 and 2014. It can be argued that credit cards are the highest risk in a bank’s balance sheet, and that the customer who resorts to it is the least reliable, but the increase in the spread is still striking.

But the bullish narrative remains intact, trade relations are improving nonstop, a scenario ahead in which not even our grandchildren will see an interest rate hike, profits will improve because they didn’t last year, if they fall it will be a temporary issue that will be resolved in the next quarter, if Sanders rises it will be good because the Republicans will win the elections by a large margin, and if Sanders wins the elections, he will boost public spending, which can be even better for companies, the fact is that the prevailing mentality is indomitable in a process permanently fueled by rising stock values. And the main beneficiary is still the United States. If 10 years ago, American stocks represented 30% of global capitalization, now they represent 40%. We can compare it with Spain, which has gone from representing 1.50% of global capitalization then to 0.82% now, almost a 50% drop in its weight.

Of course, it is not the only case of an abrupt decline. If we look at emerging markets, we have more dramatic cases. Mexico reached its historic high in 2013 and since then its indexes for a European investor have fallen by 40%, Brazil did so in 2011 and has fallen by 35%. Similar cases are found in Turkey (highs in 2013 and a 54% drop) or Indonesia (highs in 2013 and a 32% drop). However, countries like India or Russia have their stock markets at all-time highs.

If we analyze by sectors, we can see how the equivalent of «orange is the new black» is «utilities are the new tech.» The valuation they have right now trades at growth company numbers. We already mentioned that anything healthy, clean, or social is creating an investment bubble that does not cease. Massive liquidity encourages investment desires that will increase electricity supply to quite significant levels, and many of them are not taking into account the effect it will have on future prices. We will see the consequences of this bottleneck…

When we observe all these excesses, it is advisable to follow the advice given yesterday by young Charlie Munger (96 years old) at the Daily Journal’s annual shareholders meeting. «I think many problems are coming,» «There are too many miserable excesses,» «In China, they love to play with stocks, it’s really stupid,» «It’s hard to imagine anything dumber than the way the Chinese hold stocks» are some of the phrases he uttered.

He also criticized the prophets who use EBITDA as the new sacred figure instead of the traditional post-tax profit as an argument for many exaggerated valuations. He also mentioned that the boom we are seeing in innovation could begin to wane. Warning to navigators.

You already know that modern clairvoyance is called pessimism.

A Before and After for the Court of Justice of the European Union

A Before and After for the Court of Justice of the European Union

It is evident that the European Court of Justice (ECJ) ruling of September 14, 2016 (Case C-596/14, de Diego Porras) declares that Spanish legislation, which eliminates any compensation for interim workers at the end of their contract, is contrary to Community Law. This ruling has generated significant reactions among social partners.

Government, employers, unions, political parties, and experts have defended different interpretations of a decision that will inevitably require substantial reforms in our labor legislation.

On the other hand, no one seems to agree on the limits established by this important ruling, not even on basic aspects such as whether it only affects the specific case or has a general scope, the types of contracts it affects—only interim or also temporary—the need to reform labor legislation, or its effects remain to be clarified.

It is necessary to mention that the ECJ had equated concepts and compensation amounts. The first preliminary question presented was based on whether Council Directive 1999/70/EC on temporary work, which aims to equalize the «working conditions» of permanent and temporary workers, was applicable to compensation for contract termination. Thus, the ECJ considers «since the compensation is granted to the worker for the termination of the employment contract that binds him to his employer […], it is therefore included in the concept of ‘working conditions’.»

This directive will apply, as Article 4.1 cannot treat temporary workers less favorably than «comparable permanent workers,» except where there are objective and reasonable reasons justifying such differentiation, not inequality.

In this specific case, the ECJ reasoned that the worker replaced a union representative—permanent—and covered the same functions and, therefore, should not have been dismissed with a lower compensation than that granted to permanent workers in cases of objective dismissal.

However, there are significant doubts about the objective relevance of this ruling in the ECJ’s decision, as it is now up to the state to modify its regulations to comply with the European directive, which preceded the ruling and in accordance with Article 96 of the Constitution.

However, it should be noted that directives do not generally have direct application in relations between individuals except in very exceptional cases.

It is evident that the courts and tribunals of the social order will begin to recognize higher compensation for the termination of interim contracts, and even for temporary workers.

It is necessary to reflect on the types of temporary contracts to which the ECJ’s doctrine would apply. In this regard, the preliminary question raised by the Superior Court of Justice of Madrid by mentioning «temporary contracts» is very important.

Therefore, there is a risk that workers with temporary contracts, and when there is comparable permanent work in the same workplace, could file a claim demanding compensation of 20 days’ salary per year of work, instead of the current 12 days’ salary established by law.

Consequently, the ECJ ruling marks a before and after, and although it does not entail changing Spanish legislation, judges and tribunals will have to apply its content jurisprudentially.

Therefore, it will now be up to the legislator to promulgate national labor legislation to accommodate the meaning of this ruling, as the exegesis of the ECJ’s interpretation will now come. The ruling establishes that an interim worker performing the same functions as the person they replace, and whose contract ends, must receive compensation identical to that which would correspond to the replaced worker.

Today, there are several compensations in Spanish legislation when the employment relationship ends: 12 days per year worked for temporary contracts, 20 days per year for permanent employees dismissed for objective reasons, and 33 days per year for permanent employees who have suffered unfair dismissal, and 0 days of compensation for training or apprenticeship workers or interim workers, but now interim workers are penalized with compensation identical to that of permanent workers.

It is evident that Spanish labor law is far from the «legal winds blowing in Europe.» And it is undoubtedly necessary to understand this ruling as a step towards labor rights equality. However, it is equally true that the Spanish legal framework must be equated with the Community framework, both in burdens for the employer and benefits for the worker, because if we only equalize penalties, we risk further penalizing job creation in Spain; when the legal equalization could be carried out by equalizing compensation between permanent and temporary workers, reducing the penalties for objective dismissal of permanent employees.

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