Regardless of if and when Greece defaults, it is now clear that the Eurozone faces an existential crisis. The contradictions in the Euro are a symptom of a much deeper malaise and the inherent fragility of the European political project. As Martin Kettle points out, lifelong Europhiles now openly question whether the European Union itself is on its last legs.

At the heart of the European Union’s problems lies a structural ‘democratic deficit’. David Marquand gets to the heart of the matter in his excellent new book on Europe - at its core, Europe was always a technocratic undertaking aimed at transcending the “clamorous irrationality of political life”, in need of popular support but “wary of popular engagement”. This technocratic focus was not a bug but a feature, a natural byproduct of the emphasis on the “low politics” of agriculture, free trade, regulatory harmonisation etc. that is so amenable to technocratic decision-making. Underlying this approach was a “theory that integration would spread ineluctably, like an inkblot, from one policy domain to another…..The end was political, but the means were economic; and the means gradually eclipsed the end. Integration was supposed to spread, irresistibly and irrevocably, from one economic field to another; there would be no breaks in the process, when popular consent would have to be mobilized. Economic success, facts on the ground—market freedom, economies of scale, rapid growth, rising living standards—would be enough to embed the project in the public culture. There was no need to buttress legitimacy of the fact with the legitimacy of shared purposes. That would take care of itself.”

But as Marquand notes, this economistic and technocratic view is not rooted in the effective democratic consent of the citizens of Europe. In Marquand’s words:

You can’t hold institutions you don’t understand to account; and it is hard to see how they can represent you. And no one outside a tiny group of Euro-actors and Euro-academics understands how the European Union works. National politics often baffle ordinary citizens, not least because national governments are entangled in increasingly complex webs of European and global interdependence. But the citizens of the Union’s member states mostly have at least a vague notion of what national political parties stand for, and who national leaders and would-be leaders are. In the time-honored phrase, they can, if they wish, “throw the rascals out.” And there is, at least, a tenuous connection between their votes and the policies their governments pursue, None of this is true of Union politics. Voters in European elections can’t throw the rascals out. The connection between their votes and Union policies is not just tenuous but invisible. There is no shortage of rascals, but the most egregious of them belong to national governments and administrations, not to European institutions of any kind. Even the ones that do belong to European bodies—notably, Commission and Council permanent officials—are mostly out of reach of European voters and their representatives in the European Parliament. Worse still, there are no Europe-wide political parties to focus debate and offer choices to a European electorate. European citizens vote in European elections when they do (and, as earlier chapters have shown, increasing numbers don’t) to punish or reward national political parties, fighting on essentially national platforms. And though the European Parliament’s role in the Union’s legislative process has grown immeasurably in recent years, the process itself is both labyrinthine and impenetrable by outsiders….the EU has no buck—or, at least, no buck that stops. There is only an endless maze of indeterminacy.

Apart from a growing apathy (as signalled by the low and falling turnout in European Parliament elections), a perceived inability to influence political outcomes through the democratic process opens the door for the electorate to pursue more radical options. It is not a coincidence that so many of the protests and movements across Europe in Greece, Spain, Ireland and France have focused on the common theme of demanding more direct and local democracy. Although most of these protests have been allied with a distinctly left-wing political stance, they share the emphasis on more direct democracy with many right-wing Euroskeptics. This radicalisation in response to a perceived loss of democratic voice is easily understood when viewed in the context of the history of democratic rights and universal suffrage. As Albert Hirschman has pointed out in his book ‘Shifting Involvements: Private Interest and Public Action’, the introduction of universal suffrage effectively delegitimised more direct revolutionary political action. In his words:

when the vote was granted to the people of France, and in particular to that obstreperous, unruly, and impulsive people of Paris which had just made the third revolution in two generations, it became enthroned in effect as the only legitimate form of expressing political opinions. In other words, the vote represented a new right of the people, but it also restricted its participation in politics to this particular and comparatively harmless form. It was similarly a means of offsetting the perpetual Parisian avant-garde and direct-action leanings by the much more traditional and law-abiding mood of the provinces. This interpretation of the universal vote decision as restraining and conservative in fact though not, of course, in intent is suggested by the conservative outcome of the April 1848 elections to the Constituent National Assembly-and, more important, by the moral force and claim to legitimacy which this freshly elected body was able to throw against the insurgents of June 1848. If insurrection is justified in the absence of free and general elections, as republican opinion maintained at the time, then, in counterpart, the implantation of universal suffrage could be held to be an antidote to revolutionary change. This was indeed the way the more conservative republicans saw it soon after the February Revolution, and the idea is well expressed in the contemporary slogan, "the universal suffrage closes the era of revolutions."

Hirschman quotes Gambetta’s imploring speech to his fellow conservatives in defence of universal suffrage which captures this logic perfectly:

I speak to those among the conservatives who have some concern for stability, some concern for legality, some concern for moderation … in public life. To them I say: How could you not see that with universal suffrage, provided you let it function freely and respect, once it has spoken, its independence and the authority of its decisions-how could you fail to see, so I ask, that you have here a means of ending all conflicts peacefully, and of solving all crises? How could you fail to understand that, if the universal suffrage functions in the fullness of its sovereignty, revolution is no longer possible because revolution can no longer be attempted and that a coup d’Etat need no longer be feared when France has spoken?

It is in the troubled periphery of the Eurozone that this structural deficiency has reached a boiling point with the situation being made worse by the participation of the even less democratically accountable IMF. As the Guardian notes: “Eurozone policymakers too often treat democratic accountability as a luxury rather than a necessity, as shall be made amply clear this week when Brussels will force the Athens parliament to pass a raft of sharp spending cuts, tax hikes and privatisations – despite the hostility of Greek voters.” For much of the middle class in Greece, exit via emigration is a costly option given that they do not possess significant financial assets that can be easily transferred out of the country. As Hirschman would have predicted, absence of a viable exit option combined with the neutering of the democratic voice makes direct, even revolutionary action the only feasible option for many such Greek citizens.

The Greek middle class also feels squeezed due to what they perceive as the unfair burden of taxation foisted upon them relative to businessmen or the self-employed. Although it is entirely possible that this is simply a function of cronyism and corruption, taxing those who are least able to exit without incurring significant pain is the easy way out even in the absence of cronyism. In a globalised economy with free movement of capital, peripheral economies are unable to tax those sections of the populace who possess a credible threat of exit. The focus of increased taxes on those least able to exit, even if the policy is regressive, is therefore logical.

In a world where capital flight is an option for a select elite, social inequality instead of being alleviated by government policy is almost always exacerbated by it. Even the most progressive taxation and policy regime in theory translates into a regressive regime in practise. As Hirschman notes (emphasis mine):

There are numerous varieties of such mobility: transnational corporations can move subsidiaries from one country, considered unsafe, to another; more threateningly, mobility can take the form of international banks refusing to “roll over” their loans to a country that is considered to be “out of line.” Still, the principal weapon is wielded by the country’s own citizens - particularly of course by the more opulent ones among them - as they engage in capital flight on a massive scale whenever they feel threatened by domestic developments.
Occasionally these various exits do occur, according to the 18th-century script, in response to the arbitrary and capricious actions of the sovereign. But a much less favorable interpretation may be in order: exit of capital often takes place in countries intending to introduce some taxation that would curb excessive privileges of the rich or some social reforms designed to distribute the fruits of economic growth more equitably. Under these conditions, capital flight and its threat are meant to parry, fight off, and perhaps veto such reforms; whatever the outcome, they are sure to make reform more costly and difficult. It looks, therefore, as though the availability of the kind of exit that was hailed by Montesquieu and Adam Smith were today a serious menace: it damages the capability of capitalism to reform itself.

Hirschman also identified that the problem afflicts countries at the periphery of the global economy to a much larger extent than it does those at the core:

Capital flight is obviously much less of a weapon in the largest and most powerful countries where the owners of capital feel that there is no place else to go. Here it can be expected that voice will be activated by the impossibility of exit. Capitalists will make elaborate attempts to influence public opinion and public policy. An ideology in defense of capitalism will arise. At the same time, concessions are likely to be forthcoming where reforms of the system are obviously needed and are essential to the demonstration that the capitalist system can itself evolve and ameliorate the problems it creates. Purely on the basis of the differential availability of exit for capital and capitalists, one might therefore expect that the largest and most central countries of the capitalist system would be, at one and the same time, the ideological bulwarks of the system and its most active problem-solvers; the more peripheral states, on the other hand, might be in the grip of an anticapitalist ideology, and would at the same time exhibit unconscionable extremes of wealth and poverty……Here is perhaps a key to the old puzzle why anticapitalist revolutions have consistently broken out at the periphery rather than at the center of the capitalist system.

The simplistic viewpoint that democratic liberal Europe is immune to the kind of revolutionary uprisings we have seen in the Arab countries this spring is wrong - it is not just dictatorships that are prone to violent expressions of popular anger. The electorate needs to believe that their vote counts and that decisions impacting their lives are taken by a government that is accountable to them. Clearly this is no longer the case in many parts of the EU. And this disenchantment with vote as the mechanism of voice means that the people of Europe may choose much more radical means of voicing their frustration.

Comments

Jeremy Stark

well done. I get nervous about an 1830s/40s-style crisis of capitalism accompanied by social disruption and contagious violence. what we get on the other end might be better than what we have now, but I'd rather not witness the transition.

Ashwin

Jeremy - Thanks! I agree completely.

engineer27

It is not your main point, but the threat by the elite to exit with their capital/assets may be more a perception than reality. Econometrics on US states that pass various restrictive tax regimes show little resulting capital flight. Planet Money summarizes the research.

Ashwin

Hirschman's point (which I agree with) is that exit is a more valid threat in peripheral economies i.e. in places such as Greece it is a valid threat but it is not so in countries such as the United States. So your point is not in contradiction to mine. And certainly the history of capital flight in emerging markets, especially in Latin America would seem to validate Hirschman's thesis.

David Pearson

It seems a European reaction against technocracy lacks ideological roots. Democratic socialism has been usurped by the technocrats themselves, and the far left is defunct. In the U.S., our populist reactions are different. Populist reform movements here tend to have religious undertones. The Tea Party is fairly typical in this regard, and its anti-technocratic influence has already constrained both fiscal and monetary policy. The optimizing calculus of technocracy is a strong tidal force. What could ignite the passions of Europeans and overcome it? There has to be some organizing principle beyond a reaction against crony capitalism. Nationalism seems an unlikely candidate. Let's hope it stays that way.

Ashwin

David - nationalism is an undercurrent in the movements on the right which have made a bit of a comeback in the richer countries being asked to foot the bill e.g. the True Finns in Finland. In the periphery, you're right - it seems to have no obvious ideological leadership.

Liminal Hack

The problems of equitable taxation therefore need to be solved by the major centres that could actually have some chance of success (due to the aforementioned lack of flight threat credibility in these places), like the US, Japan and China and the north european core. However, even given a lack of flight threat it seems to me the more that optical fibres link us together the less the chance of effectively taxing the ephemeral quicksilver of income, transactions and so on. Perhaps taxation needs to focus on the physical and local in preference to the virtual and global. I'm thinking more taxes on oil, extracted commodities, land and so on. It may seem like a pipe dream but over the longer term I think states will move in this direction because if they don't their own existence will be threatened - and the only other alternative is an expansion and entrenchment of global technocracy. At this juncture I'd hold that both seem equally likely.

Ashwin

I hate to sound pessimistic but I can't see any meaningful change without some sort of systemic collapse preceding it.

Mirco Romanato

The capital flight in larger nations like the US is more difficult, but happen. The main difference is you don't move a factory or an enterprise overnight, because the associated costs are too high. The wealthy simply stop investing there or move investments elsewhere. It is a matter of inertia not will or ability.

Ashwin

Mirco - Don't disagree but the evidence is a lot clearer on the periphery. And Hirschman's point that the wealthy try much harder to defend the status quo in public forums etc in the larger nations is very true IMO.

Links 7/17/11 « naked capitalism

[...] The Democratic Deficit in Europe and the Crisis in the Periphery Macroresilience. A couple of weeks old, but since we’re on the subject of democratic deficits… [...]

Links 8/29/11 « naked capitalism

[...] The Democratic Deficit in Europe and the Periphery Macroresilience with another angle on the Eurozone’s problems (non-European readers are invited to read across to their local conditions if they think it’s appropriate). [...]

Keating Willcox

easy solution... Southern Europe Financial Zone 1.Portugal, Greece, Spain, Italy and Ireland all leave the Eurozone at once, and default on their loans 2.They establish their own currencies, at once. 3.Each currency is backed by a basket of commodities and vouchers from that country. These commodities would represent the goods and services required by the elderly or poor population such as wheat, olive oil, dairy, wood, bricks, vouchers for routine dental and medical care, and energy. In this fashion, each new currency would actually be backed by commodities such that if there were a run on that currency, it would produce jobs and prosperity. 4.Each country would have a tax rate very favorable to corporations, and a small free port, in the manner of Hong Kong. 5. Travel within the zone is passport required but unlimited tourist visa. Major limits on work permits and residence permits. Assimilation expected. Work permits mostly for folks who start businesses and create jobs. 6. Tax policy is set to reimburse zone corporations for currency transaction expenses within the zone. Even though there are five different currencies, it should be almost expense free to do business in the other zone currencies.

Ashwin

Keating - 1&2 are probably only a matter of time. But I'm not sure its possible to institute any meaningful limits on exit from these countries by citizens or corporations.

Linus Huber

SCARE 20.12.2012 (Stop Corruption And Repression Effective 20.12.2012) Banks were given a very important privilege to create money in the form of extending credit. This function requires diligence and careful consideration in regard to individual credit risks as well as to overall credit levels in the system. The financial crisis revealed that the banks were operating at too high a leverage and with too much risk. They were used to be saved by the Central Banks and certain that in times of difficulties the Central Banks were there to save them. They were like trained dogs and their master Greenspan or Bernanke would always be there to rescue them when unforeseen difficulties arose. That may be true but that does not absolve them from their obligation to monitor overall debt levels in the system as well as being diligent in evaluating the debtors ability to not only service a debt but to be able to repay it over time. The banks clearly failed in this function that is the core function of banking but focused mainly on their compensation packages. The way these bankers enriched themselves in the process of driving the financial system into a wall was appalling and the average income earner was never able to comprehend their schemes but preferred to simply ignore them. Of course, the bankers explained their outrages income levels with free market principles of supply and demand, where the best simply could be hired with those kinds of benefits only. In hindsight those superior managers seem to have missed their mark considerably. The most interesting aspect of all of this is the fact that, after we have been more than 3 years in this financial crisis, the bankers continue to loot the system as if nothing ever happened. True to form the Central Banks “saved” the financial system by saving those great financial institutions without whom the system would have collapsed, as was argued. Hardly were we out of the danger of collapse, the banks immediately went back to their old ways and were certain that this was a problem that would occur just once in a lifetime and now all was clear again. The real problem, however, had not been addressed but had simply been muddied. In actuality, the losses produced of extending unsustainable levels of credit by the banks have been transferred to the public. Different ways were chosen to achieve this task in the form of free money for the banks, injection of government funds into some institutions, increase of basic money supply and so on. The threat of system collapse would have been labelled blackmail if it would have occurred in another setting. However the bankers were able to influence the media, the legislators and regulators in their favour with all the financial resources available to them. Nobody was made to take any responsibility and no one was taken to account. This represents a serious violation of the spirit of the Rule of Law that is the basis of western society. It seems that now the new rule is Might is Right. This changes many parameters in the compass of the social system within the western world. No one can be sure on what level and when one will be subjected to the financial abuse of those elites. Presently, the people in charge are trying to enhance financial repression of which one form is to keep interest rates below the level of inflation which affects mainly those that lived within their means over the past many years; another clear violation of the spirit of the Rule of Law as it transfers losses from bad investments to the innocent and decent part of the population. In addition, the increased level of government debt puts in doubt all those benefits promised by governments the world over. It is interesting how the banks were able to confuse the public who was/is unable to grasp the actual situation. But considering the banker’s great financial resources, it seems not that much of a miracle to influence the media and the legislator and having politicians do their bidding. The question is what the heck can WE, THE PEOPLE do about it. Usually, we could address such things on a political level as we are a democracy, right? But it seems that the system has been corrupted by all the money sloshing around and it is extremely difficult to find any electable person that will act against those powerful interests. In addition, it will take many years until sufficient numbers of persons with the new thinking and with integrity not to be corrupted by those lobbying efforts will be elected to office that will implement the changes needed. So, what should we do? Start a revolution? Well, the blackmail used by the banks may be the only way to address the injustices that have occurred over the past few years. They showed us how to leverage one’s limited resources to achieve one’s goal. Therefore the following proposal to start the movement “SCARE 20.12.2012” should be seen in this context. The idea is that if by that time (20.12.2012) some serious injustices have not been removed from the system, people will start to withdraw their money from all financial institutions driving them into default. And it might work, because those who hesitate to support this threat may be left with no money as the banks will have to close down before all has been paid out. Now, what demands are made if that scenario is to be avoided. 1. Bankers and past Bankers (all those working in the financial industry that earned in excess of $500k plus annually for more than 2 years during the past 15 years and this without any downside risk i.e. risk of financial losses, except the possibility of losing their job) have to be made personally accountable for their past activities and be removed from any such position that might directly or indirectly have influence on the money creation and lending aspects of the economy (this includes regulating agencies and politics) before 20.12.2012. 2. Present and past regulators have to be made personally accountable for their past activities and be removed from any such position that might directly or indirectly have influence on the money creation and lending aspects of the economy (this includes financial institutions and politics) before 20.12.2012. 3. Politicians that accept any financial support from institutions that are involved in the money creation and lending aspects of the economy will have to face a jail term of no less than 2 years without the possibility of parole. When these 3 points are implemented before 20.12.2012, we the public will not destroy the financial system but support the way to find back to the RULE OF LAW and away from the idea of MIGHT IS RIGHT.

Tony

Linus Sorry to say, but that SCARE idea is not going to work. The central bank is going to function as a lender of last resort and the only thing it might do is slightly increase their cost of capital.