Sunday, May 23, 2010

The Decline of European Democracy: A Common Misunderstanding.

Peter Boone and Simon Johnson claim that European countries are traveling down Hayek’s “Road to Serfdom”, because of unregulated finance and the ideology of unfettered free markets, in their article in today’s Sunday Telegraph.

I agree with their description of the current predicament:

“As a result of the continuing euro crisis, European Central Bank (ECB) now finds itself buying up the debt of all the weaker eurozone governments, making it the – perhaps unwittingly – feudal boss of Europe. In the coming years, it will be the ECB and the European Union who dictate policy. The policy elite who run these structures – along with their allies in the private sector – are the new overlords.

We can argue about who exactly are the peasants, the vassals, and the lords under this model – and what services exactly will end up being exchanged. But there is no question we are seeing a sea change in the post-war system of property, power, and prosperity across Western Europe, just as Hayek feared. An overwhelming debt burden will bring down even the proudest people.”

But I think that they are dead wrong when they state that:

“Hayek had the sign and the destination right but was entirely wrong about the mechanism. Unregulated finance, the ideology of unfettered free markets, and state capture by corporate interests are what ended up undermining democracy both in North America and in Europe. All industrialized countries are at risk, but it’s the eurozone – with its vulnerable structures – that points most clearly to our potentially unpleasant collective futures.”

They fail to understand that the current worsening of the eurozone crisis is due to … the euro itself. Spain and Portugal for instance were not profligate in their budgetary policies before the 2007-2009 crisis. But since they had no independent monetary policy and could not rely on devaluation any more, after entering the eurozone, the only way for these countries to dampen the shock was to use keynesian public deficits policies, dramatically increasing deficits that the recession first created.

Now, I agree that “state capture by corporate interests” and, indeed, the politicians’ interests, are undermining democracy by maintaining the euro against the will of a majority of people in several countries, thus locking several economies in a hopeless mess. This has nothing to do with free market ideology and unregulated finance. In particular, because big financial interests here are tightly linked to governments and state bureaucrats rather than playing the game of really "free markets".

The overlords in this model are the ECB, EU and national bureaucrats and politicians, and their big business allies. The lords are the managers of large corporations that are allowed by governments to reap some rents from the consumers. The “peasants” are the wage earners and small local firms.

The question of the bloated welfare states, the growth of which has been made possible in large part by the absence of defense spending (a "cold war dividend" since European countries were protected by the U.S. defense umbrella), is quite another matter. The problem here is that these systems have now reached the limit of fiscal possibility in a globalized economy where economic activity is mobile, firms can easily relocate abroad, and where, as a consequence, the marginal welfare cost of taxes has been increasing steeply.

The decline of democracy is alas too real, but it results from the collusion of the "overlords" trying to reorganize national corporatist and oligopolistic systems on a broader, continental, level by the means of the European Union and the euro, against globalized free markets, and not in favor of free markets. It is an exercise in centralized and technocratic, antidemocratic state building, against the odds, and that will, hopefully, ultimately fail.

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