To what Extent
has the Recent Economic Crisis Influenced Political Change? Use the Example of
at least two European Democracies
Barry
Gilheany ©
This essay assesses the impact on the economic crisis
that arose from the global financial collapse in 2007-08 and the sovereign debt
crisis in the Eurozone in 2010 on politics in Europe. It looks at how the Euro crisis in particular
has exposed the limitations of EU institutions, how it has posed existential
questions about the future of the European integration project, how it has
weakened the legitimacy of the EU amongst the citizenry of its member states
and, more worryingly, how it has damaged the strength of the democratic process
across Europe as evidenced by the decline in trust in governance and the
electoral rise of populist political parties on the far right and far left.
This essay
takes a pan-European approach but does focus on the democracies in the Southern
Europe periphery – Greece, Italy, Spain and Portugal. First, it is necessary to briefly outline the
economic crisis which enveloped the developed world from 2007 onwards.
The crisis began with the collapse of in April 2007 of
the major US mortgage provider, New Century Financial Corporation which
triggered the end of the housing boom of the previous decade fuelled by low
interest rates, an expanding economy and more lax credit rules including the
notorious subprime mortgages, which allowed low-income households to buy homes
worth many multiples of their income. The resultant slump in in house prices in the
US made horribly clear the exposure of so many banks to volumes of worthless
debts. In the wake of the collapse of
Lehman Brothers in 2008, governments in the US and the EU bailed out and nationalised
banks to the tune of jaw-dropping sums (e.g. 6.5 percent of GDP in the UK by
2009) and fiscal stimulus programmes followed which stabilised the European and
American economies somewhat by the end of 2009 (Hansen, R. & Gordon, J.G,
2014).
However the banking crisis was to become a public debt
crisis in Southern Europe and Ireland.
In December 2009 Greece admitted that that it massively underreported
the true extent of its total debt - 300 billion euro, or 113 per cent of its
GDP – and a month later it revised its deficit levels up from 3.7 per cent of
GDP to 12.7 per cent, which was still three percentage points below the
eventual official estimate. Debts were
increasing exponentially across Ireland and Southern Europe due to a perfect
storm of sharp economic contraction, increased welfare spending, stimulus
programmes and the need to bail out domestic banks which in the cases of
Ireland and Spain had recklessly financed property splurges. A contagion scenario loomed with Greece
defaulting on its debts leading to forced defaults by Ireland, Spain, Portugal
and Italy as holders of loans in these countries would seek to all call them in
and France following Italy into default mode leading to the demise of the Euro
(Hansen & Gordon 2014, p.1203).
To avert the oncoming apocalypse, Europe’s leaders
responded albeit rather tardily. In May 2010 the European Financial Stability
Facility (EFSF) was set up as a temporary arrangement outside the Treaties
establishing the European Union to provide billions of loans of finance from EU
states and the IMF to countries unable to raise it sufficiently cheaply via
bonds supplied by Eurozone members. This
was followed in March 2011 by a supposedly permanent European Stability
Mechanism (ESM). Next came a Fiscal
Compact in December 2011 establishing greater supervision of members’ budgetary
plans. The ECB began, in effect, to provide a degree of so-called quantitative
easing to provide liquidity. The EU also
took significant steps towards a banking union by declaring that the ECB become
the single supervisor of banks across the 17 member states in the
Eurozone. A pan-European architecture of
sorts of financial market regulation was quietly set up with an overarching
European Systemic Risk Board, chaired by the ECB. Finally, the Commission and the European
Council produced a new growth strategy ‘EU2020’ which lays emphasis on the need
for coordinated supply side reforms in national economies (Bale, 2013).
The agreement by Eurozone’s supposedly sovereign nations,
albeit an incremental ad hoc one, to permanent surveillance (and potential sanctioning)
of their governments’ spending and borrowing by a supranational institution
marks an important milestone in the political economy of Europe and European
integration (Bale, 2013: p.329). To appreciate the significance of this moment
it is necessary to look back at how the common currency zone came into being.
The European Monetary Union (EMU) and the euro came
into legal existence in February 1992 with the signing by twelve countries of
the Maastricht Treaty of European Union. The rationale behind the creation of a
common European currency was that through the further convergence of their
economies, EU member states would better align their core economic interests
and create a greater politically integrated liberal democratic zone of
stability that would be the EU’s response to the emerging post-Berlin Wall
landscape in Europe. It was particularly
important that the emerging democracies of the Mediterranean, Spain, Portugal
and Greece, having joined the European Community (EC) in the 1980s, be anchored
to this new order as well as Italy with its post-1945 experiences of democratic
volatility (61 changes in government in less than 50 years). (Matthias, M.
2014).
However the global financial crisis has exposed the
economic contradictions and democratic deficits within the zone. The Eurozone encompassed two essentially
different models of economic developments and ideological constructs; the
economies of industrial Northern Europe were export-oriented and governments
tended to be committed to fiscal policies of flexible labour markets,
deregulations and supply-side reforms, the relatively more subsistence Southern
European countries tended to follow statist development strategies of
anti-competitive regulation, relatively cheap labour and stable product
demand. The most striking example of
this model is Greece (Featherstone, 2011: p.197). The effects of the unclear entry criteria
into EMU and the inconsistent application of its regulatory mechanisms came into
sharp relief as the crisis developed after 2010. Under the terms of the EU’s
Stability and Growth Pact (SGP), the Eurozone countries are prohibited from
running budget deficits of more than three per cent of GDP. But although the resultant fines would be
payable to the European Commission they are decided upon by other members acting
through the Council of Ministers. The
SGP was suspended in 2003 after repeated breaches by Germany and France. The irony of such offending behaviour was not
lost on the supposedly errant Eurozone states in the period after 2010. (Bale,
2013: p.328).
So the Eurozone encompassed virtually incompatible
models of political economy. For
countries affected by the implosion of the Eurozone; the loss of economic
autonomy in the areas of currency devaluation and the setting of interest rates
was compounded by the democratic deficits.
External actors were defining the scope for movement by national
governments to a degree unprecedented since the Second World War as bail out
deals for Spain, Ireland, Portugal and Greece came with stipulations for
rationalization of public services, reduction in public spending including
pension reforms and the implementation of structural reform, including the
easier hiring and firing of workers, more part-time employment and the
liberalization of competition in certain sectors. These attempts by the Troika to leverage
wealth transfer to press policy reforms in order to achieve non-inflationary
and non-debt-driven economic growth in Southern Europe was doomed to fail as
austerity led to a vicious circle of less economic growth, lower tax revenues
and higher deficits (Hanson & Gordon, 2014: pp.1205-09) creating
catastrophic high levels of youth unemployment in Spain, Portugal and Greece
and the near bankruptcy of Greece before its third bail out in July 2015.
The imposition of such harsh budgetary programmes on
national parliaments by external actors eroded support for national
democracy. While national legislatures
were being coerced into accepting the deals with the Troika, citizens were
voiceless in the matter. The monetary
and social policies agreed upon between the Troika and national governments had
to be accepted by the citizenry of each indebted country regardless of whether
they had voted the previous government out of power (as in Greece in 2012),
demonstrated (as the ‘Indigado’ movements did across Southern Europe) or stayed
at home or waged general strikes (as in Portugal in 2012) or cooperated. Democratic discourse was thus perceived to be
ineffective. Having given into the
pressures exerted by the capital markets and the Troika, national governments
were viewed very negatively by their citizens for this perceived surrender of
economic autonomy as well as for their incompetent handing of their economies
in the first place (Armingeon & Guthmann, 2014: pp.423-424).
In no country were the internal contradictions of the
Eurozone brought into such sharp relief as Greece. Successive governments in Athens had failed
to resolve endemic problems of low competitiveness, trade and investment
imbalances and fiscal mismanagement which exposed the economy to the
vicissitudes of changing international
climates (Featherstone, 2011: p.193).
The most notorious example of Greek fiscal incompetence was widespread
tax evasion. The European Commission
estimated that uncollected tax revenue in 2006 amounted to 30 per cent (or 3.4
per cent of GDP) in 2006. Allied to this
was inefficient budget management. As of
2009, the government budget was based on some 14,000 separate ‘budget lines’
where each ‘line’ represents grouped items of expenditure within part of the
public administration. The accumulation
of such lines disabled government capacity to track spending and therefore
assert effective accounting control (Featherstone, 2011: p.196). Reform efforts were further incapacitated by
high levels of structural unemployment caused by rigid employment laws allied
to an under-developed welfare system and a large informal economy plus
dysfunctional governance and a corrupt rent-seeking political culture in which
the two main parties – PASOK and New Democracy- had become non-ideological,
clientilist, favour dispensing machines(Featherstone, 2011:pp.195-97).
The lack of reform capacity within Greece and the
centrality of the demand from Germany (the biggest power in the Eurozone) that
there be no rescue of states with excess deficits laid bare the extent to which
the Eurozone was ill-equipped to deal with the crisis like that of 2010. For Chancellor
Angela Merkel of Germany looked to be baulking at support for any Greek bail
out. After all, no bail-out of states
with excessive deficits had been fundamental to German negotiators at
Maastricht and accepted without question by its partners. However there was no legal basis for the
expulsion of errant states and so the unenforceability of rules without prior
integration was laid bare. The
preservation of the integrity of the Euro became intertwined with German national
interests which Chancellor Merkel asserted to an extent never before by any of
her predecessors since 1945 arguably to the detriment of the wider European
integration project.
This projection of German national interests has also
arguably had detrimental effects on the health of democracy throughout Europe. To test this proposition, Armingeon and
Guthmann assess support for national democracy in EU member states through an
analysis of 78 national Eurobarometer (EB) surveys conducted between 2007 and
2011 and various country-level statistics using two key indicators:
satisfaction with the way democracy works and trust in the national
parliament. They theorise that citizens
evaluate their national democracy within both international and national frames
and that the effect of international actors and markets interfering with
national democracy is to reveal the limited room for manoevre for national
politics (Armingeon and Guthmann, 2014: pp.424-25).
On average and across all 26 countries in their
sample, satisfaction with democracy reduced by seven percentage points between
Autumn 2007 and 2011, while trust in national parliaments plummeted by eight
percentage points. In Autumn 2011, 30
per cent of Europeans trusted their parliament and about 50 per cent were
satisfied with the workings of democracy in their country. However their data
encompasses considerable variations across individual countries. While satisfaction and trust effectively
collapsed in some (e.g. Greece -45.5% percentage points, Satisfaction; -39.8%
Trust and Spain -32.1% and -29.3 respectively);
other countries actually saw an increase (e.g. Poland +11.7% and +15.3%
respectively and Sweden +6.4% and 13.1%).
These figures need to be taken in association with the
opinions of European citizens about the performance of their national economies
and their expectations for the future. A
Eurobarometer survey in the spring of 2013 found that 72% of EU citizens regarded
their overall situation to be “bad”.
Within this finding stark regional differences emerge. In Spain, 99% considered their country’s
economy to be “bad”; in Greece the figure was 98% and 96% and 93% in Portugal
and Italy respectively. By contrast respondents
in the North judged their countries overall situations to be “good” – 77% in
Germany, 75% in Luxembourg, 63% in Austria and 53% in Finland (Matthijs, 2014: pp.108-09).
This divide between the Eurozone’s northern core and
southern periphery arising from the economic hardship caused by the imposition
of austerity policies by the Troika raises questions for democratic government
in Southern Europe. Although a return to
the era of dictatorships is unlikely, there is already ample evidence that the
strength of liberal democracy in southern Europe has weakened since 2010, as
indicated in a weakening of civil and political rights, the rule of law and the
functioning of government (Matthijs, 2014: p.109).
Citing an “erosion of sovereignty and democratic accountability
associated with the effects of and responses to the euro zone crisis”, the
Economist Intelligence Unit downgraded Greece, Portugal and Italy, from “full
democracies” (those with a score above 8 on a scale from 0 to 10) in 2010 to
“flawed democracies” (those with scores of 6 to 7.9) in 2012. Spain remained a “full democracy”, but with
the lowest score of all full democracies.
Uruguay, Botswana and South Korea are now ranked higher than Greece and
Italy (Matthijs, 2014: p.109).
Freedom House has similarly lowered its ratings for
both Greece and Italy. In 2012, Greece’s aggregate score went from 1.5 to 2 on
Freedom House’s scale of 1 to 7 (with 1 representing the most free and 7 the
least) due to declining political rights, while Italy’s deteriorating civil
liberties led its aggregate rating to go from 1 in 2012 to 1.5 in 2013 (Matthijs,
2014: p.109),
Since the onset of the euro crisis all governing
parties in Southern Europe and in Ireland have been voted out of power. Both Greece (under Lucas Papademos former ECB
Vice-President in November 2011) and Italy (under Mario Monti former European
Commissioner in the same month) have experimented with unelected government by
technocrats because of the inability of the political elites to form administrations
that could deal with the deflationary demands of the euro crisis. In both countries, the electorates responded
with wholescale rejection of the old party order. In Greece the radical left anti-austerity
Syriza party came to power in 2015 (although it too had to acquiesce in the
deflationary agenda of the Troika to secure Greece’s third bail out). PASOK saw its share of the vote collapse from
43.9% in 2009 to just 12.3% in 2012. On
the far right, the neo-Nazi party Golden Dawn has emerged from nowhere to score
just before 7%. In Italy’s February 2013
elections Monti’s technocrats received just 10% of the vote while the anti-euro
and anti-establishment Five Star movement led by the comedian Beppe Grillo
attained 25% of the vote (Matthijs, 2014: pp.110-11).
Thus Southern European electorates are turning to
populist movements and extremists in part because of the perception that
national elites have become puppets of unelected EU technocrats. Growing awareness of the democratic deficit
inherent in the Troika’s choice to opt for an austerity agenda and the
perceived violation of national sovereignty has fuelled Euroscepticism not just
in the southern periphery that has emerged out of EMU but also in its northern
core with trust in the EU falling from 57 percent in May 2007 to 31 percent of
respondents polled by Eurobarometer (Matthijs, 2014: pp111-12).
To conclude, continent – widespread instability and
hostility to the European project has been fuelled by the economic,
institutional and demographic feedback from the Eurozone crisis. The Euro
allowed peripheral economies in Europe to ignore long-term structural problems
and to use the sudden stimulus of lower interest rates and easy credit to power
consumer-driven booms and chronic imbalances in tax collection and public
spending. Under any conditions the
sudden collapse in demand and increase in members’ budgets would have caused
serious financial disequilibrium in member states but the need to bail out
domestic banks contributed enormously to sovereign debt. The response of the EU bureaucracy to the
threat of default by member states has been fitful and has generated Eurosceptic
sentiment across the continent which far right parties are tapping into. This toxic climate is worsened by the
experience of high unemployment amongst young people from Southern peripheral
countries which have low birth rates and expensive pension systems who then
migrate along with other immigrant groups to Northern Europe which poorly integrates
migrants into the labour market (Hansen & Gordon, 2014: pp.1217-1218). The interaction of the economic crisis with
immigration poses fundamental questions for the future of the EU as a
supranational political entity as well as the democratic health of its member
states.
Bibliography:
Armingeon, K, and Guthmann, K. (2014) Democracy in Crisis? The Declining Support for
National Democracy in European Countries, 2007 -2011 European Journal of
Political Research 53: 423-442
Bale, T (2013) European
Politics; A Comparative Introduction Third Edition. Basingstoke: Pelgrave
Macmillan
Featherstone, K. (2011) The Greek Sovereign Debt Crisis and EMU; A Failing State in a Skewed
Regime Journal of Common Market Studies 49(2): 193-217
Hansen, R. and Gordon, J. (2014) Deficits, Democracy and Demographics: Europe’s Three Crises West
European Politics 37(6) 1199-1222
Matthijs, M. (2014) Mediterranean Blues: The Crisis in Southern Europe Journal of
Democracy 25 (1) 101-115
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