Eurozone lacks vital democracy

In: Uncategorized

10 Oct 2011

This is my regular weekly Perspective column for Fund Strategy magazine.

There is a huge and largely unnoticed hole at the centre of the discussion of the eurozone crisis. Hardly anyone seems aware of the possibility that greater democracy could help Europe to grapple with its economic problems.

If anything, the trend is in the opposite direction. It is routinely suggested that democratically elected national governments are far too parochial and responsive to popular pressure to play a constructive role.

Instead, it is frequently argued that the institutions of the European Union (EU) have to be strengthened to help bypass recalcitrant nation states.

José Manuel Barroso, the president of the European Commission (EC), provided a clear example of this centralising trend in an interview in Süddeutsche Zeitung in late September. He told the German newspaper that the EU may need to strengthen its executive institutions and negotiate a new treaty.

Barroso’s remarks were followed last week by the ratification of the EU’s new economic governance package by finance ministers. The six legal instruments it embodies – leading it to be dubbed the “six pack” – will further strengthen EU regulation of national budgets.

To understand why this technocratic approach poses fundamental problems, including practical ones, it is necessary to go back to first principles. Discussing the merits of democracy is an essential first step in finding a positive solution to a crisis that seems to get uglier by the day. Such a debate is likely to lead to a far better understanding of the eurozone’s plight than technical economics.

Although there are many competing conceptions of democracy the best starting point is the original Ancient Greek meaning of the term: government by the people. Or to use the 19th century formulation coined by Abraham Lincoln: “government of the people by the people for the people”.

In broad terms there are two sets of reasons why democracy is desirable. First, its intrinsic value. In modern societies it is widely accepted, at least in principle, that citizens should have a role in determining how they are governed. Relatively few individuals overtly call for elite rule.

The second, and less well understood, advantage of democracy is instrumental. By involving the mass of society in government it is possible to make better decisions. The democratic process provides a way of collecting information from across society and thrashing out how best to deal with difficult challenges.

It is often forgotten that for democracy to play this problem-solving role it cannot just be procedural. It is not enough to have parliamentary institutions if these are simply empty vessels. There needs to be an open clash of opinions about how best to meet society’s needs.

The institutions of the EU are incapable of playing a democratic role. Although it is elected by popular vote, the European parliament is a marginal player in the decision-making process.

The unelected EC, the EU’s executive arm, holds most of the power. It is the EC that has the central role of initiative new legislation, managing the budget and enforcing EU law.

Within the eurozone, which includes 17 of the EU’s 27 member states, the European Central Bank (ECB) is also a key institution. Like the EC the ECB consists of government appointees rather than democratically elected representatives.

Although it views itself as cosmopolitan and sophisticated, the EU elite is a narrow clique that has self-consciously insulated itself from democratic pressures. That is why over the course of the past two years of crisis in the eurozone it has habitually proposed narrow technical solutions to every problem.

It has also consistently seen the eurozone crisis as essentially financial rather than recognising its economic roots. EU proposals consistently focus on the financial markets rather than grappling with the need for restructuring of the real economy. In addition it has few if any qualms about imposing austerity.

Indeed it is hard to imagine a genuinely democratic Europe embarking on the eurozone project in the first place. As I have previously argued in this column, the creation of a monetary union embracing highly productive states and relatively unproductive ones is inherently unstable.

Other commentators have recognised this problem in the abstract but few have followed the insight through consistently. Although the abolition of the eurozone would be destabilising, the alternative of keeping it going is likely to be even worse.

Unfortunately the solution to the eurozone’s problems is not as simple as putting pressure on Brussels to repatriate power to the national authorities. There is a twist in the tale that eurosceptic critics of the EU miss.

James Heartfield, a cultural commentator, has argued convincingly that weakened national legitimacy since the 1980s has helped create the demand for European integration.

“Driving the coalescence of the European elites is the collapse of the internal dynamic that makes the different national actors into sovereign states,” Heartfield says. “The movement away from mass political contestation robs nations of the inner life that causes them to formulate national strategies and goals.”

From this perspective this integration is itself the result of the demise of democracy on a national level. The mass of the population has become estranged from politics.

As governments have become more technocratic, and therefore unresponsive to public needs, the public has become deeply cynical of politicians.

The fundamental challenges facing the eurozone are not financial or even economic. Reconstituting a genuinely democratic political life is a precondition for a positive resolution of the economic crisis facing Europe.