18/04/2012 by

In an astute commentary on the INET panel in which I appeared (see here for the text), to talk about Europe’s future, Eves Smith had this to say: “It is worth noting that one of the questions after the various presentations on the Eurozone mess raised the issue of the ‘democratic deficit’. The various speakers endorsed the idea of getting public approval, but they implicitly or explicitly acknowledged that it would be after the fact. Erm, so since when do you approve a fait accompli?” Yves is spot on. My excuse for not addressing perhaps Europe’s worst ‘deficit’ is that my task was to squeeze within my 20 minutes three policy proposals for dealing with Europe’s three crises (banking crisis, debt crisis and the hidden crisis due to under-investment and to the internal imbalance of payments). I only wish I had five more minutes to explain that these three policies are also our best chance for redressing the Eurozone’s democratic deficit.

The very structure of the European Union (inter-governmental rather than federal) puts a great distance between citizens and the EU itself. This is why, quite naturally, even though most Europeans are pro-Europe, the EU is rather unloved (and, for some, positively loathed). Then came the Eurozone. A currency union predicated upon a single institution (the ECB) that is, by design, unaccountable and, to boot, geared towards shifting the burden of an economic crisis from the social classes and strata whose actions helped cause the crisis to the weak shoulders of those who never benefitted from the preceding boom. Since such a ‘shift’ causes adverse popular reaction, the ECB is a natural ally of the domestic political forces (especially in the deficit member-states whose population bears the brunt) whose task is to bend the electorate to their will, and to the ECB’s will. To all intents and purposes, an economic crisis in the Eurozone ends up creating a form of neo-neo-colonialism within the world’s most advanced ‘democracy’ – within the EU.

In short, the awful architecture of our common currency, which was never designed to deal with a crisis like the current one, reacts to the unplanned for crisis with savage incursions into the democratic process of the deficit countries, whose populations must be beaten into a pulp until they surrender their spirit to the irrationality of the ‘cure’ (bailouts plus austerity). And since no one can remain free when others within their broader community are turned into slaves (to paraphrase Hegel), the democratic losses of the periphery soon expand to the core, the result being that Greece’s and Ireland’s democratic deficit soon spreads to Germany and Holland, diminishing the democratic processes of the surplus countries. In the end, as we have been witnessing in the Eurozone over the past two years, governments everywhere are misleading their parliaments and their people.

To put it simply, whereas in economic terms when one is in deficit someone else must be in surplus, in political terms we can all end up in a democratic deficit. The galloping Euro Crisis is dismantling the last vestiges of Europe’s democratic processes everywhere. Not just in the periphery. A necessary, though not insufficient, condition for ending this sad dynamic, and redressing the democratic deficit is to put an end to the Euro Crisis in a manner that does not give more discretionary power to the centre, to unelected officials, to ECB-like ‘rulers of the universe’.

The trick here is to find a way of decentralising power while, at the same time, Europeanising our responses to the three crises (banking crisis, debt crisis and the hidden crisis due to under-investment and to the internal imbalance of payments), i.e. managing them at the level of the Union, without creating new Czars that will tell electorates what to do and how to do it. Can this be done? It is my contention that the Modest Proposal’s implementation would achieve this. Notice that all three policy or programs it recommends (one per crisis) involve moves to be taken by Europe’s existing institutions which will now have to carry a lot more of the burden (compared to national governments) but in a manner that robs them of (as opposed to granting them additional) discretionary power. Let’s see them one by one:

Policy 1 – Public Debt Management by the ECB: On the one hand, the ECB is given a major task it currently does not have (to at as a go-between member-states and the international money markets). However, note too that the ECB gets no new discretionary power, in the sense that this debt conversion that it will now perform (on behalf of nation states) will be done on the basis of an automated rule, without conditionalities (except the super-seniority of the member-states’ ECB-debit accounts) and without negotiations between the ECB and member-state governments. Given the present state of affairs, where Mr Draghi sets conditions (of more austerity) to the Spanish or Italian governments for extending liquidity to them (via their insolvent banks or, again indirectly, through more ECB purchases of their bonds in the secondary markets), Policy 1 reduces substantially the ECB’s discretionary power over member-states. In brief, it gives the ECB an important new task while, at once, restoring power to the member-state (and without giving the latter more room to be ‘irresponsible’ – since the ECB’s debt conversion operations will only apply to the nation’s Maastricht Compliant Debt).

Policy 2 – Investment-led Recovery and Re-balancing Program:  Again, while a great burden of responsibility is now placed on European institutions like the European Investment Bank, the European Investment Fund and the ECB, the idea is again to do it in a rule-bound manner. To quote from my previous post: “the distribution of investments among the Eurozone’s regions (as opposed to member-states) may be calibrated, by means of a pre-agreed formula, in proportion to each region’s balance of payments deficit within the Eurozone”. Compliance to this formula means that, while a great deal of power (to reverse the Eurozone’s recessionary forces and to deal with its internal imbalances) will be transferred to the Centre, no increase in the Centre’s discretionary power will follow it.

Policy 3 – Unifying the Eurozone’s banking sectors: One of the greatest threats to democracy at the level of both the nation state and the Eurozone comes from what I term Bankruptocracy. The Eurozone’s Bankruptocracy is founded upon the cosy relationship between national elites (government, business etc.) and local banks. It must be broken down. Policy 3 does this effectively by shifting the responsibility of supervising and recapitalising banks to the Centre, while insisting that any recapitalisation will involve the transfer of equity from the private banks to the Eurozone. Such a policy, if implemented, would deal a massive blow to forces that are cultivating, nurturing and boosting the ‘democratic deficit’ in every nook and cranny of our nations and of the Eurozone.


Yves Smith was right: We should have addressed the question of the democratic deficit. And we did not. Some because, as economists, our mind’s eye cannot see beyond prices and quantities while others because we just did not have the time. In the preceding text I explain that which I missed out in my talk regarding the way our Modest Proposal deals, quite effectively, with the democratic deficit, in the process of arresting the Eurozone’s banking crisis, its debt crisis and the hidden crisis due to under-investment and to the ever increasing internal imbalance of payments.

Having said all this, democracy is a fragile flower that can never fully bloom while social power is distributed so liberally toward those with a near monopoly on the ‘value extraction process’. The Modest Proposal cannot address this larger issue. What it can do is give democracy the best chance it has within the type of world we live in.

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