Democratic crisis threatens Europe

Democratic crisis threatens Europe

27 Oct 2010

stefan-auer-thumb Dr Stefan Auer

First published in The Australian on 22 October, 2010.

Nicolas Sarkozy's problems in France are a foretaste of fundamental challenges to Western democracies: the inability to govern with growing sovereign debt.
The problem is not new, but the radicalisation of protests in France is giving it new urgency. Over time, Western governments have accumulated financial obligations towards their electorates, which they can no longer serve. The problem was described in January this year by a US economist, Gene Steuerle, in USA Today as "fiscal sclerosis", or "fiscal democracy". According to Steuerle, the US was broke because its mandatory spending consumed all its income, resulting in all its discretionary expenditure being financed from unsustainable debt. Every single dollar and cent earned through taxes last year had to be spent on serving past commitments and interest payments. "Fiscal democracy" is not much of a democracy, because democratically elected leaders have no space to manoeuvre, as their hands are bound by 'the programs and ideas of the past - even dead - policymakers".

Steuerle was not writing about Europe. However, a recent study released by the Max Planck Institute for the Study of Societies showed his diagnosis was applicable to Europe's most powerful economy: Germany.

How quickly times have changed. Two years ago, when the global financial and economic crises peaked in the US, some people in Europe seemed unable to hide their glee. The respected German newspaper, Frankfurter Allgemeine Zeitung, which is not known for sensationalist headlines, opined that "Europe was not America". In the meantime, it has become clear that Europe's predicament is as bad as the one in the US, if not worse.

In addition to extremely high sovereign debt, most European countries - with the notable exception of Ireland and France - have problems with demography that the US does not have.

European societies are ageing, and fewer children means that a steadily declining number of people have to serve the state's growing welfare obligations. Beyond that, the political system itself is becoming sclerotic, proving unable to respond to changing circumstances. From an Australian perspective, the uproar in France over increasing the minimum legal retirement age from 60 to 62 has an air of unreality about it. Even more surprising is the fact the protests were significantly boosted by the support of students - that is, that part of the French population bound to lose out from the unsustainable sovereign debt.

Europe, too, is basically broke. Applying Steuerle's concept of fiscal democracy, Wolfgang Streeck, from the Max-Planck Institute, calculated the levels of mandatory spending of the successive German governments over the past four decades have increased. As in the US, they were not matched by an increase in government income, leading to a severe reduction of fiscal flexibility.
"The crisis seems about to eliminate almost completely any space for fiscal discretion in the foreseeable future, unless governments are willing and able economically and legally, to take up new, additional debt," he said. In other words, even Germany, which is the star performer in the Eurozone, is perilously close to the condition of fiscal sclerosis.

Yet Europeans live in denial. Their problems are exacerbated by the lack of strong leadership. Politicians in major European economies lack legitimacy (as in France), sufficient courage (as in Germany), or both (as in Italy).
The massive support that anti-government protests in France have received so far says probably as much about the general dislike of Sarkozy as it does about the lack of public understanding of basic economics: only a solvent country can pay pensions, or meet other commitments promised by successive governments.

In Germany, no politician has dared to spell out a viable strategy to address the demographic challenge.

In Italy, Silvio Berlusconi is too busy with his personal affairs to deal with the affairs of the state's economy. And what of Brussels? While the European Commission is sensibly pressuring all member states to cut their debts and budget deficits, it is keen to increase its own budget.

Whatever the outcome of the haggling between the EC, the European parliament and the 27 member states - whether the EU budget will be increased by 5.9 per cent as originally demanded, or 2.9 per cent as was reported to be likely at the time of the writing - Brussels is not going to lead by example. While public servants in most countries are forced to accept significant pay cuts, the automatic salary increases of EU bureaucrats have been written into EU law, which makes them extremely difficult to change.

The global financial crisis threatens to turn into a crisis of democratic governance.

The prospect of a double-dip recession, which some economists fear, would not just be a serious blow to the European welfare state - it could endanger European democracies themselves.

Dr Stefan Auer is the senior lecturer in history and politics at La Trobe University, and deputy director of the Innovative Universities European Union (IUEU) Centre. He is holder of a Jean Monnet chair.




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