Eurozone policymakers are running out of ideas, and have taken to repeating old ones louder. In financial markets, some think that in the end the ECB will print and there will be very high inflation. Many others (including in the British political establishment) think there will be mass defaulting either leading to or as a result of the collapse of the euro — as Jeremy Warner put it on Friday morning, reflecting a certain kind of sentiment:
“What they are preparing for is the biggest mass default in history. There's no orderly way of doing this. European finance and trade is too far integrated to allow for an easy unwinding of contracts. It's going to be anarchy.”
I haven’t given up yet. I’ll keep pushing my schemes until the point they can’t be implemented, then I shall propose something else. But let’s suppose that matters go as now seems, if not yet favourite, then certainly highly plausible — namely that there is a disorderly collapse of the Eurozone leading to mass defaulting on debts, the collapse of much of the Eurozone banking sector, and the worst recessions seen in modern Western democracies. I’ve sketched before what some of the economic consequences of this might be. I observe that my position is much more optimistic than, say, that of the European Commission — the stated position of which is that the collapse of the euro would lead to an instant halving of the size of the Eurozone economy. On this occasion I want to ponder a little about the political, as opposed to socio-economic or financial, consequences of this.
Across Europe, almost everyone understands the threat of euro collapse as an extension of the banking crisis. They’re right to think that, but it doesn’t matter for now whether they are right — that’s what they think, and that’s what legend will say was the cause, if it does collapse. Now, virtually everyone agrees that the banking crisis / Eurozone crisis is a political failure. We might disagree how politics has failed — some of us think the key failure was not regulating the banks enough, others think it wasn’t supervising them enough, others think it was promising to bail them out and then doing so, others that it was keeping interest rates too low after the dotcom crash, and some think the banking crisis is a direct result of the formation of the euro. Regardless of how politics has failed, virtually everyone agrees that it has — virtually no-one thinks the banking crisis is just one of those things; it’s not like the Mexican earthquake, or a series of bad harvests, or the dotcom crash. We all feel that policy has been wrong in some way.
And the consequences are widely (and correctly) regarded as an utter moral outrage. Some people (we might be vague precisely who — was it bank employees, or shareholders, or depositors, or bondholders?) did very well for themselves in the good times, and then when it all went wrong the taxpayer picked up the bill.
Now join the dots. We have something regarded as a political failure, which is a moral outrage, which (let us assume) causes multiple sovereign defaults and a recession on a scale beyond modern experience or comprehension in a developed economy. What will the citizens of Europe think of the efficacy of the political systems and political classes that have, morally-outrageously, led them into such disaster?
Surely those political systems and political classes will, in many cases, be overthrown. Surely they deserve to be overthrown. The key questions are whether their overthrow will be orderly and peaceful, and what will replace them.
What are the key features of the political order that has dominated Europe these past few decades, and has now experienced systemic failure? Here are some. It is:
Now it is perfectly possible to argue that some of these features have been irrelevant to the systemic failure here, whilst in other cases the problem was that there was insufficient of the characteristic, rather than too much. For example, many commentators might suggest that the system’s being secular and constitutional are irrelevant, whilst a problem was that it was not democratic enough. But this will not be everyone’s point of view. There will be those (like myself) who claim that when something so morally outrageous occurs, that does not speak well for the virtues of secularism. The majority opinion in the press is that our society has been too liberal, allowing things that should have been forbidden. Smart policymaker opinion is that national policy-setting has proved incompatible with globalisation — we need much more international policy-setting. But many others think that the right lesson is that international cooperation through bodies like the EU had gone too far.
The aspects I’d like to highlight, though, are the democratic and the constitutional. It seems very likely to me that a sufficiently terrible recession would break the belief in the merits of democracy across much of Southern Europe. It has long been the case that Italians were sceptical about whether any politician could deliver them a macroeconomically-stable, just, low-corruption society. In the 1990s they were only too eager to contract out management of inflation to German bankers in Frankfurt — whilst in Britain in the 1990s we regarded the claim that joining the euro would mean having our economy run by unaccountable German bankers as an argument against joining, in Italy precisely the same argument was offered as the main case in favour. A key merit of the European Union was precisely that it by-passed what was regarded as a pathologically-corrupt and failing Italian domestic political system. The very point of the European project was that it was undemocratic.
Indeed, that is true more generally around Europe. The EU has been a political elite-driven project, the central purpose of which was to provide a mechanism for imposing regulatory and constitutional changes on countries (e.g. liberalising, deregulating, keeping down inflation) that they would not reliably choose from their own domestic democratic processes. The EU has always been a device whereby the outward forms of democracy could be maintained whilst the key policy decisions could be made against the democratic will. (And I say that agreeing that it has been a Good Thing.)
Greece’s recent experiment with democracy has not been going very long — when I was a little boy, it was a country run by the military. Greeks understand full well that their process of “democracy” has consisted of power being shifted around between the hands of a small number of well-connected families. And they now see democracy replaced with EU-imposed dictat – “probably an improvement, if truth be told” is surely the sentiment of many. The current Greek political order and constitution would be fortunate to survive a further halving of GDP, mass bank runs, and the other calamities Greece would / will suffer upon euro exit. Even as matters stand, the Greek government fired its top four military chiefs, just a few weeks ago, subsequently confessing that was because it feared a coup. And if the constitution falls in Greece, can trouble in Cyprus be far behind — whether from Greek forces or Turkish?
Portugal and Spain were dictatorships in my lifetime. Like in Greece, one of the great achievements of the European Union was the locking in of liberal democracy in the Iberian Peninsula. How dependent is the continuation of the outward forms of liberal democracy upon the continuation of the European Union — that fundamentally and purposefully undemocratic institution? King Juan Carlos himself was groomed in his youth to be Franco’s successor — how bad must the unemployment be before there are those who will say: “Make it so”? If the Portuguese leadership cannot maintain order after the banks collapse, will there not be those that think they remember how orderly society was under Salazar?
And that is before we get to Eastern Europe. Slovakia, of course, had an authoritarian regime as recently as the 1990s. But in how many other cases would many citizens find it easy to shrug about some further constitutional overthrow and say: “Well, at least it’s not the Communists back.”
I’ll say it again: given how morally-outrageous the policy failings have been that led us here (and setting aside for now the debate about precisely what those failings were), if such morally-outrageous actions drive much of Europe into unprecedented depression, political orders and political classes will not deserve to survive. Their replacement will be a moral imperative. If there is a huge depression, the question will not be whether there is an overthrow of the established political order across many parts of Europe. It will only be whether that overthrow is peaceful, and what will replace it. And, especially given (a) that a key merit of the EU has been its anti-democratic nature; and (b) many EU member states have only a very recent history of being liberal democracies, and locked in the outward forms of liberal democracy by joining the EU shortly after democracy was introduced — especially given these things, we should by no means assume that, if the EU collapses, liberal democracy will be the main choice European countries make in their new political orders.