The assassination of Boris Nemtsov on 27.2.15 brings into new light the problems of Russian Democracy. The failure of Capitalism to translate into Democracy is evident in both Russia and China and as I argued in my 2010 book places the whole policy of the West as to democratisation via marketisation in jeopardy. Of course it is convenient to blame the death of Russian democracy on Putin and the inadequacies of the Yeltsin regime that preceded him. Within this narrative of blame it is easy to excuse the corrosive influence of western advice and the neoliberal ideas that were tested on Russia in the 1990s. I have argued that defects in marketisation and the downgrading of democracy inherent in neoliberalism could have led to little else than the oligarchic illiberal capitalism that one sees today in Russia.
While Putin presents a problem that the west needs to address, both for its domestic and international consequences (Ukraine), the failure of the idea of markets as a Trojan horse for democracy should worry us more. Thinking marketisation or liberalisation clearly no longer means democratisation. Western institutions like the World Bank and the IMF better remember this when they propose ‘market friendly’ interventions across the world.
A discussion on Twitter on the Euro being a political decision and the aims of the ECB started by @europeansunited as a response to comments by Valéry Giscard d’Estaing that Greece should exit the Euro, has reminded me of an analysis of institutional independence I included in my 2013 book. It is worth remembering that in discussing regulatory reform we must recognise that the regulation of the economy is not just a matter for law and economics. Regulatory interventions, or the lack thereof, can have severe consequences on the political economy of a state and changing popular perceptions of the functions of law can have direct effects on the democratic legitimacy of institutions. The substitution of state regulation by independent regulators is an example of the negative effects of de-politicisation on perceptions of legitimacy. Independent, non-state regulators are meant to achieve the aims of market support without abandoning the still dominant perception of the market as primarily self-regulating. The creation of allegedly non-political, independent institutions however means institutions isolated from the political and by extension democratic process. The ECB for example prides itself in not seeking or taking instructions from European Unon institutions or bodies, from any government of an EU Member State or from any other body, in determining its price stability policies. Considering however the effect on the economy that the setting of interest rates has, some degree of political input in the Bank’s decision making would be at least desirable, if not required. It is no wonder that the institutional independence of the ECB does not improve public perceptions of the EU as a democratically deficient structure.
A times of severe economic crisis and recession, selecting types of self-regulation over political control can be a particularly politically dangerous route to follow. As suggested above, using the example of the ECB, central bank independence ensures that monetary policy is determined solely by ‘economic’ concerns. This ensures the pursuit of policies deemed good for the ‘investment climate’. It also, however, dis-empowers governments; they are less able to control the economy or to pursue expansionary economic policies necessary to achieve wider social objectives. When elected representatives are unwilling or unable to deal with fundamental economic issues, there can often seem to be little difference between democratic and authoritarian government. De-politicisation creates a legitimacy vacuum which can damage people’s belief in democracy. Is it really beyond explanation that the Greeks, faced with the longest depression the world has ever seen, abandon traditional politics in favour of extreme, even fascist alternatives? Further reforms aimed at addressing these problems often create a new set of difficulties, not least because they usually seek to build on structures which are little respected. This risks a downward spiral that affects legal and institutional structures alike. If the traditional parties of power have become transmission mechanisms for policies demanded by international lenders, would you vote for someone so anti-systemic so as to be against democracy itself? In 2012 in two successive elections 7% of Greeks voted for the neo-nazi group ‘Golden Dawn’. Have we come to a point where the institutional structures of financialised capitalism point to an abandonment of democracy? What is one to make of German Finance Minister Wolfgang Schäuble’s pronouncements that the Greek Bailout Programme targets are to be respected despite the express wishes of the Greek people as marked on 25.1.15?
One consequence of the de-politicisation of economic decision is to make many citizens today quietly contemptuous of democracy. Either one considers that others are not competent to be consulted as to how a country should be run, or one thinks that whatever people think is irrelevant, as the political system is captured by an ‘establishment’ that renders democratic processes a sham. This nihilism is a very dangerous aspect of our times. Being disinterested in democracy is a threat to the survival of the only workable idea of government we have left today. After having tried different versions of authoritarianism, from paternalist dictatorship to self-interested oligarchy, the world seems -by a process of elimination- to be left with liberal democracy. This has been claimed to signify a so-called ‘end of history’ according to authors like Francis Fukuyama. While talk of an end to history is of course non-nonsensical, the question nevertheless remains: is there an alternative to democratic capitalism available? The opposing doctrine of course is not theocratic dictatorship as implied by easy to digest, yet empirically false claims of a clash of civilisations, but an evolution of liberal democracy along a different path. Such path cannot open however unless we are willing to re-examine how we got here and whether we want to use our democratic institutions to determine where we want to get to. Does Syriza in Greece and the efforts of Prof. Varoufakis point the way?
I promised in a previous post to explore the options for default within the Eurozone. Here is an idea from FP. The Greek government could meet its domestic obligations, such as pension payments, by issuing tradeable IOUs that could also be used to make tax payments — in effect, creating a parallel currency. This virtual money could also be used for other purposes: for instance, to recapitalize ailing banks. That would enable the Greek government to default on its EU creditors relatively painlessly, while remaining within the euro.
With the fate of Greece dependant on Eurogroup deliberations, many are wondering what this body is and what is its place in EU decision making.
The Eurogroup was created by a European Council decision in 1997 as an informal forum for close policy dialogue among the most relevant decision-makers in the euro area. It was not assigned any legislative decision-making competences. Its members include the finance ministers of the countries having adopted the euro as their currency, the commissioner for economic and financial affairs and the president of the ECB. Puetter explains that while the Eurogroup predates the Lisbon Treaty, Lisbon formally recognised the role of the group. The Treaty expands the scope of decisions on which the euro area countries can decide amongst themselves. This formalises the practice of de facto domination of ECOFIN through the Eurogroup. The Eurogroup is still characterised by informal working methods comprising of discussions among finance ministers, the Commission and in particular with the ECB.
See below for an indicative bibliography:
Secchi, C. (2009) (Istituto per gli studi di politica internazionale)
Liberalism in Crisis?: European Economic Governance in the Age of Turbulence, EE
Begg, I. (2008), ‘Economic governance in an enlarged euro area’, European Economy – Economic Papers, (311)
Hodson, D. (2011), Governing the euro area in good times and bad (Oxford: Oxford University Press).
Puetter, U. (2006), The Eurogroup: how a secretive circle of finance ministers shape European economic governance (Manchester: Manchester University Press).
— (2012), ‘Europe’s deliberative intergovernmentalism – the role of the Council and European Council in EU economic governance’, Journal of European Public Policy, 19 (2)
The latest failed Eurogroup on 16.2.15 has led to talk of legality in keeping Greece focused on fulfilling its obligations to its creditors. It is fanciful however to consider the Maastricht convergence criteria (or ESM obligations) as legal obligations in the strict sense, especially when the former have been honoured via violation from the point of their conception.
Even if one agrees that this ‘legality’ means something for Greece, the overall legal wrapping of austerity served to delegitimise law and the enforcement tools of Troika imposed policies.
This is the topic of my paper on Law and Austerity recently published on the TNI website. Click here for details.
Here is my explanation of the dynamics behind the financial crisis. See the slides below, while listening to the audio file.
The events of the last few days, present us with a worrying path towards Euro disintegration. This post presents in summary what is happening and possible options for the Greek government and the Eurogroup. I need to stress that this does not need to happen and that there is time for all parties to reach a negotiated solution. In this Varoufakis is not to blame as the Greek government is very willing to reach a compromise. It is Germany which needs to consider whether the following sequence needs to play out in this way.
Up till 26.1.15 (the day after the Greek election) Greece was receiving funding primarily from the Troika (represented here by a nice set of IKEA scissors), to a small degree by markets (there were a couple of test sales of Greek bonds in 2014) and the ECB was supporting the Greek banking system, accepting Greek bonds as collateral (via a waiver to the normal rules for collateral).
After the election and the decision of Syriza (it was elected to do this) not to continue with the Troika agreed programme, Greece is not due to receive more funds from the Troika, nor is it currently likely to borrow in the markets (spreads have shot up since the election). This meant that the only interim avenue for funding would be via Greek commercial banks buying Greek sovereign debt and depositing it with the ECB/BoG as collateral for liquidity support.
On 4.2.15 Draghi closed this avenue of funding by withdrawing the ECB waiver that allowed the low-rated Greek bonds to be accepted as collateral. This leaves the Greek government with only one option of borrowing: through its banking system by drawing liquidity from the Bank of Greece via the ELA. The ELA is available as the ECB collateral rules do not apply.
How secure is this avenue for funding? Can Greece rely on the ELA for back-door financing via its banking system (and ultimately the ECB) if all other funding avenues are unavailable indefinitely? This is where things get dangerous. The ECB (see earlier posts for explanations) can control the extent (in time and value) of the ELA and if the BoG authorises liquidity support for the sole purpose of funding government expenditure through commercial channels, then the ECB is likely to want to shut the ELA down.
What are the options for the Greek government if that happens? Sadly, there are not many options. It can choose to selectively default on internal or external debt (or both). Or it can pressure the BoG to ignore the ECB and continue with ELA support. In the former case, we need to consider the consequences of default within the Eurozone (this will be the content of a future post). In the latter case, we need to consider the tools the ECB has for shutting down unauthorised ELA. The only way it can do this (barring being persuasive) is to order the other NCBs in the Eurosystem to stop lending to the BoG. This effectively (and immediately) segregates the BoG from the Eurosystem (see earlier posts) and brings the Grexit scenario into fruition. The consequence will be a Greek Euro and the old Euro, with fluctuations in their relative values. This is not a scenario we wish to see in practice.
I hope all the above demonstrates why a solution to Greece’s funding needs has to be found. No-one can afford an ECB/NCB conflict scenario. So I would urge Dr Schaeuble to realise things have changed and start thinking how to resolve this sensibly.