The Crisis of the Democratic State in Europe

This working paper titled ‘Political Tensions in Euro-Varieties of Capitalism’ argues that the European response to the financial cum fiscal crisis in the Eurozone is leading to a democratic crisis of the state. It has exposed a tension between the national and the supranational in a multi-level polity whilst opening up new political cleavages between the core and periphery of Europe. This dilemma has become particularly acute for program countries that are either directly or indirectly in receipt of non-market financial funding from the Troika. In the absence of exchange rate adjustments, Ireland and Southern European countries must pursue an internal devaluation that shifts the entire burden of adjustment on to fiscal and labour market policy.  National governments, regardless of political partisanship, are required to comply with external EMU mandates and liberalize their welfare state, cut public spending and impose market conforming structural reforms. The core argument of this paper is that imposing a one size-fits-all neoliberal solution to diverse economic problems across different varieties of capitalism is the real source of the Eurozone crisis. Using a cross-country comparative analysis of Greece, Ireland, Italy, Portugal and Spain I conclude that this is an outcome of inbuilt institutional and macroeconomic asymmetries in the EMU. But it is leading to unprecedented electoral volatility and a legitimation crisis of the democratic state in Southern Europe.

Critical feedback most welcome: aidan.regan@eui.eu

Machiavelli and the Political Response to the Eurozone Crisis

This year is the 500 anniversary of the publication of Niccolo Machiavelli’s Il Principe (The Prince). The European University Institute (EUI) will hold a conference next week to discuss various interpretations of this infamous book. I will present a paper that attempts to ask what Machiavelli would say about the political response to the current Eurozone crisis. It is not an attempt at democratic normative theory but an inquiry into what Machiavelli can contribute to comparative political economy. More precisely it asks why citizens in Europe should comply with external mandates of the EMU.

The paper argues that Machiavelli has been influential in political science because he systematically analysed the strategies pursued by leaders to consolidate their power. In this regard it was shift away from normative to empirical political theory. I argue that political leaders in Europe today must legitimate their policy decisions to the electorate. There are two ways to do this: input or output legitimacy. Input legitimacy means that governments respond to the preference of the electorate by designing policies that satisfy their interests. This is currently lacking for countries in Troika adjustment programs.

In the absence of input legitimacy national governments can legitimate their policies if the outcomes lead to effective performance such as strong economic growth or full employment. The crisis of the Eurozone is a causal outcome of an absence of both input and output legitimacy. The European response has been to promote technocratic economic policies insulated from politics. The lesson to be learnt from Machiavelli is that such a response is not viable. Incumbent governments will be punished by their electorates leading to unprecedented political volatility in the Eurozone.

The paper concludes that it would be perfectly legitimate for heads-of-state in Ireland and Southern Europe to make a credible threat to leave the Eurozone.

Understanding the Fiasco of Italian Politics

The clear winner of the Italian elections was Beppe Grillo and the Cinque Stelle Movimento (5 Star Movement). They emerged out of nowhere to take 25 percent of the vote, recording the largest ever increase for a party entering their first election. They now hold the balance of power in parliament but have no interest in entering government. Italy has a hung parliament and unless the social democrats strike a suicidal deal with Berlusconi (which Grillo wants) a new election is likely. Presently, the government are electing a new president who will be tasked with trying to forge a grand coalition. In the unlikely event that this occurs those who are likely to benefit from a new election, according to recent polls, are Beppe Grillo and Silvio Berlusconi; two masters of populist leadership which attracts so many votes in Italy. It is the undesirable outcome of the personalization of politics, and something the left have proven incapable of adapting to.

Whilst the social democratic; ‘Partitio Democratico’ (PD), led by Pier Luigi Bersani emerged as the largest party, taking 29.5 percent of the vote, this is less than 8 percent of what they took in the 2005 elections. In a context of an unprecedented financial crisis, recession and austerity, this massive drop in support is being heralded as a clear crisis for the centre-left. Furthermore, for the first time in Italian elections, the far-left failed to get above the 4 percent threshold, taking no seats in parliament. Some have argued that had the social democrats elected Matteo Renzi instead of Pier Bersani, they would have taken an additional 7 percent of the vote. Renzi (the mayor of Florence) is young, charismatic and understands the dynamics of contemporay media driven politics. For the traditional left he is nothing more than a centrist promoter of Blairite New Labour. But he appreciates that there are votes in the centre and that Italians, more than most, have a tendency to support personalities (the social democrats were the only party to not put a picture of their leader on posters). If a new election is to be held Renzi will probably strike for the leadership.

Another important observation to be taken away from this election was the outright rejection of Mario Monti and his centre right civic movement, who won a mere 10 percent of the vote. This is less than what was gained by the pre-existing centrist parties that he gathered to form his civic movement. Some have argued that the vote against Monti was a vote against European austerity. There is an element of truth in this. His reforms were widely criticised as having depressed domestic demand, leading to increased unemployment. But the policy reform he introduced that led to most criticism was the re-introduction of a property tax. This has nothing to do with Europe. The role of EMU in shaping the Italian crisis was secondary to domestic politics in this election. In fact, the Italians don’t even have a word for ‘policy’, it is all about ‘politics’, and Monti simply did not fit the bill for what makes a successful politician in Italy. The respected technocrat was demolished by the political campaigning force of Berlusconi. But importantly, one must think about the counter-factual situation of what would have happened if Monti had not entered the election? He split the right-wing vote and kept Berlusconi and the PDL out of government. If this is the case, then Monti’s succeeded in his task of saving Italy from Berlusconi.

Berlusconi’s centre-right ‘Popollo Della Libertá’ (PDL) emerged as the second largest party, taking 29.18 percent of the vote. Some have lauded this as a political comeback but this hides the fact that it was the biggest ever defeat for a sitting party in Italian elections. The PDL lost 16 percent of the vote. This is much like what happened to the Christian Democrats in the late 1980′s. They probably would have lost more if Berlusconi had not promised to personally re-fund the property tax if elected. It is only because of a peculiar electoral law that Berlusconi has a commanding majority in the house of deputies – and hence a cliam to form a government. The outcome is that there are 8 possible majorities that could facilitate a coalition government. Bersani and the PD must be part of 7 of these. The only real possibility, however, is Grillo supporting the social democrats. He has categorically ruled this out. Hence, Italy is in the hands of Beppe Grillo who does not play by the rules of representative democracy. Is this a crisis for Italy?

The short answer is yes. The two main parties of the left and right have lost their largest share ever in Italian elections. It was the second most volatile election since WW2. The volatility can be explained by a change in ‘supply’ (i.e. the entry of a new party). Hence to understand the political fiasco of Italy we have to explain the success of Beppe Grillo and his 5 star movimento. In much of the Italian press they are dismissed as a joke led by a quasi-authoritarian comedian. In truth they are a mix between the German pirate party and anti-establishment populism, with a charismatic political leader. The emphasis they place on participatory democracy is not practised within the party. Their policies are predominately left wing even if they refuse to call them so. In terms of the candidates who ran under the platform of the Movimento, according to research carried out at the Bacconi institute, they were the youngest, most female represented, and most educated of all the political parties. In this regard, the movimento are more reflective and representative of Italian society.

Those who voted for Grillo and the Movimento, however, do not reflect this profile. Most of their vote came from small towns and municipalities with traditionally low-voter turn out. This might suggest that a vote for Grillo was an alternative to abstention. The social democrats continue to take most of the votes from those with third level education. Those with secondary level education were most likely to vote for Grillo. Berlusconi and Grillo, in this regard, take their vote from what would have been traditionally called the ‘working class’. The Italian left, as far back asGramsci, have always tried and failed to mobilise this section of the electorate. Grillo seems to have succeeded. But this has little to do with their ‘new internet’ approach, given the age profile and broadband coverage of those living in these rural municipal areas. In truth, Grillo mobilised the disaffected, and those who are fed up with the Italian political caste. This is all the more remarkable when one considers that the movimento refused to deal with the mainstream media throughout the campaign.

This leads me to the conclusion that Beppe Grillo and the Movimento won this election because they tapped into mass popular discontent toward what the electorate perceive to be a self-serving corrupt political elite who have ransacked Italian instiutions for their own gain. This has little or anything to do with European imposed austerity. Italians are feeling the reccession but blame poor economic performance on domestic not European politics. It is remarkable that throughout the election campaign Bersani and the social democrats never mentioned corruption once. Needless to say, Berlusconi didn’t either. But it was the central message of the Movimento. If one accepts that the real crisis in Italy is institutional and political (in the same vein as Daron Acemoglu would argue) then the Movimento are a counter-political backlash against an old regime that needs to change. It is quite another thing to argue that the Movimento can be the agent of this change. But it does pose a serious dilemma for the Italian left. They failed to win after the collapse of the Italian system in 1994 and they have failed to win again today. In the absence of a serious alternative to Monti (technocratic) and Berlusconi (populist) the electorate will flock to the Grillo and the Movimento, with unforseen consequences.

Week 8: The Sovereign Debt Crisis in Ireland and Southern Europe

This class is an examination into the sovereign debt crisis afflicting Greece, Ireland, Portugal, Spain and Italy (the so-called GIPSI countries). In these countries the core assumptions of comparative political economy that domestic institutions and political choices lead to differing responses to crisis does not seem to hold. External constraints associated with membership of the EMU seem to be more important than domestic institutions and politics.

For Baccaro and Armingeon (2012) the sovereign debt crisis reveals two things: a dramatic shrinking of the policy space for peripheral countries as a result of monetary unification, and an in-built neoliberal bias of the Euro project. The common GIPSI response is to engineer an internal devaluation vis-á-vis Germany and other trading partners. This has been forced on to countries either directly as part of EU-ECB-IMF (troika) bailout packages or indirectly by interest rates in the sovereign bond markets.

EMU countries are being forced into a procyclical fiscal policy (austerity in a time of contracting growth) which, according to the IMF, is proving to be self-defeating. They are imitating an internal devaluation – focused on cuts in public sector pay, numbers and services. For Baccaro and Armingeon (2012) the only choice left for governments is the process through which they legitimate policy decisions: technocratic governments, grand parliamentary coalitions, concessionary social pacts.

Week 7: National Policy Responses to the Great Recession in Europe

A central question guiding this class is how to explain the cross-national variation in policy responses to the Eurozone crisis in the core and peripheral economies of Europe. This week we will examine the European wide fiscal response, government responses in Germany and France, and conclude with an examination of Northern Europe. We begin with an analysis of the factors we might think are likely to explain variation in government responses to an economic crisis: International institutions, government partisanship, domestic policy legacies, and economic ideas.

Jonas Pontusson and Nancy Bermeo identify three major themes from their edited comparative study into the policy response to the great recession when compared with the long recession of the 1970’s: international institutions have failed to play an ameliorating role than anticipated, the menu of policy choices has narrowed considerably and changed in content, the core insights of the varieties of capitalism framework in comparative political economy hold less weight than might be expected.

Week 6: Europeanisation and the EU Budget

This class examines who gets what, how and when in the EU budget. Agriculture and regional expenditure remain by far the biggest spending blocks. Lisbon gave treaty status to the multi-annual planning process which has signigficantly increased the role of EU parliament. The divide between net beneficiaries and net contributors to the budget, however, has never been larger

Week 5: The Impact of EMU on industrial relations and wage setting

The historical origins of the German model of ‘coordinated market capitalism’ was premised on the limited mobility of production factors across national borders, a situation that no longer exists in Europe. The domestic politics of class compromise that constituted the domestic regime has been replaced by international diplomacy of market making at the EU level, ruling out the drive toward accommodating conflicting political interests in the national arena.

This lecture asks whether market modifying and market correcting political intervention in the economy, particularly labour market, industrial relations and employment policy, can only take place within nation state. It probes whether Europeanisation in general, and EMU in particular, favours national regimes that are constructed around a liberal market model. If so, what does this mean for the future of national industrial relations and wage setting systems in the Eurozone?

Week 4: The Double Asymmetry of European Integration

The European Economic Community, up until the 1980s, was based on intergovernmental negotiations to remove trade barriers in the construction of the single market. Public services functions, and public policies associated with the welfare state, were left to member-states. This division between the national and transnational worked well for a period of time but ultimately proved sustainable for a variety of reasons, primarily the difficulty of separating the market from social rights. This lecture, building upon Fritz Scharpf, asks the question whether the liberal transformation of the EU was the direct the result of an ideological preference by political actors or a functional outcome of the structural impediments associated with European integration?

Week 3: Rethinking the Trade-off Between Equality and Efficiency

Democratic politics is about distributive conflict tempered by a common interest in economic growth. This lecture is about rethinking the trade-off between growth and equality. We do this through an examination of income distribution, labour markets, wage bargaining and employment growth in liberal market economies (Ireland, UK, USA, Canada and Australia), social market economies (Sweden, Norway, Finland and Denmark), corporatist market economies (Germany, Netherlands, Austria), and Mediterranean market economies (Italy, Spain and France). The lecture concludes with a discussion on the fiscal crisis facing the nation-state, welfare state retrenchment, the monetary union and directions for progressive reform in Europe.

Modern industrial societies have generated a conflict between the egalitarian logic of democracy versus the inegalitarian logic of the market. The attempt to reconcile these tensions has given birth to democratic capitalism: popular elections among competing political parties whereby citizens across the income distribution can make their political demands on the state. This democratic process riles any notion that the economy can be separated from politics. On the one hand, employers and employees, are free to organise themselves into peak organisations and engage in collective bargaining. On the other, political parties are free to organise and seek direct election to the state. The latter is, constitutionally speaking, more embedded and prioritised in liberal representative democracy. The complex institutional relationship between the two is central to the evolution of post-war welfare states. This connects social policy with labour market policy in the social economies of Europe.

This lecture builds upon Jonas Pontusson’s study into the political and policy trade-offs facing the USA and Western Europe in their pursuit of equality, economic and employment performance. It begins from the assumption that those across the income distribution have different material interests that either do or do not get reflected in the public policies of the state. In terms of outcomes these 16 countries vary significantly. Some have kept inequality low, but unemployment high, equality low and employment high. Like most comparative political economists, this study traces the divergence to politics and the construction of institutions: political parties, the welfare state and collective bargaining. As argued last week by Esping Anderson, underpinning these institutions are political-class coalitions. It is the variation in these political-class coalitions that generated liberal, social and corporatist economies.

The full lecture can be read here

Week 2: The Three Worlds of Welfare State Capitalism

State institutions are now preoccupied with the production and distribution of social well-being. To study the welfare state is to understand a novel phenomenon in the history of capitalist societies. But there is significant qualitative variation in how states organise the distribution of welfare. Even if expenditure is the same in some countries, their distinct historical characteristics will shape outcomes.

This lecture reintegrates the study of the welfare state into political economy and, using Esping Andersen, identifies three distinct organisational logics that reflect three regimes of democratic capitalism: liberal, conservative and social democratic. Central to how these operate is the extent to which they a) embed social rights of citizens independent of market forces, b) lead to social stratification such as widening income and status differentials and c) create employment opportunities.

The full lecture can be found here