Pragmatism, Idealism and European Demoicracy

 

Kalypso Nicolaidis-120x120Dr. Kalypso Nicolaïdis is Professor of International Relations at the University of Oxford.

Europe has never been so crowded with Cassandras than in the last three years since the Eurocrisis began – pundits and politicians predicting that the Euro or even the European Union would collapse if we did not at last achieve ‘unity’ while claiming that they themselves were cursed with public disbelief in their predictions – predictions echoed on the other side of the ideological divide by those heralding the end of national democracy as we know it unless we got rid of the Euro.

Yet, neither the EU nor the Eurozone have disintegrated. Instead the muddlers through have, well, muddled through, causing much damage to Europe’s social fabric in the process, but nevertheless keeping the show on the road. Jürgen Habermas cogently names the main culprit in his Leuven speech published here on Social Europe Journal: unfettered capitalism. Absolutely. This is not just an abstract system, it is a bunch of people tainted by the greedy and corrupt among them. The latter will hopefully be reigned in and we may yet one day progress to a truly new kind of fairer and greener capitalism. Habermas is right, this is what is at stake in Europe and around the world today.

As part of this vast agenda, the immediate question is whether EU politics as we know it can help do the job. And here, Europe’s tragedy has been that the Cassandras in question are false Cassandras with real agendas. False Cassandras, for their predictions are flawed and unfortunately believed by many. We must resist the idea that the only alternative ‘solutions’ be either the disintegration of the Eurozone or to turn the EU into a state-like entity, turning coordinated national policies into common EU politics and adopting democratic recipes aping national models at the EU level.

As Weiler has put it, the EU is still fuelled by the messianism of at least part of its elites and the idea that the ends of integration per se justifies the means, even if such means involve overlooking publics everywhere. An unholy alliance between ‘market pressures’ and messianic zeal – as Habermas puts it ‘when economic constraints imposed by markets happily meet the flexibility of a free-floating European technocracy’ – can be tremendously powerful. With the crisis, those who see ‘more integration’ as an end in itself have found their Messiah shrouded in veils of yields and spreads, one that will bring the project to their desired end. But of course it is a false Messiah – as Messiahs always are – who might be defeated but bring much despair upon the citizens of Europe in the process. Or maybe in the end, the profligacy of modern Greeks will have helped make the story crafted by their ancestors come true: Europe kidnapped by a wild bull, the bull of financial markets…

In this sense, the management of the Eurocrisis is simply a microcosmos of European politics at large. Politicians are unsurprisingly a mixed bunch in this story, sometimes decent, all too often complicit, always fallible. But whatever their relative merits, it is an illusion to believe that there is some sort of revolutionary alternative to the art of muddle through in the EU today. The issue is not that they muddle through but how. In debtor countries, some have managed to create political space for democratically sustainable reform – indeed the creation of temporary political space seems to be the ECB remit these days. In creditor countries, some have managed to create political space for some eventual degree of transnational redistribution – ready public opinions for transfers that have not happened yet. To give her credit, if Angela Merkel follows through on current policy change in Germany, she may be able to face the inevitable further debt restructurings awaiting countries like Greece and Portugal. If and when this happens, we may well realize that instead of doing ‘too little too late,’ she will have been pursuing a steady course of ‘just enough, just in time’ in order to buy and keep that domestic political space she so much needs to address external expectations. In the best of all world, next year could showcase European incremental consensus at its best: a German sense of responsibility in spite of an annoying dose of self-righteousness, a Greek sense of accountability in spite of a frustrating dose of ineffectiveness, a French sense of reckoning in sense of continued wishful thinking. That is in the best of all worlds.

And so, here is for me the tension, a tension that seems to live in many European minds at the moment. On one hand, we must defend this European way against its detractors and remain vigilant in preserving its main features. On the other, we must also aim for something more radical, some kind of radical democratic transformation, if the EU is going to acquire the kind democratic appeal that will ensure its sustainability in the years to come.

Perils of federal Unity, Promise of transnational Union: Why European Demoicracy is an ideal worth fighting for

Can we reconcile these two imperatives? I have argued along with other like-minded scholars that to start with we need a compass but not a destination point. This compass is a certain understanding and valuing of the EU as a European demoicracy in the making, defined as a Union of peoples, understood both as states and as citizens, who govern together but not as one. In contrast with the classic representation of the EU as an ‘in-between’ an alliance and a federal state, this represents a third way against both these alternatives which both equate democracy with a single demos – the first, a Union of democratic states as ‘sovereignists’ would have it, the second, a Union-as-a-democratic state to be as ‘federalists’ would have it. In this sense, the EU is a truly unique political experiment and should remain an open-ended process of transformation which seeks to accommodate the tensions inherent in the pursuit of radical mutual opening between separate peoples.

Is this also turning out to be a rather unstable equilibrium – as we would expect from the history of federal unions turned federal states? In my view, while the EU seemed to approximate such an understanding of demoicracy as far as its constitutional and institutional features were concerned and evolved over time, the management of the Eurocrisis has taken it off course as it were and we should be seeking a restoration, not a revolution. At the same time, the crisis has also highlighted more than ever before the distance between the praxis and demoicratic ideal.

It is important to stress that such a demoicratic understanding of the EU is both pragmatic and idealist. This is, pragmatically, an argument from what Europe is. European integration is demoicracy at its best when it accommodates the deep diversity of our national political and economic systems, under a modus operandi that is multi-centered and not only multi-level. Indeed, diversity is not a static factor but what we make of it. European diversity is not a constraint that we must work around or try to overcome through the right kind of pedagogy or the right kind of incentives for convergence at all cost. Each member state is an arena for different social bargains, state-society relationships as well as different debates which overlap and echo across borders but are also grounded in different ‘languages’ in the full sense of the term (as discussed in European Stories). The role of the EU should be to engineer their permanent compatibility and horizontal contagion, not their homogeneity. And the prize here is of an inclusive EU that will keep all its member states in, including Britain – albeit in a differentiated fashion – as well as embrace publics with widely different expectations of integration.

But our European demoicracy is also about what Europe should be, an ideal worth nurturing, in fact a post-war ideal which translate ‘peace’ into its component, its long term preconditions, a kind of political ethics. For one, this Union shall abide by the imperative of transnational non-domination as an anti-hegemonic, not an anti-national, project. The idea was and still is that the peoples of France or Germany qua states would never again be allowed to subjugate others on the continent thanks to a system of institutionalized balance of power between states. But nor should this happen through a new kind of domination. In this sense, Germany today cannot simply address its hegemonic dilemma (how not to turn desired responsibility into undesired coercion) by replacing horizontal power from Berlin by vertical domination from ‘Brussels.’ Instead, the second imperative for running a peace union is that of true and genuine transnational mutual recognition between its peoples who in an ideal world would engage in deep and demanding mutual recognition if they are to persevere in ‘governing together but not as one.’ It is an understatement to note that such a political ethics is greatly lacking in today’s crisis-ridden EU.

There is no ready blue print on how to translate such a broad ethos into a litmus test for the changing pattern of European integration under the EU crisis. Indeed, as Luuk Van Middlelaar would argue, the spirit of open-ended transformation is to recover the contingent and unpredictable nature of genuine politics. This is true wherever politics takes place, in capitals, in cities, in assemblies, or in subterranean politics. Moreover, it seems crucial not to confuse today’s exceptional circumstances dictated by the imperative of ‘saving the Euro’ (whether or not this is a good thing is a separate question) with the required long term structural changes required to manage the Eurozone as well as the EU democratically. In short, European demoicracy should not be hostage to ‘legacy measures.’ Instead, the question is how to improve it qua demoicracy without then crossing the rubicon to a classical federal form of multilevel democracy. Again, we are back to the challenge of combining conservation with radical transformation. In order to continue to walk this fine line, judgements ought to be made in three realms.

 

  • The first is that of national democratic self-government. European demoicracy starts with and rests on the health and integrity of national democracies, the ‘cratos’ of individual demoi. The crisis has led us to ask with ever greater urgency what are the minimum requirements for each of the member state polities to maintain their own democratic integrity. This is an agenda shared by many scholars these days including Damian Chalmers, Ben Crum, Christian Joerges, Peter Lindseth, Giandomenico Majone, Andrew Moravcsik or Fritz Scharpf. In my view, the EU ought to adopt a ‘do no harm’ principle and test its planned interventions in domestic arena against it, thus weeding out interventions that are democratically counterproductive or actions with other aims that have democratic negative spillover effects

 

  • Crucially, demoicracy is above all a transnational democracy : the demoi so protected ought not to be considered as any old demoi if demoicracy means governing together. Demoicracy is about the common ‘cratos’ even if such cratos is itself a fragmented and diffuse creature. So the type and extent of delegation of power to the EU level ought also to be determined by the need to manage not only economic but also democratic interdependence – which implies that the EU should nurture and maximize positive externalities and discipline certain negative externalities between national democracies. Especially because we value member states as the sites where democracy and social justice have been progressively and imperfectly shaped historically implies that states should interact on fair term and their actions be demoicratically compatible. Addressing democratic failings in a member state can only be sustained if done democratically.

 

  • So thirdly, the way in which the first two realms are to be balanced is in turn dependent on what happens at the center. The supranational locus of democracy in a demoicracy ought to remain a consensus democracy within the bounds of ‘reasonable disagreements. ‘ The pooling of sovereignty –eg how member states decide together – must respect national self determination, small states cannot be bullied into submission when Council decides on Treaty change; and crucially, the delegation of sovereignty – how the Commission, ECJ, ECB and EP are empowered to act ought not to break ombilical cord with some sort of genuine politics – be it through its own way of functioning (EP) or its legitimacy as a mediator or enabler of political action (Commission, ECB). If what Peter Lindseth calls the ‘postwar constitutional settlement of administrative governance,’ is to remain compatible with European integration, the architects of the latter must keep in mind that the separation of norm-production by the state apparatus from institutions that embody the capacity of historical political communities to rule themselves in a strongly legitimated fashion was compensated domestically through mechanisms of political control whether in the US or in European states. Hence, the crucial issue if we want to recover the spirit of the Community method is not about each locus of power individually but about their relationship. How the European Council delegates to the Commission and how it works with the EP to do so. And crucially that the democratic control of supranational rule making includes durable mechanisms of collective oversight form national executives, national high courts and increased recourse to national parliamentary scrutiny.

 

Sustaining Europe’s demoicratic third way: The political art of crabbing in a political union

Many questions arise from this crude characterization of European demoicracy and the effects of the crisis which cannot be explored here. The current impetus for so-called ‘political union’ amounts to pouring old wines into new bottles. The EU from its inception was fueled by the wine of politics where the three realms above are brought into tension– struggle between political visions of Europe, political fights and compromises between states and governments of the moment, resistance to attempts at political bypass by supranational bodies, political indoctrination or cooptation of passive citizenries into the European project followed by continued attempts to placate discontent, political agency in the rest of the world. Political union may be a fact of the matter but its renewed invocation today is a response to the heightened degree of democratic interdependence –and corollary perceptions of ‘democratic disconnect’ in the formulation of the Transatlantic Academy. So everyone is looking for new bottles but to serve different aims.

To put it bluntly, at a time of crisis, creditor states want mechanisms to control how debtor states (or their banks) use of their money and the latter want the control how the former craft the conditions for such control. There is compatibility there: creditor countries think of political union as a way of legitimizing their dictate, while debtors thinks of political union as a way of co-shaping them. In a European demoicracy, these national concerns, obsessions, predicaments, must be respected and mutually accommodated. The problem is that the new kind of EU governance envisaged to repair EMU is now shaped by an emergency led old fashion IMF type struggle. Can conditionality modus operandi truly shape a polity like the EU? Is it right to legitimise a deeply interventionist droit de regard by the Commission (albeit stamped by the Council) over the composition of budgets which cover close to 50% of national GDPs in the name of budget deficits? Instead of accommodating the politics of conditionality, EU governance must remain faithful to the tenets of demoicracy –a balancing act which entails a light touch on the part of EU bodies.

In the end, member states must expect more of each other through mutual trust-cum-spying according to the art of political crabbing (in flight lingua, overshooting your target destination when confronted with side winds). As holocaust survivor and psychiatrist Viktor Frankl argued in the post-68 era of political optimism, we need to recover Goethe’s belief that ‘if we take man as he is we make him worse but if we take man as he should be we make him capable of becoming what he can be.’ Should this old wisdom not guide our European demoicracy today? Can European peoples as national and European citizens not learn to over-estimate each other? For this, we need to energise all fields of democracies and accountability at the same time. As Heather Grabbe recently argued our new global era of protest is part much bigger battle between ‘leader knows best’ politics and modern social participation. If the art of crabbing means that idealism adapted to changing winds is true realism, we can rely on such social participation to renew and reenergise the European process of reconciling national, transnational and supranational democracy.

Whatever else the sought-after reform of the Union will be, as Zygmunt Bauman argues here on Social Europe Journal, it can’t be a one-off deed, but only a process of perpetual reinvention. Not only must we insist that no one can ‘force the end’ today in the EU, but that there is no such end to be contemplated, divorced from a process of deeper and sustained democratic political experimentation within and across member states and their politics and socio-economic contracts. More than ever, the EU may succumb to its demon, its obsession with Oneness, at its peril. But if it doesn’t, it may still come out of this crisis stronger in its capacity to manage rather than negate differences among its peoples.

This article has been published in the Social Europe Journal and posted here by permition of the author and the journal

References

Seyla Benhabid et al, The democratic Disconnect, Transatlantic Academy, April 2013

Damian Chalmers, ‘Democratic Self-Government in Europe: Domestic Solutions to the EU Legitimacy Crisis’ Policy Network Paper, May 2013

Francis Cheneval and Frank Schimmelfennig, ‘The Case for Demoicracy in the European Union,’ JCMS: Journal of Common Market Studies 51, no. 2 (2012): 334–350.

Justince Lacroix and Kalypso Nicolaïdis, European Stories: Intellectual Debates on Europe in National Contexts, OUP, 2010

Müller, J.-W. (2010) ‘The Promise of Demoi-cracy: Diversity and Domination in the European Public Order’. In Neyer, J. and Wiener, A. (eds) The Political Theory of the European Union (Oxford: Oxford University Press).

Kalypso Nicolaïdis, ‘We, the Peoples of Europe …,’ Foreign Affairs, 83, no. 6 (Nov.–Dec., 2004): 97–110;

Kalypso Nicolaïdis, ‘Germany as Europe: How the Constitutional Court Unwittingly Embraced EU Demoi-cracy: A Comment on Franz Mayer,’ International Journal of Constitutional Law 9, no. 3–4 (2011): 786–792;

Kalypso Nicolaïdis, ‘The Idea of European Demoicracy,’ in Philosophical Foundations of European Union Law, ed. Julie Dickson and Pavlos Eleftheriadis (Oxford: Oxford University Press, 2012);

Kalypso Nicolaïdis, ‘European Demoicracy and Its Crisis,’ JCMS: Journal of Common Market Studies 51, no. 2 (2013): 351–369.

Samantha Besson, ‘Deliberative Demoi-cracy in the European Union: Towards the Deterritorialization of Democracy,’ in Deliberative Democracy And Its Discontents, ed. Samantha Besson and José Luis Marti (Ashgate Publishing, Ltd., 2006)

Fritz Scharpf (2009) ‘Legitimacy in the Multilevel European Polity’. European Political Science Review, Vol. 1, No. 2, pp. 173–204.

Luuk Van Middlelaar, Le Passage a L’Europe: Histoire d’un commencement, Gallimard, 2012

 

The Optimum Degree of Government Financial Intervention

drjohn11aDr. John Psarouthakis, Executive Editor of www.BusinessThinker.com, Distinguished Visiting Fellow at the Institute of Advanced Studies in the Humanities, University of Edinburgh, Scotland, publisher of www.GavdosPress.com and Founder and former CEO, JP Industries, Inc., a Fortune 500 industrial corporation

The central question in many economic debates is how much should the government intervene in the economy. In other words, what is the optimum level of government spending? In a recent paper, Psarouthakis et al. (Economics and Finance Notes, 2012) show that the answer is a function of the country’s level of economic development.

According to this research, the economy is a complex system in which firms, households and the government interact to determine the process of wealth creation and, ultimately, the economic well-being of the nation as a whole. Firms and the government share certain objectives. Both are social organizations created to add value for their respective stakeholders, stockholders and voters respectively. In this effort, a minimum intervention would be to, at least, reduce the respective transaction costs in the economy. Poor performance of governments, namely a high debt to GDP ratio, tend to generate negative externalities for the economy (or higher transaction costs) that are reflected in macroeconomic variables such as output, involuntary unemployment, slowdown of profitability and capital creation and/or utilization, and a rise in inflation. In other words, the economic performance of the overall system depends significantly on the government involvement needed to reduce transaction costs given the characteristics of the economy. One of the major difficulties in the analysis of government involvement is the identification of variables that define the optimal size of the public sector relative to the private sector. Despite this difficulty, it is possible to evaluate the public action by looking at the overall economic performance of the system for a given period of time, and infer from this evaluation the nature of the relationship between the government and the economy.

If an economy has a positive acceleration of income then the optimal policy is a gradual reduction in the relative government involvement in order to avoid an excess of aggregate demand in the economy that may translate into higher prices, and a loss of the competitiveness on international markets. In the other hand, if the economy has a negative acceleration of private income, then the government may adopt an expansionary fiscal policy in order to support the aggregate demand in the economy and increase the utilization of factors of production in the economy. The above policy rule defines a counter-cyclical behavior in the optimal size of government intervention, in which the public sector systematically adjusts the aggregate supply and demand in the economy in order to avoid any potential source of income contraction. During a recession period, the economy is close to a Keynesian economy with unemployment of resources and real impact of government actions. At this point higher government expenditure may produce excess of demand in the economy because of the “inefficiencies” in the production side. This effect is associated with an aggregate demand larger than aggregate supply hence with an inflationary process. In an open economy, international accounts would start to present a negative balance.

In this sense, the government acts as a macro-coordinator of market forces (labor and capital, production efficiency and technology) trying to minimize dislocations in the economy. In the same sense, an excessive involvement of government (via increased spending) can be considered as another form of economic “bottleneck” or dislocation. According to the above theoretical aspects, the following facts are observed:

  1. Under an optimal government behavior, the allocation of government expenditure depends on the “state” of the economy. Particularly on the phase of the business cycle of the economy.
  2. It can be shown that the growth of government involvement is negatively related to the acceleration of the economy measured as the second time differential of growth of per capita income to time.
  3. The behavior proposed implies that the growth of government involvement is stronger, in periods of GDP deceleration than in acceleration periods.
  4. Economies with evident excess of government supply, e.g. central-planned economies, would present lower rates of growth than free market economies. See Guseh (1997) for empirical evidence.
  5. If economies tend to converge to a natural optimum rate of government size, then countries with relatively stable growth would tend to present, ceteris paribus, a low fluctuation in the degree of government involvement.

The above mentioned theoretical negative relationship between the growth of government involvement and the acceleration of the economy is being confirmed empirically in Psarouthakis et al. (2012) in a sample of selected OECD countries for the period 1970-2008. Periods of deceleration in per capita income are associated with a growth in government size and vice versa. If the reaction of the government is linear with respect to changes in the degree of economic growth, a sharp decline of economic output could support a sharp rise in government expenditures to bring the economy back to its efficient point. However, when the economy gains momentum and accelerates, the government should redefine its role.

The Dangers of Self-Deception: The Deus ex machina does not Exist

CharalambakisDr. John E. Charalambakis is the Chief Economist at Blacksummit Financial Group, Inc. Lexington, Kentucky. He is also with the Adjunct Faculty at Patterson School of Diplomacy, University of Kentucky.  

This article is contributed by the author for publication in the Business Thinker. It has also been published by the Blacksummit Financial Group Blog.  

In the last few weeks Greece and Cyprus occupied the headlines again in newspapers like The Wall Street Journal, the New York Times, and the Financial Times. I apologize for being the bearer of bad news, but the deus ex machina does not exist for Greece or anyone else (at least not at this present stage). For four years now the Greek economy has been in a depressionary limbo, but it seems that it has not sunk in yet that prosperity bought on credit is not real prosperity. The anchors on Greek TV channels sound like that someone cheated Greece of its entitlement regarding the new tranche from the troika (the EU, the ECB, and the IMF).

It seems that more than three years after the first tranche was given to Greece and after more than $330 billion in new loans, bonds’ haircuts, and numerous pronouncements that the situation has reached bottom, not only the bottom cannot be seen but the leviathan gaps of uncertainty, illiquidity, lack of jobs, shrinking incomes, and productivity are getting bigger and bigger.

The tranches have been used to bailout the perpetrators of the crisis (mostly foreign but also domestic banks), real structural reforms are still in absentia, investors are discouraged in putting their monies at work, while credit and real production keep declining. Under these circumstances we should not be surprised if GDP growth rate drops by another 5.2% this year and official unemployment reaches 29% (the unofficial well exceeds 33% currently).

What could a brief diagnosis of the Greek situation look like?

  • Questionable faith in the rule of law
  • A sclerotic state that suffocated the private sector while advanced the interests of special groups
  • Too many regulations that created business atrophy, while allowed those special interests groups to become the fat cats due to government contracts
  • An educational system that did not push for creative and interdisciplinary thinking, but rather produced mind-parts of a machinery that advances lethargy
  • A business climate that discouraged competition and innovation and which inflicted the virus called reliance on government handouts
  • An inefficient tax structure that advanced the interests of few while kept squeezing the middle class, which was extended consumer loans and “prospered” through credit extensions
  • An uncompetitive business environment which had the illusion that because credit was abundant it could “prosper” in perpetuity
  • A badly designed and executed Euro – see several pertinent commentaries and newsletters in our website – that was too expensive for Greek standards and which trapped the economy into a fetish mentality where staying in the Euro became an end in itself
  • A policy of riding on the bandwagon of bailouts that included unacceptable terms and conditions that sacrificed national sovereignty, imposed measures that suffocated hopes for exit from the crisis, while suppressed incomes and allowed no room for flexibility
  • The policies applied completely neglected the competitive advantages of the nation

The above list focuses on some fundamental issues/problems that have been keeping Greece in a captive situation. Certainly we could add many more reasons, but my belief is that a correct prescription presupposes an accurate diagnosis of the fundamental problems.

At the current stage, the malignancy will remain and the prospects will deteriorate after October (German elections and tighter EU credit standards). If a prediction could be made is that if Cyprus exits the Euro in the next 15 months, then the repercussions will be felt in Greece too in the form of a pressure to exit the Euro zone too. It is very unfortunate that Cyprus chose to bow down to the idol called Euro and now it ends up having a nominal Euro that is not the same as the Euro in other countries. I have been talking to Cypriot businesspeople every week, and the situation there deteriorates by the day.

After October, the Greek economy will have to face the music again due to the following facts:

  • First, the debt is not sustainable at the projected 124% level, let alone the current165% of GDP
  • Second, the non-compliance with the austerity measures (public sector layoffs, privatizations, missing revenue targets, etc.) will force either cuts in the tranches or the demand for new measures, either of which will create not just economic but also political turmoil
  • Third, national central banks in the EU do not seem willing to roll over the Greek bonds, which in turn will force the IMF to withdraw its support. Both events will leave a huge funding gap for Greece
  • Fourth, healthcare costs and other unfunded liabilities will start showing their true face which in turn will create a budget hole
  • Fifth, Greek politicians expect the deus ex machina called OSI (official sector involvement a.k.a. haircuts in the bond holdings of central banks among other official institutions)to show up and they will be disappointed due to the no show
  • Sixth, the existed financing fatigue will materialize in the form of “let it go and see what happens” (similar to the fatigue that brought down Lehman Brothers on September 15th 2008)
  • Seventh, the lack of any realistic prospects for growth undermines the coalition’s cohesiveness and once the summer months pass and reality kicks back in, the street complaints will pick up pace
  • Eighth, the credit environment will tighten even further in the EU and thus they cannot upfront funds to Greece (as they are doing currently in order to save face and avoid turmoil before the German elections)
  • Ninth, the lack of any serious foreign investments will demoralize the business environment which at the same time will discover that it cannot expect any liquidity from the recapitalized Greek banks since those funds were already committed to cover existing holes
  • Tenth, the incoming tremors in the French, Italian, and Spanish banking systems along with disagreements related to the EU’s banking union, will force the troika to focus on those countries rather than trying to recover their money from Greece.

In conclusion, I choose to reiterate London’s tube pronouncement: “Mind the Gap”, because the light at the end of the tunnel may be the incoming train.