It is therefore not difficult to foresee a series of collisions between national governments, struggling to bring their finances under control, and the European Central Bank, which is bound to maintain price stability97 as its primary objective (under Article 2 of the Statute of the European System of Central Banks). The ECB is likely to ignore the ‘unpleasant monetary arithmetic’ implied by the budgetary imbalances of the member states, and to retort with some ‘unpleasant fiscal arithmetic’ of its own by raising interest rates.98
If all countries were in approximately the same predicament, a political resolution of this conflict might be conceivable. But because there is such variation in the scale of the generational imbalances within the Eurozone, and indeed in their rates of growth and inflation, some countries will get into difficulties sooner than others. It is not hard to foresee the kind of inter-country conflicts this could lead to.99 Most attempts to assess the likely durability of EMU have sought to estimate the effects of an ‘asymmetric’ shock to the system.100 Generational accounting suggests that the system already has the asymmetry and may not need a very large shock.
Then what? Legally, withdrawal from EMU is impossible: unlike the gold standard, there is no escape clause. But historically, there is always an exit. If a country’s only politically viable policy option is to print money and inflate away some of its liabilities (in other words, to levy the inflation tax), and if the EU institutions abide by the ‘no bail-out rule’, then secession will need to be considered. The only remaining question is what the costs of secession from EMU would be.
First, there would be higher interest rates in the short term, and much would depend on the speed with which this impacted upon the government’s debt service bill. In this context, the different term structures of the various national debts are important: a country with a lot of short-term debt will stand to gain much less from a rise in inflation. More than half of Spain’s domestic debt is short-term, for example, compared with 0.4 per cent of Austria’s, so Spain would find it much harder to inflate away its obligations.101 Secondly, the exchange rate of the new (or restored pre-EMU) currency of the seceding state would weaken relative to the euro and other major currencies. This might provide a stimulus to exports, though whether this would compensate for the higher interest rates that would almost certainly be needed is impossible to predict. Moreover, there would also be all kinds of legal tangles as creditors and debtors (foreign and domestic) fought over whether the pre-secession debts should be treated as euro- or national-currency denominated. This could severely destabilize the seceding country’s financial system, as well as those of other countries. Again, the implications would be graver the more of a country’s debt was held externally. In short, secession from EMU would be far more difficult than secession from the ERM, a point to be borne in mind by countries like the UK which are still considering whether or not to join.
It is possible that the political will to implement spending cuts and tax increases may be strengthened by these obvious disincentives. Less likely, but also conceivable, there could be a weakening of the ECB’s anti-inflation resolve; or, alternatively, a shift towards greater fiscal centralization to allow the continent’s generational imbalances to be dealt with collectively.
Still, the fact remains that history offers few examples of democratically agreed budgetary adjustments on the scale necessary in certain European countries today. What it does offer are several examples of monetary unions between sovereign states disintegrating when the exigencies of national fiscal policy became incompatible with the constraint imposed by a single international currency.
12
The American Wave: Democracy’s Flow and Ebb
It is evident to all alike that a great democratic revolution is going on among us, but all do not look at it in the same light…. A kind of religious awe [is] produced in the author’s mind by the view of that irresistible revolution which has advanced for centuries in spite of every obstacle and which is still advancing in the midst of the ruins it has caused.
TOCQUEVILLE1
When the American sociologist Francis Fukuyama proclaimed ‘The End of History’ in 1989, his role model was the philosopher of history and master of the dialectical method Georg Wilhelm Friedrich Hegel.2 For Hegel, world history was ‘governed by an ultimate design … a divine and absolute reason’. ‘The spirit [of reason] and the course of its development’ were ‘the true substance of history’, Hegel argued; and this spirit he equated with ‘the idea of human freedom’. Thus the historical process could be understood as the attainment of self-knowledge by this idea of freedom through a succession of ‘world spirits’. In Hegel’s tortuous prose, ‘the concrete manifestation’ of ‘the unity of the subjective will and the universal’ – ‘the totality of ethical life and the realisation of freedom’ – was the state.3 As a young man, Hegel had been inspired by the French Revolution (‘a glorious sunrise … a sublime emotion’); but his model state turned out to be the Prussian.4 Fukuyama’s inspiration was the East European revolutions of 1989; yet his model remains the liberal capitalist democracy of the United States.
Like Hegel, Fukuyama is anything but an economic reductionist. The progressive, dialectical relationship he discerns between democracy and growth is mediated by culture.5 And he has acknowledged that (particularly in Asia) ‘political development could turn away from democracy’ because of cultural resistance to the individualism associated with democracy. Nevertheless, ten years after ‘The End of History’, he remains confident of ‘a long-term progressive evolution of human political institutions in the direction of liberal democracy’. Indeed, Fukuyama concluded his most recent book, The Great Disruption, with an unabashedly Hegelian claim: ‘In the political and economic sphere, history appears to be progressive and directional, and at the end of the twentieth century has culminated in liberal democracy as the only viable alternative for technologically advanced societies.’6
The view that democracy and economic progress are mutually reinforcing is close to becoming a new orthodoxy. The political economist Mancur Olson’s posthumously published Power and Prosperity advanced the argument that democratic systems are more conducive to wealth creation than their undemocratic predecessors for the same fundamental reason that in the Middle Ages a tyranny was preferable to anarchy. A monarch – or ‘stationary bandit’ in Olson’s striking phrase – has an ‘encompassing interest’ in the long-term prosperity of his subjects, which is not true of a wandering band of brigands. The brigands ‘tax’ at a rate of 100 per cent and then move on, indifferent to the fact that by preventing present investment and discouraging future investment, they are reducing the future output of those they plunder. The stationary bandit, by contrast, will tend to ‘reduce his rate of tax theft down to the point where what he gains (from tax theft on a larger output) is just offset by what he loses (from taking a smaller share of output)’. He also has an incentive to provide public goods out of his own resources if they will increase the output of his subjects.7 But democracy is even better, because the governing majority gains not only from redistributing tax revenues towards itself, but also from maximizing its income from market transactions: hence ‘the optimal tax rate for the majority is bound to be lower than the autocrat’s’.8 In the same way, the greater encompassing interest of a democratic majority will incline it to spend more of its resources on public goods which benefit everyone. There can even be ‘superencompassing interests’ (i.e. majorities which do not include all of society) which are so broad that they tax and spend out of self-interest exactly as much as if their motives were entirely altruistic. Olson had argued in earlier works that the protection of property rights and the security of contracts were crucial in stimulating economic activity; now he asserted that these were more likely under democratic governments.9 This argument echoes earlier work by Douglass North, who argued that democratic government offers ‘greater political efficiency’ because it ‘gives a greater and greater percentage of the populace a
ccess to the political decision process, eliminates the capricious capacity of a ruler to confiscate wealth, and develops third-party enforcement of contracts with an independent judiciary’.10
The Nobel laureate Amartya Sen too has lent his support to the idea that democracy is economically beneficial. Sen argues that freedom, desirable in its own right, also has an economically instrumental justification. True, he concedes, China, Singapore and (until recently) South Korea have enjoyed rapid economic growth in the past two decades despite the absence of democracy. But these examples of authoritarian ‘tiger’ economies do not suffice to rebut the economic case for democracy. There are counterexamples like Botswana, a rapidly growing oasis of democracy in Africa. More tellingly, democracies are better at avoiding economic disasters than autocracies. ‘No substantial famine’, Sen argues in Development as Freedom, ‘has ever occurred in a democratic country – no matter how poor … because a government in a multiparty democracy with elections and free media has strong political incentives to undertake famine prevention.’11 Here the contrast between India’s experience since independence and China’s is in the former’s favour.
Such arguments find echoes in the work of less well-known scholars too. One recent study compared the ‘quality of citizen’s lives’ in over a hundred mainly developing countries and concluded that democratic states meet the basic needs of their citizens ‘as much as 70 per cent more’ than non-democratic states.12 A similar comparison has been made for the pre-industrial period between self-governing European towns and those under absolutist rulers, showing that growth was faster when towns were governed by their local merchant élites.13 A partly political explanation has also been suggested for the superior economic performance of post-Communist Poland, with its comparatively vibrant democratic institutions as compared with Russia, where democratization has been impeded by ‘kleptocratic’ élites.14 The general refrain has been taken up by policy-makers too. The Bonn Conference on Economic Cooperation in Europe summed up the new conventional wisdom: ‘democratic institutions and economic freedom foster economic progress’.15
It is certainly a plausible historical hypothesis that economic growth encourages the evolution of democratic institutions. But is it so certain that the causation runs in the opposite direction too? Can democratization be relied upon to boost growth? If so, then history may well have ended – and like a fairy-story: they all lived happily (or at least, democratically and prosperously) ever after. This is the ‘double helix’ theory in its essence: democracy and economic progress spiralling upwards together, each dependent on the other.
There are, however, reasons for caution. One of Olson’s bolder sallies is that ‘the Whig interpretation of history was right’ in discerning an upward trajectory in British constitutional history. No historian can feel entirely comfortable with such an ingenuous conclusion, based as it is on an admixture of mathematics and a barely recognizable caricature of historical events.16 Fukuyama’s dialectical optimism should also make us pause. We seem to confront here an improbable alliance of Hegel and Lord Macaulay.17
A PARISIAN IN AMERICA
Of Macaulay’s generation, perhaps the shrewdest analyst of democracy was the French aristocrat, historian, sociologist and politician Alexis de Tocqueville. In Democracy in America (1835), based on a nine-month journey to the United States in 1831–2, Tocqueville gave a qualified welcome to the ‘institutions and mores’ he had encountered there. Among the strengths of American democracy he identified the decentralization of government; the power of the law courts; the strength of associational life; the role of lawyers as a surrogate aristocracy and the vigour of religion (‘if [man] is free, he must believe’). Strongly influenced by the Federalists, Tocqueville was not blind to the defects and potential hazards of American democracy. Political parties were ‘an inherent evil of free governments’; the press was excessively violent and prone to muck-raking; the people tended to vote mediocrities into high office (he badly underestimated Andrew Jackson); above all there was the danger of the ‘tyranny of the majority’. Tocqueville was also alive to the intolerance of minorities – and particularly of blacks, whether enslaved or free. But his conclusion was optimistic: the strengths of American society would be enough to compensate for these deficiencies. Democracy was the future, he argued in his introduction, and – in America at least – it worked.
Whether it could work as well elsewhere was another question, however. In France, ‘the democratic revolution [had] taken place in the body of society without that concomitant change in the laws, ideas, customs, and morals which was necessary to render such a revolution beneficial’. Democracy had been ‘abandoned to its wild instincts’ and its ‘lawless passions’.18 In England (which Tocqueville visited in 1833 and 1835), a new ‘manufacturing aristocracy’ had arisen which, he warned, might succeed in restoring the ‘permanent inequality of conditions’ of the pre-democratic social order. Above all, Tocqueville noted that in Europe, unlike in the United States, public administration was becoming ‘more centralized … more inquisitive and minute…. It gains a firmer footing every day about, above and around all private persons, to assist, to advise, and to coerce them’.19 In a startlingly prescient passage towards the end of the second volume he identified
the novel features under which despotism may appear in the world. The first thing that strikes the observation is an innumerable multitude of men, all equal and alike, incessantly endeavouring to procure the petty and paltry pleasures with which they glut their lives. Each of them, living apart, is a stranger to the fate of all the rest; his children and private friends constitute to him the whole of mankind…. Above this race of men stands an immense and tutelary power, which takes upon itself to secure their gratification and to watch over their fate. That power is absolute, minute, regular, provident and mild…. It provides for their security, foresees and supplies their necessities, facilitates their pleasures, manages their principal concerns, directs their industry, regulates the descent of property, and subdivides their inheritances; what remains, but to spare them all the care of thinking and all the trouble of living?… Every day it renders the exercise of the free agency of man less useful and less frequent … The principle of equality has prepared men for these things…. I have always thought that servitude of the regular, quiet and gentle kind which I have just described … might … establish itself under the wing of the sovereignty of the people.20
In the 1830s and 1840s Tocqueville remained hopeful that France could achieve the transition to a form of democracy similar (though not identical) to the American; above all, one which preserved individual liberty and limited the power of the central state. But by the time L’Ancien Régime et la Révolution appeared in 1856 – the first and only volume of his projected history of the French Revolution – he had become less optimistic. It had proved impossible to introduce democracy in France without an intolerable sacrifice of liberty. The aristocracy and the Church against which the Revolution had directed its energies had in fact been bastions of liberty under the old regime. Once they had been destroyed, the process of centralization – which long antedated the revolution – could accelerate unchecked. Equality trumped liberty, and the result was despotism:
For while the urge to freedom is forever assuming new forms, losing or gaining strength according to the march of events, our love of equality is constant and pursues the object of its desire with a zeal that is obstinate and often blind … Hence the fact that the French nation is prepared to tolerate, in a government that favours and flatters its desire for equality, practices and principles that are, in fact, the tools of despotism…. Every time that an attempt is made to do away with absolutism the most that [can] be done has been to graft the head of Liberty onto a servile body.21
Admittedly, Tocqueville’s bleaker view of French democracy owed much to the frustration of his own political career following the revolution of 1848. Appointed Foreign Minister in September 1849, he had been dismissed after less than two mo
nths by the President, Louis Napoleon; even more bruisingly, his thirteen-year parliamentary career had been cut off when Napoleon staged his coup d’état and restored the Empire in December 1851.22 Mindful of these events, modern historians have been at pains to point out the many anachronisms in Tocqueville’s account of eighteenth-century France: his portrayal of the intendants as prototypes of Bonapartist prefects, for example. Yet as a work of political theory Tocqueville’s Old Regime deserves to be reread, along with the concluding book of Democracy in America, and not least as a corrective to the neo-Hegelian effusions of Fukuyama and Olson’s updated Whiggery. Democracy may indeed be destined to triumph over autocracy around the world. But we cannot take it for granted that liberty – including economic liberty – will always share in that victory.
The Cash Nexus: Money and Politics in Modern History, 1700-2000 Page 41