After Failed Austerity, European Democracy in Danger

There are times when I really don’t like being able to say “See I Told You So”. But when it comes to the European crisis, it is particularly painful to point to my own predictions and to what is now unfolding. After the Greek elections, it has become mainstream in Europe to vote for authoritarianism: in the June 15 Greek elections a shocking 39 percent of the votes went to parties that have little or no commitment to parliamentary democracy. A very thin line now divides a frail, status-quo democracy from a kind of government that we thought would be gone from Europe with the fall of the Berlin Wall. If nothing changes for the better  in Greece – and so long as they cling to their welfare state we have very good reasons to believe nothing will improve – the current government will lose the last of its credibility with voters. At that point there are Communists, Nazis and Hugo-Chavez style radical socialists waiting in the hallway to form a government of their own.

Since Greece is not the only country with a welfare state in deep trouble, the threat to democracy is not isolated to Greece. There is now rising fear that the Spanish democracy might be in danger. But before we get there, let’s get the latest from the crisis battlefront. Here is how the British newspaper Daily Mail summarizes the situation as of today, June 25, 2012:

  • Fears panic will spread from Spain to Italy and tear the Eurozone apart
  • British taxpayers could be dragged into a bailout of stricken Spain
  • FTSE 100 index of leading shares down 2% as Spain bans short-selling of shares to stem stock market losses
  • French and German markets down 3%
  • Italy heads towards bail-out with nearly £1trillion public debt
  • Spanish sovereign borrowing costs soar to crisis levels: 10-year bond yields at 7.5%, unsustainable in medium term

As horrifying as this escalating crisis is, it has by no means been unpredictable. See this thread of articles for my analysis of the European crisis since the beginning of the year.

Back to The Daily Mail:

The Eurozone was back on the brink last night as Spain edged towards a financial disaster that could tear the single currency apart. Analysts said Spain’s huge economy was at a ‘tipping point’ and would inevitably need international aid. In a sign that Europe’s debt crisis is deepening, Italy’s borrowing costs edged higher, Greece was was facing a 1930s-style depression and its austerity measures were said to be faltering.

See, I told you so.

Additionally, ratings agencies threatened to strip Germany of its gold-plated credit rating because of the risk of the crisis spreading.

Which is why I warned a couple of days ago that other, smaller European countries with less problems than Greece and Spain might get out of the euro before the fiscal disaster zones are expelled. And left to fend for themselves. As the Daily Mail explains, that group could even include Italy:

Sources close to the government were reported as saying that Spain would need a loan to avoid ‘imminent financial collapse’ facing the country when it has to cover a further £22billion of debt in October. The Eurozone was further shaken by ratings agency Moody’s threat to downgrade the AAA credit ratings of Germany, the Netherlands and Luxembourg. Factory output in Germany and France fell at the fastest rate for more than three years. The euro tumbled against the pound and shares from Madrid to Milan went into reverse. Borrowing costs in Italy also soared as the financial markets bet that it will be the next domino to fall. City analyst Gary Jenkins said … Italy is widely seen as too big to save.

About the Spanish crisis:

Spain has already required an emergency loan package of up to £80 billion to bail out its banks but that has done nothing to quell concerns about its ability to pay its way. The country is crippled by a property crash and recession and the highest rate of unemployment in Europe. Spain’s crucial ten-year bond yield – the interest rate the government pays to borrow and a key indicator of a country’s financial health – hit a new euro-era high of 7.6 per cent. That is deep in the danger zone and well above the 7 per cent level that triggered bailouts in Greece, Ireland and Portugal. Spain is now paying more to service its debt over six months than countries such as Slovakia and the Czech Republic pay to borrow over ten years.

As I have explained numerous times, the bank crisis has very little to do with the current state of affairs in the Spanish economy. Government debt has exploded over the past few years, and according to Eurostat more than half of that debt is owned by – you guessed it – the banks. By completely mismanaging its budget, the Spanish government has robbed banks of one of their strongest low-risk investment opportunities: the treasury bond.

In other words, the welfare state crisis vastly overshadows any property-related crisis that the banks may have brought upon themselves through irresponsible lending.

In a related story, the Daily Mail also reports that:

In Spain, the disruption on the financial markets has triggered a series of public protests on the streets. These threaten to pose the biggest challenge to the country’s democratic system since the death of the dictator Franco in 1975, which ushered in a period of modernisation, prosperity and free elections.

A major reason for this is that the spending cuts executed by the national governments under EU-imposed austerity programs have already hurt large layers of the population. Dependency on government is a lifestyle under the welfare state, and when the welfare state keeps taxing and regulating but still can’t raise enough money to honor its spending commitments (all welfare states get there sooner or later) people are left with nothing. When, on top of that, local governments run out of money, the crisis really hits home. Local governments in Europe, much like here in America, are responsible for schools and social services, but also for a good part of the government-run health care system. As a result, vital parts of every-day services that government has socialized, which as the Daily Mail story explains, puts these services in grave danger:

The truth is the monumental scale of the problems facing the beleaguered nations in euroland is moving to a new, dangerous level. Instead of being merely a problem for banks and central government, the economic woes are now starting to affect the countries’ grassroots. Across the so-called ClubMed nations (the deeply indebted Greece, Spain, Portugal and Italy), regions and municipalities are fast running out of money and are seeking rescue from their central governments. … After the [Spanish] Valencia region disclosed last week that it was appealing to Madrid for a bail-out, the Murcia region also demanded one. Catalonia is also said to be in financial difficulty. Italy’s regions face similar catastrophe with reports suggesting that as many as half the provinces are in serious financial difficulty. Several local authorities have warned that some schools may not be able to re-open after the summer because there might not be enough money to pay teachers as a result of austerity measures already taken.

The economic and social situation in Europe is deteriorating rapidly. It is now at a point where it is hard to predict the precise development from one week to the next, but we do know this: the mechanisms that have brought Greece, Spain and Italy to the brink of economic collapse and totalitarianism, are not unique to those countries.

Unless the Europeans give up their welfare state, they will have to give up democracy.