Eurozone runs into the democratic deficit

by George Hatjoullis

Come from the Shadows

Come from the Shadows (Photo credit: Wikipedia)

The EU/EMU project has ridden roughshod over national democratic process from inception. It needed to do so to avoid being still-born. This is a good or bad thing depending upon your perspective on the importance of the project. No view is offered in this respect. The point being made is that the progress made by the project would eventually run into this democratic deficit. It seems Portugal may have done so last night.

The importance of the Portugal event depends upon which newspaper you read. The FT deems it a significant set-back ( whilst the Daily Telegraph sees it as a minor irritation of no consequence ( The Guardian, as yet, offers no report or comment.

Portugal was bailed out of its sovereign debt problems some time a go and part of its commitment was to reduce the budget deficit according to a troika determined path. It has struggled to do so earning extensions to the programme (Portugal, like Ireland, was a neutral country in WWII but I am sure this is of no consequence). In order to meet the target for the latest extension the Portugal government introduced a budget plan, part of which has been ruled unconstitutional by the constitutional court. The implied shortfall seems to be between 0.9 and 1.3 billion euro, which does not sound like an insurmountable sum for Portugal. However, it is testament to the extreme austerity already imposed on the country that a constitutional challenge to a budget has been instituted. It may not sound much but when you have cut to the bone there may not be any flesh left. It may be a billion too far.

The use of a constitutional court to challenge a budget is testament to the size of the democratic deficit. It seems it was the only way to push back the overwhelming force that is the troika. Successive governments of all complexions have succumbed to the troika terms. This challenge was instituted by an alliance of domestic interests. It could be seen as an act of despair and concern at the failure of the normal democratic process.

The troika, of course, see things differently and by troika I mean Berlin. The EU play a relatively small part in this trio. The IMF is present because at the start of the crisis resolution process Berlin lost faith in the technical expertise of the EC commission and their objectivity (i.e willingness to see things the way Berlin does). The Berlin concern, as I have outlined in an earlier post, was to eliminate any risk of moral hazard and to avoid the monetary union becoming a fiscal transfer union.

The Berlin view was that the only way to do this was to use the opportunity to force member states to correct domestic fiscal imbalances quickly and put in place effective impediments to such imbalances ever again arising. The result has been synchronised austerity within the eurozone which has in the short-term added to the problem and made achieving domestic fiscal balance that much more challenging. The fact that this process has inflicted horrendous social pain on so many eurozone members was deemed, at best, unfortunate by Berlin and, perhaps, a helpful reminder of what happens if members do not heed the German model of monetary union.

What happens next in Portugal could be important. If the government finds the missing billion from somewhere, as the Daily Telegraph suggests it might, and the people are able to donate this pound of flesh from some other part of their body, all well and good. However, if this is not the case then either Berlin (oops, sorry, the troika) cut them some more slack or the government may fall.

The lesson for Cyprus is obvious. The people may as well grasp now that this rescue is not the end of pain but just the start. The troika recovery path is fantasy (the Cyprus government has admitted, more or less) and Cyprus will miss the budget targets even on the extended timeframe. There will be more extensions and more debt and, unless the gas reserves eventually bail the Republic out, the future is bleak.

This is not to say that Cyprus was not the architect of its own downfall. It most certainly was. This is not to say that the Republic of Cyprus economy, and in particular the banking and public sector, is not in need of substantial structural reform. It most certainly is. The point is that to try to inflict such change in an economic augenblick involves excessive social pain and risks a democratic backlash that may undermine the whole purpose of the EU/EMU project. People do resist.

The contribution of the great Joan Baez (