How Europe works

This time it’s Italy
I used to believe that the Eurozone was undemocratic. Now I’m not so sure. The simple view is that national electorates have been neutered. When Greece votes to reject austerity, its government is forced back to the table, and delivers more of the same. When Ireland faces a run on its banks, the ECB president sends the government a set of instructions on a couple of sides of A4, as a condition of lender-of-last-resort support, and when Portugal’s newly elected government decides to breach the fiscal rules, it risks disqualification from the QE programme and eventually tows the line.

Italy has been here before. At the height of Eurocrisis, Silvio Berlusconi was given his marching orders, and Mario Monti brought in as an interim enforcer of fiscal compliance. The Italian political system hasn’t even come close to engaging European authorities this time around. Its president, Sergio Mattarella, has the done the work for them, caused a nascent populist government to die an early death, and then permitting a more benign renaissance. Is this democracy in action, or flagrant rule by dictatorial technocrats?

The Varoufakis fallacy
There has to be a distinction between policies we have a personal preference for, and legitimacy of process. I have opposed all of the fiscal policies pursued in these instances, but bar the intervention of Trichet in Ireland, which was probably illegal, it is not obvious that the others are undemocratic. Majoritarian electoral process is an essential component of democratic legitimacy, but not its sole basis. The flaws in electoral voting systems are well-rehearsed. Elections often result in minority rule. Unless the vast majority of the electorate share preferences, coalitions give disproportionate power to minorities, and in first-past-the-post systems, a minority of the electorate often ends up with a majority of seats. Perhaps more importantly, the preferences of voters are not consistent at one point in time, or across time. Decisions made in the past are often binding on future electorates. Deciding to join the Euro is a clear example.

In response to the structural flaws in electoral process, mature democracies have checks and balances. Bi-cameral legislatures with different appointment processes or different electoral cycles try to compensate for time inconsistency and minority rule. Constitutions often constrain the current crop of legislators. Italy’s President fulfils a similar constitutional function.

In the real world, checks and balances extend beyond the political institutional structure. Interdependence is an inherent loss of sovereignty. If capital or labour can move freely across borders, there will be consequences for national decision-making. Turkey is not part of the Euro, but the main constraint on Erdogan’s growing power is the free movement of domestic and international capital. He can wrestle with his central bank for control of interest rates, but he can’t stop his currency from collapsing at the same time.

How the Eurozone works
The facts of how the Eurozone works are now very clear, and no nation can really claim they walked into it blindfold. Eurozone economies do not have fiscal autonomy. That is a fact. It is a not a consequence German obstinacy, but of joining the Euro. The current fiscal rules may be a travesty of economic best practice, as Simon Wren Lewis points out, but they are not undemocratic. If a national government cannot print money, its budget constraint is determined by capital markets and by access to the central bank, in this case the ECB. This is precisely why a number of European countries choose not to join the Euro. Those that did were giving up a significant degree of fiscal and monetary autonomy. They were importing a check on domestic political authority. Consistent with the clear objectives of the European project, joining the Euro further constrains domestic political extremism through belt-and-braces monetary and fiscal prudence.

In democracies, we are victims and beneficiaries of our past decisions. The ‘Varoufakis fallacy’ – that every national electoral decision somehow carries divine authority – is naive and disingenuous. You cannot hold a national election and then claim a mandate to change Euro-wide rules. That would require a Euro-wide election, or a negotiation between members states.

In Italy’s case, the rules of the game for large economies in the Eurozone are very clear. Stick by the fiscal rules and the central bank ultimately stands behind your bond market and your ability to finance fiscal deficits. Reject the rules, and you face the market. ‘The market’ is international capital, but also domestic capital, and savings. National savers are rarely as nationalistic as their political representatives. Italians are as likely as anyone else to flee their banks and government bond markets if central bank backing is withdrawn. This is not undemocratic in any sense. Elections rarely, if ever, reflect ‘the will of the people’. The Northern League won only 18% of the vote. The five star movement, which won 30%, is a protest vote – it is easier to define as a rejection of the status quo than as a positive policy platform. No one voted for a coalition of the two – it wasn’t on the ballot paper.

True democracy is messy. It protects essential rights, it resolves political conflict legally and peacefully, it provides for changes in government and it checks concentrations of power. What’s happening in Italy is democracy in action.