Greece: the Euro’s Democracy-Compatibility Test

by Ferdi De Ville

The election of Francois Hollande as the new French president did not come as a surprise to anyone. It had – as I argued in a previous blog – been anticipated in advance in EU circles. This led to a reorientation of the crisis discourse in the EU towards growth and jobs as at least a complement to austerity.

Judging from the reactions, the results in Greece did come as a revelation to many. While I was also shocked by the images of the neo-fascist Golden Dawn celebrating its entry into parliament, I was not amazed that the traditional governing parties New Democracy and PASOK did not secure enough votes to constitute a parliamentary majority with each other (they together not even convinced one in three voters). It seems that some in Brussels, Berlin, Frankfurt and elsewhere were still hoping that behind the protesters on Syntagma Square, a silent majority of the Greek population supported the Memoranda policies because they want to stay a eurozone member. Quod non.

To be frank: what the hell were they thinking? While consistently laying all of the blame for the Greek (and euro) crisis with the Greek policies of the past decade, they were expecting Greek voters to once more support the parties that have reigned during this decade (and ever since the democratic revolution). They pressured the PASOK and New Democracy to sign a declaration that they would respect the agreement also after the elections (and thereby seal their doom). But at the same time expected them to appear as winners from an election that was all about dismissing this memorandum.

Also after election day, they seem not to have learned and changed their mind. Barroso, Merkel, Weidman and others have insisted that the Greek government honours the terms of the bailout. Or otherwise the peninsula has to leave the club. This equals to telling the Greek population that if they want to remain a member of the eurozone democracy will only be a farce for many years to come. At the time of writing this entry, New Democracy’s Antonis Samaras, Alexis Tsiparas, leader of the radical leftwing party Syriza and PASOK leader Evangelos Venizelos have failed to form a governing coalition. Unless the Greek president succeeds in bringing together a national coalition (behind a technocratic government?) we are heading to new elections somewhere in the middle of June.

Leaving aside the much debated question if the euro zone is ready to manage and deal with a Grexit legally and economically, I want to raise the issue of what this episode, and a possible more-or-less forced Greek exit, means politically. In my opinion, this is a crucial test for the compatibility between monetary union and (real) democracy. It is well known that the establishment of the Economic and Monetary Union with a single currency and an independent central bank entailed (voluntary) losses of autonomy for nation states in currency and monetary matters. Moreover, in the 1990s the members of the to-be-established eurozone argued that for monetary union to succeed, they also needed to agree to respect fiscal rules that were included in the Stability and Growth Pact.

This architecture eventually proved to be insufficient to prevent micro- and macro-economic imbalances to build up within the eurozone, which member states were unable to contain because of lack of competencies (e.g. on the interest rate or capital controls). The reaction, based on a mistaken reading of the euro crisis as being caused solely by governmental profligacy, has been to contain democratic sovereignty even further. Eurozone states that had to be rescued through emergency funding had to agree with harsh conditionality programs. And all euro zone states and most non-eurozone EU Member States agreed to stricter rules and enforcement of fiscal discipline through the so-called six pack and the Fiscal Treaty that prescribes the constitutional anchoring of a budget equilibrium. Of course, all of this has been agreed (if sometimes under much pressure) by democratically elected governments, and thus has still at least a semblance of democracy.

However, by insisting that a newly elected Greek government should respect an agreement that its predecessor has grudgingly agreed to or otherwise it will be (kindly) requested to leave the club, the eurozone is really trampling on its democratic credentials. What signal does this give to other countries in trouble? And also: policy-makers are blazing around that a Grexit would be an exceptional event, and that this acknowledgement would suffice to convince everyone (including investors) that there would be no contagion. But exceptional until when? Until another population decides through the ballot box that it no longer wishes to suffer to repay the debts that are a collective responsibility of the debtor states, but also of the creditor states and of the systemic defects of the monetary union? Until the Irish vote wrongly in a referendum again?

Paul De Grauwe is right to say that to save the euro forgiveness rather than punishment is needed. The self-righteous imposing of punishment by northern countries and calling this solidarity will self-defeat the euro. Northern countries need to accept co-responsibility for the crisis. The consequence of this will be the cancellation of part of Greek – and possibly also Portuguese, Irish and Spanish – debt that has by now become official lending. This is nothing less than real transfers, and thus unconcealed solidarity. But there is no alternative, and it has the virtue of clarity. If Greece leaves the eurozone (and possibly others), it may default on even a larger part of its debt. This should be explained by politicians in northern countries. It would make clear that transfers are an inevitable feature of a monetary union, and that this might be managed better, more transparent and less acrimonious on a permanent basis than each time after crises. The euro zone has to become a solidarity union or it will disintegrate, and the unravelling will not stop with Greece. Of course, such solidarity could also be democratically rejected in Northern countries. But in any case, the policy of muddling through has reached its limits. The euro now desperately needs a vision. People are not willing to make infinite sacrifices for a currency. The currency should be reformed so as to serve the people.