Economic Liberalism and Democracy

by Daniela Schwarzer

More and more, the debate in Europe is turning towards the question whether we are facing a crisis of legitimacy or even democracy in the EU – on top of the banking and sovereign debt crisis. In this and two following blog posts I am developing some thoughts on the challenges national democracies are currently facing in the euro area.
The tensions between economic liberalism and political liberalism have been identified decades ago. Economic, in particular financial openness can indeed have destabilising political effects. The European Union in this regard poses a particular challenge to its Member States. The creation of the single market and the introduction of the single currency considerably limited the ability of the Member States to influence the economic developments in their home countries. The euro area members have handed monetary and exchange rate policy over to the European level – and have hence given up the most powerful instruments to influence their economies. Meanwhile, there are no other instruments for macro-economic policy making on the EMU level in the absence of a euro area budget or European labour policies. As a consequence, macro-economic policy developments are no longer a matter of political choice. They are a more or less random result of the aggregate of national policy choices which usually do not fully take into account the new realities of sharing a currency and an economy and the monetary policy stance of the European Central Bank.

Meanwhile, capital mobility, in particular under the conditions of a single currency, has increased the pressure on governments to become more competitive. As Fritz Scharpf and others have argued, monetary and financial market integration have led to a bias towards supply-sided policies on the national level in order to attract investment and corporations which are tempted to move to sites with lower taxes and production costs. Until the sovereign debt crisis started to hit the eurozone in early 2010, low interest rates in the less competitive and less fiscally sound Member States hid these new constraints and have provoked irresponsible behaviour of the political and financial elite which now has to be paid for by the citizens. But since markets switched from an under- to an overemphasis of country risk, these same governments are exposed to severe constraints.

All governments of the euro area face much more restricted policy choices and can no longer credibly claim that they are able to influence growth and employment in their country. Increasing European and global competition puts them under pressure to reduce tax-financed welfare spending while unions face tough choices of either accepting lower wages and less attractive employment conditions or seeing jobs move out of the country. The challenges to post-war social market economies are hence substantial: measures to regulate employment and production conditions are as much at stake as are redistributive welfare and taxation policies which were designed to cushion off the unequal distribution effects.

Interest groups and governments seeking to maintain the welfare state now turn to the EU to provide the protection that used to be ensured on the national level. Given monetary integration and factor mobility in the EU, this is the right place to look. But the EU has no tools to provide social protection, transfers or the like to its citizens and there is little chance that the Member States will put the necessary competencies, instruments and financial means at its disposal in the near future.

Dr Daniela Schwarzer is Senior Associate at the Research Division European Integration at the German Institute for International and Security Affairs, Stiftung Wissenschaft und Politik (SWP) in Berlin. From September 2012 till August 2013 she is Fritz Thyssen Fellow at the Weatherhead Centre of the University of Harvard.