Capitalism and Democracy in East Central Europe: a Sequence of Crises

Young Economists Conference 2017 – European Integration at a Crossroads

October 12-13, AK WienDorothee Bohle, European University Institute, Florence

Structure

• Framework: Wolfgang Streeck’s (2014) “Buying Time: The delayed crisis of democratic capitalism”

• Extension of the framework to East Central European capitalist democracies before the Global Financial Crisis

• Two reactions to the Global Financial Crisis: rebellious and compliant debtors

• Debt and the unmaking of Democracy

A series of crises of democratic capitalism and a series of displacements of the tensions between capitalism and democracy

Type of capitalism Institutional location of tensions

Postponing the crisis (“buying time”)

Political formula

Crisis of Fordism Labor market(capital vs labor)

Inflation Democratic corporatism

Neoliberalism Electoral arena(capital vs voters)

Public Debt Conservative-market radical

Financializedcapitalism

Financial markets (asset owners vs indebted consumers)

Private Debt 3rd way Social Democracy

Austerity capitalism Within and between states(creditors vs debtors)

QuantitativeEasing

Technocracy

Source: Based on Streeck 2014

Four crises of democratic capitalism in the US

Streeck 2014

Implications for democracy: a process of hollowing

Mechanisms• Capital goes global, whereas

democracy does not• Capital squeezes the state, which

increasingly lacks the resources to deliver to its citizens (tax state ->debt state-> consolidation state)

• Capitalism destroys collective identities and institutions

Marketization

Popular Democracy Hollow Democracy

Electoral Democracy/Depoliticized Institutions

Democratic Corporatism

International Diplomacy

Transformational recession and predictions of democratic breakdown

1990 1991 1992 1993 1994 1995 1996Visegrad 4 -4,5 -12 -3,4 -0,5 3,9 6,4 5,2Baltic-3 -3,4 -10,9 -29 -16,3 -0,4 3,1 2Slovenia -4,7 -8,1 -5,4 1,3 5,3 3,5 3

-30

-25

-20

-15

-10

-5

0

5

Ach

sent

itel

GDP growth per capita 1990-1996

EBRD Transition Report 1996

Early democratic breakdown prophesies, e.g.

• Claus Offe’s “Dilemma of Simultaneity”

• Adam Przeworski’s warning of “inevitable authoritarian temptations”

did not come true.

Hollowing of democracy

15

25

35

45

55

65

75

1991 1992 1993 1994 1995 1996 1997 1998

Trade Union Density, 1991-1998

Visegrad Baltic States Slovenia

45

50

55

60

65

70

75

80

85

90

1 2 3 4

Voter Turnout (1990s)

Visegrad Baltic States Slovenia

Jelle Visser database 2016 Idea Voter Turnout database

Reconciling democracy and capitalism in and after the transformational recession: the Visegrád countries and Slovenia

Welfarist Social Contracts– Protection provided in relation to perceived or

demonstrated voice in politics (“Divide and Pacify”)– Results in an “abnormal pensioners’ boom” and a

pensioners’ welfare state (Vanhuysse 2006)

Democratic Corporatist Social Contract– Combines welfarist contract and institutional labor

inclusion

Vulnerability– public debt

V8(Vanhuysse 2006)

Reconciling democracy and capitalism in and after the transformational recession: The Baltic States

Nationalist Social Contracts in the Baltic States

– Compensate by identity gains for social losses, reverse ethnic hierarchy, contribute to national rebirth

– Operate through destroying losers’ collective action capacity to resist

– Exclusionary democracy: the absence of citizenship rights for large ethnic minorities

• Vulnerability: social question

9

The 2000s: two patterns of public and private debt

0

10

20

30

40

50

60

70

80

Public and household debt, Visegrád& Slovenia

public debt household debt

0,00

10,00

20,00

30,00

40,00

50,00

60,00

70,00

80,00

Public and household debt, Baltic States

public debt household debt

% of GDP, data for public debt Eurostat, for private debt: European Mortgage Foundation

An unprecedented mortgage and housing boom

V-4 & Slovenia: • boom relieved the public purse

from having to offer public subsidies for housing (esp. Hungary)

• Contributed to growthBaltic States• Debt was at the core of growth

and helped address the social question

0

10

20

30

40

50

60

70

80

90

0 5 10 15 20

Residential loans to

GDP (annual change)

Nominal house price (annual change)

Figure 1: House price and mortgage lending (2002-2006)

ECE

WEP

Core

House prices Egert and Mihalik 2007 and European Mortgage Foundation, residential loans: European Mortgage Foundation

Foreign-led mortgage boom

EU financial governance regime fostered rapid credit growth

Foreign currency loans decrease the cost of capital

12

Molnar 2010: 11

Capitalism and democracy during and after the GFC: Hungary - a debtor’s revolt….

In 2011 we are declaring war against government debt. . . . We must and will defeat government debt, which is the source of most of our problems and difficulties today. If we do not overcome it, then it will overcome us once and for all. (February 2011)

When it is an issue of our having an economic policy that is not built upon our taking away pensions, curtailing social support, reducing family support and so on, but our trying to protect pensioners, to defend those living on their wages and pay and to maintain the cultural standards of the country, then we can come into conflict with representatives of the IMF: this is what happened. (August 24, 2013)

Prime Minister Orbán announces the government’s war on public debt during his 2011 State of the State Address.

…. in the name of the people & national sovereignty

The banks… must get used to the new situation. Now we are the stronger ones and they must adapt to the Hungarian people. Nobody is going to gain extra profit at the expense of the Hungarian people ever again. The era of colonization is over. (September 13, 2013)

[W]e …. do not like to live off other people’s money, because sooner or later this will lead to the loss of our dignity, the evaporation of respect for our nation and a degree of subordination; this is something that the Hungarians do not tolerate well. (May 8, 2015)

Do rebellious debtors have to be anti-democratic?

Why the debtor-creditor relation is conducive to a populist revolt1. It pits states against states (or the EU)2. It provides for external and internal

enemies that can cement the imagined unity of the “real” people

3. It offers a welcome opportunity to challenge external checks and balances

4. It supports a “deep story” the relationship between great powers and small (indebted) nations

Greece: an aborted democratic revolt

• Syriza came to power with a clear mandate to renegotiate a debt deal for Greece which was reeling under the effects of five years of brutal austerity.

• While Syriza staged a (ill-conceived) revolt against Europe in the name of the Greek people, it lacks the anti-democratic features of other revolts.

• The harsh reaction of the creditors to the democratic revolt contrasts sharply with their absence of reaction to the right-wing populist revolt.

• Debt renegotiation vs partial revolt?• Left-wing revolts are more frightening than right-wing ones?

Latvia: a compliant debtor

[The central bank governor said a devaluation] would completely destroy the economy. In fact, he said suggesting such a thing was unprofessional and immoral (I will spare you his more graphic language). (IMF mission chief Rosenberg, Nov. 17 2008)

Already now Baltic performance has reassured many sceptics that the internal adjustment strategy simply works, making a good case for other countries to move forward with fiscal consolidation and much needed reforms (Ilmars Rimsevic 2010).

Bank of Latvia’s governor Ilmars Rimsevic for whom devaluation is not a medicine but poison

Austerity nationalism and hollow democracy

• A huge protest wave in 2009 gives way to resignation and massive exit

• Despite frequent government changes, politics of austerity remain the same

• Although a party critical of austerity repeatedly received most of the votes, it was excluded from government because of the ethnic divide

Conclusions

• Similar to advanced capitalist countries, the East has experienced a sequence of crises of democratic capitalism, and has relied on a number of solutions to overcome these crises. None of these solutions has been sustainable, and with each crisis, new “fixes” had to be found.

• In the current phase of capitalism, democracies’ biggest challenge is to cope with multiple debt crises, in an environment where the power lies with creditors.

• In this situation, the democratic center does not hold– right wing populists revolt against debt in the name of the people only to later

disband the people– debt compliance is only achieved at the cost of democracy’s popular component.