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

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1 Capitalism and Democracy in East Central Europe: a Sequence of Crises Young Economists Conference 2017 European Integration at a Crossroads October 12-13, AK Wien Dorothee Bohle, European University Institute, Florence

2 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

3 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 Financialized capitalism Financial markets (asset owners vs indebted consumers) Private Debt 3 rd way Social Democracy Austerity capitalism Within and between states (creditors vs debtors) Quantitative Easing Technocracy Source: Based on Streeck 2014

4 Four crises of democratic capitalism in the US Streeck 2014

5 Implications for democracy: a process of hollowing Mechanisms M a r k e ti z a ti o n Democratic Corporatism Electoral Democracy/ Depoliticized Institutions International Diplomacy 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 Popular Democracy Hollow Democracy

6 EBRD Transition Report 1996 Transformational recession and predictions of democratic breakdown Achsentitel GDP growth per capita Visegrad 4-4, ,4-0,5 3,9 6,4 5,2 Baltic-3-3,4-10, ,3-0,4 3,1 2 Slovenia -4,7-8,1-5,4 1,3 5,3 3,5 3 Early democratic breakdown prophesies, e.g. Claus Offe s Dilemma of Simultaneity Adam Przeworski s warning of inevitable authoritarian temptations did not come true.

7 Hollowing of democracy Trade Union Density, Voter Turnout (1990s) Visegrad Baltic States Slovenia Visegrad Baltic States Slovenia Jelle Visser database 2016 Idea Voter Turnout database

8 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 (Vanhuysse 2006) V8

9 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

10 The 2000s: two patterns of public and private debt Public and household debt, Visegrád& Slovenia Public and household debt, Baltic States 80 80, , , , , , , ,00 0 0,00 public debt household debt public debt household debt % of GDP, data for public debt Eurostat, for private debt: European Mortgage Foundation

11 An unprecedented mortgage and housing boom Figure 1: House price and mortgage lending ( ) Residential loans to GDP (annual change) Nominal house price (annual change) ECE WEP Core V-4 & Slovenia: boom relieved the public purse from having to offer public subsidies for housing (esp. Hungary) Contributed to growth Baltic States Debt was at the core of growth and helped address the social question House prices Egert and Mihalik 2007 and European Mortgage Foundation, residential loans: European Mortgage Foundation

12 12 Foreign-led mortgage boom EU financial governance regime fostered rapid credit growth Foreign currency loans decrease the cost of capital Molnar 2010: 11

13 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.

14 . 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)

15 Do rebellious debtors have to be anti-democratic? Why the debtor-creditor relation is conducive to a populist revolt 1. 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

16 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 antidemocratic 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?

17 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 ) 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

18 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

19 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.