Austerity, Democracy, left and right wing parties, Greece (Syriza) and Spain (Podemos, we can)

In extended time of austerity due to after war conditions or financial default problems, people feelings swing to extremes: either the people opt for a left-leaning social reforms or they retract to their cocoon of right wing tendencies that lead to authoritarian political systems.

It may be odd to use a Roman metaphor to describe a Greek political event, but in this case, it’s apt.

Just as Julius Caesar crossed the Rubicon river because he could, in spite of the warnings of the Roman Senate not to, so Alex Tsipras, leader of the anti-austerity party, Syriza, has decided to try to end austerity in Greece, in spite of Europe’s leaders saying he shouldn’t.

Whether Tsipras will succeed is still unclear, but whatever happens, his victory represents a crucial turning point for Europe—a signal that time has run out on austerity policies.

Spain is following suit as Europe is facing an extended period of deflation and social unrest.

Give people jobs and they quiet down. How to reform a capitalist system so that worthy and honourable jobs can be created and sustained?

Austerity vs. Democracy in Greece

A “Tsipras” had to happen somewhere eventually, because there’s only so long you can ask people to vote for impoverishment today based on promises of a better tomorrow that never arrives.

If voting for impoverishment brings only more impoverishment, eventually people will stop voting for it—and the timing of “eventually” will depend on when people’s assets run out.

In the Greek case, backers of the incumbent New Democracy party and its austerity policies constitute that quarter of the electorate who still have assets (pensions, paper, and portfolios) after 5 years of depression and who want to preserve what they have.

The 36% that voted for Syriza were the young, the asset-less, and the unemployed—people who either lost what they once had or never had much to begin with.

Greece’s 1.9 percent of growth last year means essentially nothing to a society that has lost nearly 30 percent of GDP in a little over half a decade.

On the current course, it would take, by latest estimates, two generations for the country to get back above water.

Syriza’s victory presents two lessons for the rest of Europe.

First, no one votes for a 15-year-long recession.

Second, you can’t run a gold standard in a democracy. Either the gold standard goes, or democracy goes, and that is the choice Europe may face sooner than it thinks. (Why? Is the USA system truly a democracy after they flaunted the gold standard in 1968?)

The Euro is the gold standard that pretends that it’s not one—and therein lies the rub. While Europe has a plethora of national parliaments and free and fair elections, as well as a European parliament and multiple institutions with delegated power to represent the interests of citizens, once a country is a member of the eurozone, certain things happen that bypass any possible democratic checks.

On the upside, its credit history gets rewritten. Greece and Italy get to borrow like Germany (with predictable results). On the downside, when a eurozone country is hit with an economic shock, it cannot respond to it through the exchange rate (devaluation) or by using the printing press (inflation).  (Only Germany has the monopoly of printing the Euro money)

It must choose between default, which is not allowed, and balancing its books through internal devaluation (austerity).

And if that means a couple of constitutional coups d’état have to happen in the heart of democracy to get the policies through, as happened in Italy and Greece in 2011, then so be it.

So austerity becomes the only game in town. Although it may be rational for any one country to be austere, when multiple countries that share the same currency with no common fiscal policy do so, the result can only be a massive contraction of GDP and a corresponding increase in debt—which is exactly what has happened in Europe in recent years.

The boost in consumer and investor confidence that austerity was supposed to provide never materialized, and the eurozone as a whole slid into recession, and then, in the periphery, into depression and deflation. Now that all of this has occurred, however, the politics of sustaining the euro have changed, and changed utterly.

Until now, Eurozone policymakers’ obsession with fighting inflation has given them a one-sided understanding of politics. (Why Europe has to fight deflation too? It is good for the common people to survive their daily expenses)

In fact, Europe has not had an inflation problem of any magnitude since the 1970s. What it now faces is deflation—and since the politics of inflation and deflation are very different, the wrong policy choices produce Syrizas.

Inflation, after all, is not a general malaise that hurts all members of society equally, but a class-specific tax.

Those with assets, particularly paper assets, lose harder and faster than other groups that can pressure the state to accommodate them, which is why under inflation creditors suffer and debtors prosper. (Not in the USA)

Consequently, periods of inflation produce a type of politics where creditor interests come to the fore and the state is forced to retreat. The 1920s were one such period and the 1970s another—which is when Europe, and the euro, began to take their current form.

Deflation is different. Rather than creditors losing and debtors benefitting, in a deflation almost everyone loses, regardless of asset class.

Consider the choice of whether to work. A worker who decides to take a pay cut to price herself into a job is individually rational. But collectively, if all workers try this, the result is a collapse in consumption. (If the price of commodities drop commensurate to the pay cut, there is no problem. Common people will refrain from taking vacations abroad and patronize their own sceneries).

Employers get cheaper labor, to be sure, but also less demand for their products. Their logical individual responses are to cut prices to spur sales—but once again, the aggregate effect of such responses is to lower prices further. This increases real wages at a time when the economy is shrinking, which leads to more layoffs (Cannot comprehend this logic).

In such a world, with practically everyone losing, calls ring out for state intervention to stop the bleeding, and eventually, they are heard. It happened in the 1930s, and it is happening once again today.

This is what Tsipras and Syriza represent: the moment Europe drifted from ever-deeper and ever-wider open capital markets and institutionalized neoliberalism to a system in which the state comes back to reassert sovereignty over markets. (What if investors are reluctant to buy State properties as in Greece, on the assumption that the State will eventually lower its asking price?)

At that point, either democracy trumps markets, which need not be a progressive move, as Syriza’s immediate choice of coalition partners demonstrates, or markets undermine democracy to protect their asset values.

Which course European countries choose will be determined in the next few years, but a glance around the continent suggests that such a choice is indeed coming.

Greece may have crossed the Rubicon first, but due to its size in the European economy, Spain may be the game changer.

In Spain, Podemos is likely to form a winning left-wing coalition after that country’s general elections this fall, especially after the demonstration effect of Syriza.

In Ireland, Sinn Fein is cut from the same anti-austerity cloth and has risen substantially in the polls.

Although such parties are often called extreme, it is important to stress that their support bases, regardless of their leader’s dodgy connections, are democratic political forces whose core claims—­an end to self-defeating austerity and impoverishing wage policies—echo mainstream social democracy and the recommendations of many prominent economists on both sides of the Atlantic.

With regard to debt relief, these parties are merely restating the standard economic case that their countries’ debt overhangs are too big for investment to be resuscitated to levels that would permit high growth.  (The time of big countries waging wars against defaulting countries as during the colonial period is a tenuous alternative. Actually, big countries foment civil wars to buy very cheap State properties in exchange of the default debt)

Maturities can be extended indefinitely, but unless growth is restored, the game is over, and not just for Greece.

For those who fear Syriza and its left-wing counterparts, it is worth looking at the alternatives on the radical right.

From Britain to Hungary, political parties—whose ideology spans the spectrum from the explicitly Nazi (the Golden Dawn in Greece) to the nationalist–populist (the United Kingdom Independence Party and the French National Front)—are busy working to channel public anger in a different direction.

Harkening back to Europe’s darkest days, they translate negotiable conflicts over economic policy into non-negotiable conflicts over ethnic identity. They attack European integration even more than the left-wing parties, question the democratic rights of existing citizens, and fan the flames of xenophobia toward ethnic minorities and immigrants.

If Europe’s ruling elites want to save the European project, and the Euro at the heart of it, they need to start actively engaging with democratic left-wing parties such as Syriza and Podemos rather than shunning them.

If they don’t, they will drive some of these parties into volatile left–right alliances, or, if they fail in their mandates, leave the stage open to political forces whose goals will be far more radical than mere debt restructuring and opposition to austerity.

What is at stake now is not simply Syriza’s next moves or even a possible “Grexit.” These are symptoms, not causes.

The problem is that European authorities, driven by Germany, are enforcing a politics of deflation under a pseudo-gold standard, expecting citizens to vote indefinitely for their own impoverishment in order to save the asset values of creditors.

In such a world, both radical left- and right-wing forces can only stand to gain ground across many supposedly stable countries, and quicker than we think. To avoid that fate, the continent’s powerbrokers should make some sort of deal with Syriza now—because what may follow it may be far worse.