In his latest note, Richard Koo warns that the economic malaise in Europe threatens democracy itself:
The question is how long democracy can survive with governments and EU institutions forcing the patient to undergo treatment for the wrong disease. Eurozone social security programs have made great strides since the prewar era, and as a result a recession will not lead to an immediate collapse of democratic government.
However, the term “democratic deficit” is appearing more frequently in Western newspapers, as more governments are implementing policies without going through proper democratic channels. The complete inability of leaders in the countries already experiencing double dips to present a plan for addressing the situation also casts a shadow over the outlook for democracy.
In Germany’s Weimar Republic, the unemployment rate was at 28% when the government pushed through austerity measures in the midst of a balance sheet recession, causing democratic structures to collapse.
In that sense I am deeply concerned about eurozone unemployment, which now stands at 24.8% in Spain (June, Eurostat) and 23.1% in Greece (May, National Statistical Service of Greece). Even more worrying, policymakers have been unable to present the public with a single persuasive scenario showing a way out of the current predicament.
The Weimar Republic collapsed in 1933 after Chancellor Heinrich Brüning’s insistence on fiscal consolidation triggered an economic implosion. It is extremely unfortunate that the countries of Europe are repeating his mistake some 80 years later.
The one difference is that this time it is the lack of understanding of balance sheet recessions at the ECB, the EU, and the German government that is pushing the eurozone (ex Germany) in the wrong direction.
This might seem alarmist, but it is not totally out of line.
When you see the Neo-Nazi Golden Dawn party enter parliament in Greece, it becomes clear that the economic crisis has shaken the public’s views in the system in a big way.
Democracy is also under threat in a way Koo doesn’t threat, namely the subjugation of democracy on behalf of stability. The rise to power of Italian PM Mario Monti — an unelected technocrat who was basically put in place by the ECB — is a good example of that.