Improving the functioning of European democracies will require tackling a multitude of inequalities. This cannot be achieved without making fiscal and monetary policymaking more responsive to electorates.
This research paper has shown that the economy plays a much deeper role in the crisis of liberal democracy in Europe than is suggested even in the debate about the cultural and economic causes of populism. In particular, economic factors have been problematic in two ways that have not yet received sufficient attention. First, the transformation of European economies in the last 40 years has increased various kinds of economic inequality, which in turn has translated into political inequality and thus undermined democracy. Second, economic policymaking has been depoliticized and thus de-democratized, with the result that the focus of political contestation has shifted to toxic cultural issues. To solve both of these problems, it is necessary to ‘repoliticize’ and redemocratize economic policymaking in Europe.
There has been an increasing awareness that economic inequality is a problem for democracy in Europe – even in the debate about populism, there is an acknowledgment that economic policy must help those ‘left behind’ by globalization, financialization or other structural changes. This is a large part of what slogans like ‘build back better’ or ‘levelling up’ are about. In recent years, there has been no shortage of policy ideas for tackling income, wealth and ‘spatial’ inequalities (the latter defined as uneven levels of economic development and opportunities between regions within a country). These ideas include: redistribution through higher wealth taxes or the establishment of national wealth funds; the narrowing of spatial inequalities through targeted investment and changing macroeconomic management; and permanently running the economy closer to full capacity.
However, while such policies would go a long way towards reducing inequality, there are structural impediments to realizing them. As we have shown in this research paper, a clear bias towards the interests and preferences of the rich, the well-educated and asset owners has been entrenched in depoliticized institutions. Institutions biased in this way are unlikely to produce the policies required to reduce the economic inequalities that contribute to political dislocation in Europe. In particular, such institutions are unlikely to implement wealth taxes or similarly redistributive policies. In the absence of institutional change, the costs of future economic shifts such as the green transition are also likely to be borne by the poor, despite much lofty rhetoric about a ‘just transition’.
In other words, in order to solve the problem of inequality, it is also necessary to address the depoliticization of policymaking in Europe. Politics will only become more responsive to the preferences of a wider electorate if there is democratic contestation of economic policy questions that, as Chapter 4 showed, have increasingly been handled by technocrats over the past 40 years. In particular, the depoliticization of economic policymaking has reduced the policy space available to national parliaments within the EU, which have therefore become more preoccupied with cultural issues.
In the absence of institutional change, the costs of future economic shifts such as the green transition are likely to be borne by the poor, despite much lofty rhetoric about a ‘just transition’.
In thinking about how such a repoliticization and redemocratization of economic policymaking in Europe might occur, it is important to separate different aspects of economic policy, which in each case involve different kinds of policymakers with different levels of democratic legitimacy. In particular, it is necessary to distinguish between fiscal policy and monetary policy, which have been depoliticized in different ways and to different degrees, and which involve different actors. Fiscal policy, still in principle directed by elected governments, is theoretically more politically responsive than monetary policy delegated to an independent central bank.
Fiscal policy
As national parliaments, particularly in eurozone countries, have lost some of their power over fiscal policy, political contestation has instead focused on cultural issues. Restoring wider decision-making power to democratically elected politicians could allow parliaments and political parties to offer voters real alternatives, thus enabling constructive polarization in the economic policy debate.
However, for national decision-makers to gain meaningful new policy space, a change in monetary–fiscal coordination is required. Today, the political parties, parliaments and governments of eurozone member states, especially in the periphery, live in reasonable fear of adverse bond market movements. Because the ECB does not provide unconditional backing to eurozone government bonds, their interest rates can attract significant risk premiums or ‘spreads’ and increase significantly above the risk-free rate. This is particularly likely in response to signals of disapproval from the European Commission, the ECB or other, powerful member state governments. Partly for this reason, the term ‘lo spread’ – that is, the difference between German and Italian 10-year government bond yields – has become well known in Italian political discourse.
While creditor countries like Germany would see unconditional ECB support for member state treasuries as creating moral hazard, a policy of full monetary support conditional on compliance with reformed fiscal rules could reinvigorate governance. It could allow fiscal decision-making to be contested within a clearly delineated arena for national debate, rather than being dictated in effect by a (politically guided) fear of bond market vigilantes., This could foster more active debates over, for example, potential increases in public investment or the appropriate level of primary deficit. Such measures could support the green transition but could also be adopted in pursuit of wider economic policy aims, which themselves would be actively debated.
Beyond fiscal rules, and subject to lifting the bond market constraint just discussed, fiscal policymaking, as well as wider economic policymaking, could be opened up more radically through reform of democratic processes and institutions themselves. This could encompass the introduction of alternative models of democracy to complement or even ultimately replace traditional representative democracy. Such models include sortition (selection by lottery), deliberative democracy (citizens’ assemblies) and direct democracy (referendums, participatory budgeting, etc.).
Monetary policy
Since the global financial crisis of 2008–09, independent central banks and above all the ECB have been required to do the heavy lifting in terms of macroeconomic management and stabilization. Democratically elected politicians have been either unable or unwilling to use fiscal policy to achieve such aims, partly because of adherence to ordoliberal ideas or fear of bond market reactions, especially in the eurozone. In the future, central banks may become even more important, depending on their role in the green transition. More immediately, central bankers are faced with the highest inflation in over 40 years in many European economies. Inflation at this level requires a substantial policy response, with all the resulting distributive and political implications that this involves. This makes it essential to find ways to repoliticize and redemocratize monetary policymaking.
Making monetary policy more responsive does not necessarily mean reversing central bank independence, which some fear would entrench a permanent inflationary bias in policymaking. Instead, some central banks are experimenting with increasing participation in monetary policymaking by deepening their engagement with the public. They are making greater efforts to explain decisions to a wider audience, and in some cases are listening more to public opinion. But such steps are largely about more effective communication rather than meaningful consultation. Even where citizens’ views are solicited, it is not clear that these influence central bank decision-making. In short, while better communication helps, it is not sufficient to empower citizens.
Reforms need to go further. Recent research has shown that inflation generates a widespread popular and electoral backlash, as indeed it did in the 1970s. The so-called Great Inflation of that period was defeated not by heroic central bankers acting in the teeth of popular opposition but by nationally variegated political coalitions, all of which reacted to a groundswell of popular opposition to double-digit rates of inflation. This revision of the received telling of the ‘Volcker shock’ and the Thatcher and Reagan revolutions of the 1980s has a clear institutional implication: a redemocratization of central banking need not impart a permanent inflationary bias. As a result, central bank independence could be reimagined as independence primarily from the financial sector, which central banks have long considered their primary constituency.
Determining which institutional set-up best realizes this new kind of independence, and provides greater democratic accountability, will require further research and debate. Equally, how best to balance and combine increased democratic accountability with operational excellence must be discussed and trialled. One option would be to increase formal cooperation between democratically elected legislatures and monetary policymakers. This would still run into issues around the responsiveness of legislatures, but it would provide the opportunity for political contestation over another policy area with significant influence on the real economy.
Within the eurozone, this could be achieved without treaty change: in addition to its price stability mandate, the ECB is technically already obliged to follow a secondary mandate to ‘support the general economic policies in the Union’. Because this indeterminate wording leaves more room for discretion than the ECB can legitimately exercise in its current, de-democratized form, it could be given meaning and precision through high-level coordination with the political institutions of the EU. For example, if, within such a new coordination process, elected European policymakers were to state that pursuing a green transition is a high priority, the ECB could support this in a more democratically legitimate manner than if it just introduced the relevant policies itself.
Another option for combining a new form of central bank independence with the redemocratization of monetary policy would be to set up an elected body to oversee and possibly direct monetary policy. This would place greater emphasis on a separation of powers, i.e. independence not just from the private financial sector but also (particularly in parliamentary systems) from the elected executive. While this option would require more profound institutional change, it could harmonize well with deeper reforms to representative democracy.
The Catch-22 of repoliticization
Although each of the steps discussed above could go some way towards bringing democratic politics and the formulation/implementation of economic and monetary policy closer together, there remain significant barriers to progress. Firstly, beyond depoliticization, another driving force behind the economic transformations we have flagged is an ideational one, as centrist thinking on economic issues has converged on a broadly liberal worldview, in particular in the wake of the disappearance of the most obvious alternative to liberal capitalism with the collapse of the Soviet Union.
On top of that, reversing some of the institutional depoliticization of recent decades is not enough. Reversing de-democratization also requires behavioural change on the part of politicians, political parties and technocrats. As a result, the problem is not open to quick technical or technocratic fixes. Furthermore, as the brief discussion around bond spreads and fiscal policy showed, a repoliticization of economic policymaking will have to involve national governments and legislatures as well as supranational institutions, particularly in the EU. This creates further difficulties, as a number of supranational agencies were specifically designed to remove ‘excessive’ democratic influence from policymaking.
However, the main structural impediment to a significant redemocratization of economic policymaking remains the deeper issue of generalized unequal responsiveness. If the current, depoliticized system works particularly well for those whose interests and preferences are best represented in politics generally, any attempt at democratizing reforms will face an uphill battle. This is something of a Catch-22 situation: depoliticized economic policymaking has created the political conditions in which it is difficult to redemocratize economic policymaking. In other words, this is ultimately not a problem that can be solved easily or quickly. It requires a long-term and broadly shared commitment to improving the functioning of European democracies in order to prepare them successfully for the upcoming economic transformations.
