February 2012

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outside interests and austerity. Creditors have bypassed the natural dynamics of democracy in Samuel Rines favor of imposing budgetary discipline on the irresponsible sovereigns. However, it appears there was little, if any, attention paid to the long-term effects in the imposition of austerity on the liberal democratic process. The concentration of power in ost in discussion of the European debt crisis a debt democracy lies not in elected leader, but in is the health of democracy, more specifically, an extra-national or non-governmental entity with the de facto power to impose its will on the debtor. liberal democracy. Liberal in the sense that Sovereignty of the mass citizenry is lost to the government should be organized around power of the outside few. Although usually in the the rule of law and individual liberties, not the American context. The debt loads of the European form of fiscal consolidation, the lack of an ability to successfully govern naturally follows these South are not only causing a fiscal crisis across circumstances. Demands of creditors to reduce the regionthey are causing a democratic one. government deficits and employment drastically Greece is no longer ruled by popular vote and reduce the feeling of political enfranchisement of legislative rulemaking. It is ruled by a troika and the population. The unelected are in control of a government with little ability to govern in the the domestic decision mechanism, namely, the peoples interest. Yes, this is the result of years of money. Is it difficult to comprehend the election of over-spending, over-promising, and insufficient a strong man, when one is already in place? governance. However, the disturbing and longerterm issue is the condition, functionality, and even This is not a critique of the International the legitimacy of democracy. The legitimacy of Monetary Fund or other creditors, and their democracy and liberal individual rights is critical methods of handling countries in need of bailouts. to repayment of debts, but it is also essential It is a critique of the way in which lenders to avoiding states with elected strong men. An safeguard and protect democratic and liberal unfortunate new class of democracy is in its values. The Greeks should not be apathetic to the infancy, the debt democracy demands of delayed elections, the imposition of is here. a technocratic government, and mandatory job Democracy, specifically the brand based on and wage cuts. It would be a different matter had a durable constitution, depends on a system the Greeks and their government come to the of governance that divides the power to rule. conclusion on their own, or at the least had the This creates a system in which it is difficult perception of self-motivation. The disillusionment to consolidate power in the hands of a single of a countrys people with the political system executive. The debt crisis has allowed the West matters. It is difficult for courts to be taken to witness the complete disenfranchisement of individual choice in government affairs in favor of seriously when there is no apparatus to enforce

The Debt Democracy

their rulings. The contractual obligation to pay pensions becomes unenforceable when there is no money. A basic tenant of a liberal society is the rule of law. The breakdown and renegotiation of these contracts between the people and their government begins to disturb this premise. Not only does a debt democracy struggle to maintain the domestic policy apparatus from crumbling, but it faces a challenge to the integrity of its legal framework. The debt democracy faces a crisis, not only of payment, but of legitimacy to its people.

The debt crisis has allowed the West to witness the complete disenfranchisement of individual choice in government affairs in favor of outside interests
The full development of a debt democracy does not end at the point of intervention. It is the future political backdrop that is critical to the stability, and the return, of a democratic and liberal society. Crises are a recipe for political turmoil, especially in societies where dramatic and forceful changes have been instituted. Preserving democracy and freedom through the crisis is pivotal. Safeguards against tyranny in a subverted democracy are currently overlooked in favor of the narrow view that debts should be repaid at all cost. When measuring the outcomes of austerity and restructuring programs, the common measurement is the interest rate on debt issued to the public. This is much too narrow a view, as the consequences of attempting to placate investors may well have an irreparable impact on the legitimacy of liberal governance. The political atmosphere of a debt democracy is central to both the potential for repayment and a proper power structure. When coming of age, it is likely, nearly assured, the debt democracy will search for a new way to rule, a hoisting of the occupiers. The temptation is to elect a powerful, nationalistic executive. This is not so far afield, after all, there is already an immensely inf luential entity dictating the course of the country. The sudden change in the ruling mechanism of the state has already shaken it substantially from its core method of governance

in the past. Electing a leader with a will to implement internal change and provide strong leadership is not a concern in and of itself. It is the potential for this leader to subsume power, in the name of reform, and constructing a centralized, dominant position in the executive branch. This shift towards an elected, illiberal government must be defended against in the periods of reform. Instead of looking at the situation as one economic transformation for the better is taking place, a closer look should be granted to the shifts in political power. Debt democracy is in many ways the symptom of a larger and more potent force. Fiscal deficits and the debt financing have allowed much of the developed world to spend on social programs and policies that are not sustainable in the long-run. Declining interest rates over the past 30-or-so years have allowed governments to borrow and sustain this borrowing. Used to finance popular programs and thwart economic crises across the past couple of decades, the debt remained, until the financial crisis, mostly an afterthought. The ability to maintain low rates of borrowing can be sustained for a prolonged period of timeJapan is an examplebut it will not last forever. The West must be wary of the debt democracy, and the possible outcomes, when conducting policy. Debt is the great limiter of political capability at its extremes. As the debt democracies continue to come into existence, the inability of these governments to act as an arbiter for their people must be taken seriously. Otherwise, the risk is not only to encounter mounting sovereign debt crises, but a rising disenchantment with liberal democracy.
SAMUEL RINES is an a nalyst and Economist at chilton capital m anagEmEnt in houston, tExas. dirEct quEstions or commEnts to: srinEs @chiltoncapital .com ZACH BECk is thE E ditor of chilton currEnts and an opErations spEcialist at chilton capital m anagEmEnt in houston, tExas. for furthEr information on chilton capital m anagEmEnt stratEgiEs and sErvicEs, plEasE contact christophEr l. K napp, cKnapp@chiltoncapital .com for rEprints contact srinEs@chiltoncapital .com www.chiltoncapital .com/currEnts