Tuesday, 28 June 2016

BREXIT, THE REACTION: democratic deficit, the falling elites, and the future of the EU

After hearing the results of the Brexit referendum on early Friday morning, my initial reaction was this comment on Facebook:



After cooling down over the next few days and reading about Brexit from a number of perspectives, I have to say that everything I said initially - still holds. I will carefully explain each point.

First, the democratic deficit problem. This is, sort of, my PhD topic, meaning that I'll be writing quite a lot about it over the next few years. Before explaining why this outcome is a deficit of democracy we must first define the concept of democratic deficit (or perhaps even - democracy failure). Basically, the democratic deficit concept concerns the interaction between politicians and partial interest groups, a legitimate consequence of electoral competition and political freedom to express and fight for one’s interests, and whether or not this interaction results in adverse economic outcomes (in my PhD I will be focusing on linking the failures of democracy to the rise in income and wealth inequality). The point is that in some cases democracies fail to erect the necessary institutions to prevent the favouritism of partial interests, the consequence of which are usually cronyism, corruption, nepotism, clientelism, etc. To make this a bit more relevant, consider the following excerpt from an earlier essay of mine
"The recent economic crisis has exposed all of democracy’s deficits. Dysfunctionality and political gridlocks that only worsened the crisis became a standard in the United States and Europe. Government bank bailouts and rapid accumulation of debt stroke a huge blow to the positive perception of Western democracy and capitalism itself. In addition, the Western model of democracy is facing a serious problem with rising inequality and to some extent the lack of social mobility. Various interest groups dominate the political spectrum in biasing budgetary expenditures towards their preferred goals leaving relatively less money for redistribution programs aimed at the poorer ends of the society, particularly in terms of education and health care. Politicians themselves engage in direct or indirect vote buying (either through gerrymandering or by giving direct concessions to their support groups), budget-maximizing bureaucrats add to the rise in government spending which isn't targeted towards the general population, while political campaigns are financed heavily by the corporate sector desiring prone legislation. All of this adds concerns over a poor image of the Western-style democracy. It has failed to become fully robust to cronyism."
So how is this linked to the Brexit? In two ways: first, the 'angry' Leave voters which consider themselves the losers of globalization (the 'immigrants taking our jobs argument'). Globalization always has its winners and losers, this is inevitable. As the theory of international trade teaches us the losers are usually the holders of the deficient resource within a country - in the case of the West: the blue-collar working class. Naturally as the working class keeps losing their jobs they have a tendency to blame both immigrants and their domestic political elites which have failed to protect them from these misfortunes. The European Union is a natural enemy of anti-globalizationalists. It represents everything they fear - in particular their intrinsic loss of competitiveness as the market attracts the better skilled workers to replace them. This is true for every country in the West, without exception. There is growing discontent from the working classes regarding the benefits of globalization and its prime manifestation - the European Union. They feel alienated as they did not reap any visible nor direct benefits from it. Naturally, they will rebel and oppose globalization and will support any political platform (far-right or far-left) that delivers the same bold criticism. 

However, the working class voters often fail to realize that the reason for their economic misfortunes lie beyond globalization itself and can be traced within their domestic institutions, in particular within their domestic political elites. How exactly? 

I've written about this before as well. Globalization, in addition to bringing enormous opportunities for wealth creation, in some instances led to the abrupt rise of new powerful elites - banking, political, and media - which threatened the sustainability of the system. The principles of competition were replaced by the rapid accumulation of power within a handful of selected business groups (recall the Leveson inquiry or the LIBOR scandal). British political elites forgot the distinction between being pro-business (favoring monopolies, oligopolies and picking winners) and pro-market (supporting competition and equal opportunity). This was not, as many falsely believe, a consequence of Thatcher's reign as she vehemently opposed any partial big business interests that undermined the interest of the customer, as well as the rapid accumulation of power within any industry, particularly within banking or politics. The post-Thatcher political leadership forgot those lessons and set the country on a path to increasing cronyism, rising inequality and declining social mobility, all of which was further emphasized by the financial crisis, the post-crisis austerity approach, and the subsequent long (double-dip) recovery. Luckily, none of these undermined Britain's vast accumulated wealth, but they had certainly limited its growth and split its population into the winners and losers of globalization. 

The second way in which Brexit represents a democratic failure is the huge political (and even constitutional) instability and economic uncertainty arising as a consequence. The markets' reaction is only a natural response to the huge uncertainty surrounding Britain and the EU. So the paradox here is that the legitimate (and direct) decision of the electorate (the very essence of democracy) has undermined the economic and political stability of the country. Some say this won't last too long and that the long term consequences are likely to be positive for Britain, however it's hard to see how that will be achieved given that the very country, the United Kingdom, may fall apart itself (if the Scottish and Northern Irish enact their independence referendums). 

So, the failure of elected political elites to suppress cronyism and the subsequent decision of the electorate that undermines the country's political and economic stability can both be considered good examples of how democracies need not always yield optimal outcomes. 

Second, the decline of trust in establishment elites, and the rise of populism. This is closely linked to the previous points. The failure of the political establishment to prevent cronyism and the rise of new powerful elites has severely deteriorated the people's trust in institutions and expert opinion. Whether domestic (the Treasury, Bank of England, prominent UK Universities,  and think tanks), or international (the IMF, World Bank, any EU-related institution) - they were all considered to be untrustworthy during the Brexit debate. Why? One reason was the use of populist ideology to unsettle the electorate accusing the experts (particularly the economists) of having a vested interest as they tend to receive a lot of money from the EU. This argument worked well having in mind the anger against the establishment, as expert opinion was seen as a justification of establishment policies and was therefore considered to be untrue. Whatever argument was being thrown into the debate, not a single one had the allure of impartiality. On the other hand the establishment (and the experts to some extent) made their own mistakes of ignoring the concerns of their electorate, in particular the low and middle classes. This led to the further deterioration in the relationship between the elites and the "non-elites", implying even lower levels of trust among the non-elites. Unfortunately, there seems to be no signs of this damaged relationship to be improved any time soon. 

Third, Cameron's political legacy. Boy, did he mess up! This time last year he was in heaven. He had just secured his second mandate by a landslide electoral victory, removing his Conservative party of the LibDem coalition shackles, and was on course to bring a truly positive political legacy to Britain. After winning two general elections, and securing a major political win with the Scottish referendum, he decided to tie his political career, not to mention the future of his country, to the Brexit referendum. Just like Blair destroyed his positive legacy with the Iraq war, Cameron did perhaps even worse with the EU referendum. A man who had it all he ever wanted, just lost everything in a crazy gamble with his own party and what is mostly his own electorate. Not unlucky, just plain stupid.

Fourth, Boris Johnson as the new PM, the spread of populism, and the tectonic changes that await us. Boris Johnson is in a very difficult position currently. He appears to have gotten exactly what he wanted - Leave won and now he's the first favorite to take over the party and the Prime-ministership in October. Which is four years earlier than he'd hoped. However his victory seems awfully bitter to him as well (judging from his reactions and, well, his body language). It is as he had thought: "there is no way Leave will win, but I will make myself the leading figure of the campaign, and use this to take over the party with its looming euro-skeptics after Cameron quits" (which he announced to do prior to 2020, and said he was not seeking a third term). Sounds like a perfect plan, particularly as Boris would have no problem winning the generals in 2020 from the lackluster Labour leader Jeremy Corbyn (who is also likely to face a leadership challenge soon). Except that it backfired - Leave won! So Boris got what he wanted, he's becoming the PM, why isn't he happy? Perhaps because he realizes he probably won't be PM for too long. Time for another Batman quote (this time from the Joker's conversation with Harvey Dent):


As for the consequences and the spread of populism, my immediate fears are not with the EU, but on the upcoming Presidential elections in the US in November. There you have another typical establishment candidate, Hilary Clinton, which would in normal times, given her enormous experience (First Lady, Senator, Secretary of State, etc.) be a shoe-in to lock the victory. However she is going up against the worst possible manifestation of cheap populism, lies, and low-class appeal - Donald Trump. Who would have figured that an 80s style billionaire would speak to the mind of the poorest better than any socialist out there (including Bernie Sanders). Trump's messages are almost the same as those of the Leave campaign, as is his likely voting population. Perhaps the Democrats will learn from the mistakes of the Remainers by not having a negative campaign and not trying to scare the voters as to what will happen if Trump wins. A positive message is necessary. 

Fifth, the EU devolution, the reaction of EU policymakers, and the potential separation of Scotland and Northern Ireland from Britain (this last one I failed to touch upon in my initial comment). Despite the initial reaction of Europe's far-right and far-left parties demanding EU membership referendums in other countries, I am still confident that the EU will survive this shock. As it survived the sovereign debt crisis, the boiling point of November 2011 (which was several times worse in its destabilizing effect than the current referendum result), not to mention several highly likely Grexit possibilities. Europe's strength has been tested on a numerous occasions in the past 6-7 years, and even though this might seem as the decisive blow, I highly doubt it. Particularly given the reactions not only of Europe's leaders, but many others across the EU (this could however be selection bias, as only the most vocal express their concerns about the EU). 

This is not to forget that Europe needs a deep, deep reform of its institutions. I've personally been emphasizing this since I started the blog. The EU has completely alienated itself from the people. Even more so than any political leadership in any of its members. No one sees the EU as the convergence machine for prosperity anymore, while the benefits of the free trade area and the guarantee of peace on the continent are mostly being taken for granted. Instead the EU is, quite rightly, being portrayed as the bureaucratic leviathan with endless regulatory and legal requirements that stifle business and innovation, and that are to the common EU citizen nothing but an unnecessary burden. The EU's bureaucratic regime is turning into the worst manifestation of Kafka's and Orwell's novels. It is no wonder the people have an urge to fight against it. 

I sincerely hope the EU political elites get the message from Brexit. That could be the biggest positive that comes out of it - that the EU reforms and starts re-emphasizing innovation and trade, and starts to focus on lowering within-country (as well as between-country) inequality and increasing the living standards of its people. But that's certainly not all. EU law needs to be altered as the biggest objection against the EU is that it is being run by unelected technocrats. This is true, and it need to change. EU Parliament elections are not enough since Parliament has very little political clout in the EU. On the other hand the EU budget itself has a purely developmental goal (agricultural subsidies, EU funds, education and skills, etc.) and is not really a mechanism for economic policy. So despite being overreaching and intrusive in its regulatory patterns, the EU at the same time signals vast incompetence and inability to deal with the people's problems. Just recall its responsiveness to the sovereign debt crisis, or its reactions regarding the Ukraine crisis. 

In order to do all this, perhaps more federalism is needed. Now that the UK, the biggest opponent to "an ever closer Union", is out of the picture, this may very well be achieved. However, the danger is again the same - will this new federalism enable the unelected bureaucrats with more power which would imply more of the same or will it force them into promoting the true goals of Europe, as envisioned back in the 1950s? Given that the EU project is still evolving, meaning that it is still in the phase of trial and error, we can think of most efforts in the past 6-7 years as being an example of error. But that doesn't mean we should give up on it quite yet. 

Finally, what is to be left of the UK after this whole thing boils down? Possible just England and Wales. The biggest problem in the whole post-referendum debris is the vast political uncertainty. Literary no one knows what comes next: will Article 50 be invoked?; when and how?; what will the negotiations bring?; is the referendum outcome fully binding and will the "Bregret" crowd succeed in overturning it?; will Scotland block the Brexit vote?; will they have their own referendum which will bring them back into the EU?; will Northern Ireland do the same? - these are all questions no one has an answer to yet. One thing is certain though - in the short run, Britain will suffer. Political instability always gives rise to economic instability and possibly a recession, depending on how long it takes to resolve the situation. And from the signals we're currently getting, it will take quite some time to resolve it. 

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