Political stability under threat?

The idea of contagion is oft quoted by economic correspondents as they chart the diffusion of the liquidity drought throughout the economic world, yet its wider political implications have, in general, received scant column space. The notion that economic health impacts on the political sphere is universally accepted, yet how exactly will the current economic context impact upon the political landscape?

Will the crisis fundamentally weaken the appeal of the free market form of capitalism which has become the mainstay of the world’s democratic countries? Will this crisis, as that of 1929 did, push people towards the political extremes and polarize both opinions and parliaments?

The relationship between capitalism and democracy is oft debated, but as Charles Calomiris states, in recent times democracy has provided a framework conducive to spread and maintenance of individual freedoms upon which both capitalism and western society are founded. Yet the fate of capitalism has rarely seemed so uncertain, and Marx is undoubtedly chuckling in his grave at the exposure of many of its inherent contradictions. However, the FT newspaper has gathered together a group of fifty prominent actors and thinkers to reflect on “The Future of Capitalism”, and while many of them bemoan its current sorry state they propose a re-calibration of capitalism rather than its overthrow. A consensus is building around the fact that the future of capitalism will most probably involve smaller private markets, and bigger governments. The model of capitalism which began with the dawn of Reagonomics and Thatcherism has been thoroughly discredited and as the dominant ideology of the west its decline, along with other factors, surely heralds the end of any lingering attachment to Charles Krauthammer’s “Unipolar moment”. This ideological blow may well contribute to an eastern shift in the balance of power. However, while the lustre of free markets may have faded democracy seems unlikely to go away.

But what about the 1930’s, one may cry? While the triumph of totalitarianism following the stock market crash of 1929 and the ensuing depression set a worrying precedent, it is one unlikely to repeated. However, this does not preclude significant political turmoil, a fact attested to by the protests crushed by riot police in Vladivostok, the violent clashes in Greece and more recently the civil disorder in Guadeloupe. Governments have fallen, Latvia and Iceland being the most pertinent examples and the grand European project is on the ropes. While this crisis should by its very nature benefit the left, the French sociologist Emmanuel Todd believes that it may well signal the rise of right wing populous leaders such as Nicolas Sarkozy and Silvio Berlusconi and an attendant erosion of democracy faced with their authoritarian and demagogic leadership style. Aristotle was a firm believer in the role of the middle class as a stabilising force, but in this recession as they bear the brunt of the pain the recently named “coping class” is increasingly unable and unwilling to maintain the status quo. The true test of political stability and allegiance will come as citizens are confronted with the inevitable evolution in fiscal policy towards higher taxes. This stress test will happen both on a national level where stimulus plans will have to be paid for and on the European level where the flow of transfers towards the struggling eastern countries will have to intensify.

Popular discontent with the current situation, the perceived injustice of the aid to financial institutions, rising unemployment and burgeoning government debt will dictate a profound evolution in the economic policy of most political parties. For the foreseeable future both politicians and voters will be preoccupied with the search for a solution. However, the extent of the political implications of the economic crisis are ultimately dependent on its duration and severity. A relatively smooth return to growth and stability would mitigate any lasting political legacy, but a drawn-out recession would foster social unrest which could lead to the redrawing of the political landscape.

With the future looking uncertain, one certainty remains: we must work to end this recession, and end it quickly.