Capitalism and Democracy in East Central Europe: a

Sequence of Crises

Johns Hopkins University SAIS Europe, Understanding

the New Europe Seminar Series, Bologna, April 27, 2017
Dorothee Bohle, European University Institute,
Florence
 Structure

• Framework: Wolfgang Streeck’s (2016) “Buying Time: The

delayed crisis of democratic capitalism”
• Extension of the framework to East Central European
capitalist democracies before the Global Financial Crisis
• Two reactions to the Global Financial Crisis: rebellious and
compliant debtors
• Debt and the unmaking of democracy
 A series of crises of democratic capitalism and a series of
displacements of the tensions between capitalism and democracy
Type of capitalism Institutional location Postponing the Political formula
of tensions crisis (“buying
time”)
Crisis of Fordism Labor market Inflation Democratic
(capital vs labor) corporatism
Neoliberalism Electoral arena Public Debt Conservative-market
(capital vs voters) radical
Financialized Financial markets Private Debt 3rd way Social
capitalism (asset owners vs Democracy
indebted consumers)
Austerity capitalism Within and between Quantitative Easing Technocracy
states
(creditors vs debtors)
Source: Based on Streeck 2016
Four crises of democratic capitalism in the US

Streeck 2014
Implications for democracy: a process of hollowing

Mechanisms
• Capital goes global, whereas
M democracy does not
a
r
k
International
Diplomacy
• Capital squeezes the state, which
e
ti increasingly lacks the resources to
Electoral
z
a Democracy/
Depoliticized
deliver to its citizens (tax state
ti
o Institutions ->debt state-> consolidation state)
n
Democratic • Capitalism destroys collective
Corporatism
identities and institutions

Popular Democracy Hollow Democracy

 Transformational recession and predictions of
democratic breakdown

GDP growth per capita 1990-1996 Early democratic breakdown

5 prophesies, e.g.
0
-5 • Claus Offe’s “Dilemma of
Axis Title

-10
Simultaneity”
-15
-20
• Adam Przeworski’s warning
-25 of “inevitable authoritarian
-30
1990 1991 1992 1993 1994 1995 1996 temptations”
Visegrad 4 -4.5 -12 -3.4 -0.5 3.9 6.4 5.2
Baltic-3 -3.4 -10.9 -29 -16.3 -0.4 3.1 2
Slovenia -4.7 -8.1 -5.4 1.3 5.3 3.5 3 did not come true.
EBRD Transition Report 1996
 Hollowing of democracy

Trade Union Density, 1991-1998 Voter Turnout (1990s)

75 90
85
65
80
55 75
70
45
65
35 60
55
25
50
15 45
1991 1992 1993 1994 1995 1996 1997 1998 1 2 3 4

Visegrad Baltic States Slovenia Visegrad Baltic States Slovenia

Jelle Visser database 2016 Idea Voter Turnout database

 Reconciling democracy and capitalism in and after the
transformational recession: the Visegrád countries and Slovenia

Welfarist Social Contracts

– Protection provided in relation to perceived or
demonstrated voice in politics (“Divide and Pacify”)
– Results in an “abnormal pensioners’ boom” and a
pensioners’ welfare state (Vanhuysse 2006)
Democratic Corporatist Social Contract
– Combines welfarist contract and institutional labor
inclusion
Vulnerability
– public debt

V8
(Vanhuysse 2006)
 Reconciling democracy and capitalism in and after the
transformational recession: The Baltic States

Nationalist Social Contracts in the Baltic

States
– Compensate by identity gains for social losses,
reverse ethnic hierarchy, contribute to national
rebirth
– Operate through destroying losers’ collective
action capacity to resist
– Exclusionary democracy: the absence of
citizenship rights for large ethnic minorities
• Vulnerability: social question

9
The 2000s: two patterns of public and private debt

Public and household debt, Public and household debt,

Visegrád& Slovenia Baltic States
80 80.00
70 70.00
60 60.00
50 50.00
40 40.00
30 30.00
20 20.00
10 10.00
0 0.00

public debt household debt public debt household debt

% of GDP, data for public debt Eurostat, for private debt: European Mortgage
Foundation
 An unprecedented mortgage and housing boom

Figure 1: House price and mortgage V-4 & Slovenia:

lending (2002-2006)
90 • boom relieved the public purse
80
from having to offer public
70

60
subsidies for housing (esp.
Residential
loans to 50
Hungary)
GDP ECE
(annual 40
WEP • Contributed to growth
change) 30

20
Core Baltic States
10 • Debt was at the core of growth
0
0 5 10 15 20
and helped address the social
Nominal house price (annual change) question
House prices Egert and Mihalik 2007 and European Mortgage Foundation, residential loans:
European Mortgage Foundation
12

Foreign-led mortgage boom

EU financial governance Foreign currency loans decrease the

regime fostered rapid credit cost of capital
growth
I
n
t
e
r
e
s
t

r
a
t
e
s

Molnar 2010: 11
WSJ, October 25, 2011
 Capitalism and democracy during and after the
GFC: Hungary - a debtor’s revolt….
In 2011 we are declaring war against government debt. . . .
We must and will defeat government debt, which is the source of
most of our problems and difficulties today. If we do not
overcome it, then it will overcome us once and for all. (February
2011)

When it is an issue of our having an economic policy that

is not built upon our taking away pensions, curtailing
social support, reducing family support and so on, but our
Prime Minister Orbán announces
trying to protect pensioners, to defend those living on their
the government’s war on public
wages and pay and to maintain the cultural standards of the debt during his 2011 State of the
country, then we can come into conflict with State Address.
representatives of the IMF: this is what happened. (August
24, 2013)
 …. in the name of the people & national
sovereignty
The banks… must get used to the new situation. Now we are the
stronger ones and they must adapt to the Hungarian people.
Nobody is going to gain extra profit at the expense of the Hungarian
people ever again. The era of colonization is over. (September
13, 2013)

[W]e …. do not like to live off other people’s money, because

sooner or later this will lead to the loss of our dignity, the
evaporation of respect for our nation and a degree of
subordination; this is something that the Hungarians do not tolerate
well. (May 8, 2015)
Do rebellious debtors have to be anti-democratic?

Why the debtor-creditor relation is

conducive to a populist revolt
1. It pits states against states (or the EU)
2. It provides for external and internal
enemies that can cement the imagined
unity of the “real” people
3. It offers a welcome opportunity to
challenge external checks and balances
4. It supports a “deep story” the
relationship between great powers and
small (indebted) nations
 Greece: an aborted democratic revolt

• Syriza came to power with a clear mandate to

renegotiate a debt deal for Greece which was reeling
under the effects of five years of brutal austerity.
• While Syriza staged a (ill-conceived) revolt against
Europe in the name of the Greek people, it lacks the anti-
democratic features of other revolts.
• The harsh reaction of the creditors to the democratic
revolt contrasts sharply with their absence of reaction to
the right-wing populist revolt.
• Debt renegotiation vs partial revolt?
• Left-wing revolts are more frightening than right-wing ones?
 Latvia: a compliant debtor

[The central bank governor said a devaluation] would

completely destroy the economy. In fact, he said
suggesting such a thing was unprofessional and immoral
(I will spare you his more graphic language). (IMF
mission chief Rosenberg, Nov. 17 2008)

Already now Baltic performance has reassured many

sceptics that the internal adjustment strategy
simply works, making a good case for other
countries to move forward with fiscal consolidation Bank of Latvia’s governor
and much needed reforms (Ilmars Rimsevic 2010). Ilmars Rimsevic for whom
devaluation is not a
medicine but poison
 Austerity nationalism and hollow democracy

• A huge protest wave in 2009 gives way to

resignation and massive exit
• Despite frequent government changes,
politics of austerity remain the same
• Although a party critical of austerity
repeatedly received most of the votes, it
was excluded from government because
of the ethnic divide
 Conclusions

• Similar to advanced capitalist countries, the East has experienced a

sequence of crises of democratic capitalism, and has relied on a number of
solutions to overcome these crises. None of these solutions has been
sustainable, and with each crisis, new “fixes” had to be found.
• In the current phase of capitalism, democracies’ biggest challenge is to
cope with multiple debt crises, in an environment where the power lies
with creditors.
• In this situation, the democratic center does not hold
– right wing populists revolt against debt in the name of the people only to later
disband the people
– debt compliance is only achieved at the cost of democracy’s popular component.