Political Consequences of the Economic Crisis

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Xin Min Wang's picture

Political Consequences of the Economic Crisis


Introduction

The global economic crisis, which started with the sub-prime mortgage crisis in the United States and which has now spread to the Eurozone debt crisis, has fundamentally altered three key relationships in these regions: first, between governments and citizens; second, between markets and governments, and lastly, among nations. These relationships are underpinned by underlying structural tensions in global economy.   

Relationship between Government and Citizens

Most significantly, the crisis has affected the relationship between governments and their citizens. In Europe for example, the direct consequences of the crisis include rising unemployment and declining purchasing power while its resultant impacts include austerity policies undertaken by many European governments in response to rising government debt levels, such as freezes or cuts in public sector pay, retirement pensions and child benefits.

These impacts and measures have fuelled widespread voter discontent, as reflected through the voting out of incumbent governments in Europe. The resultant pessimism about future developments has also led to the rise of anti-establishment ideologies by far right, extreme political parties. Indeed, incumbent governments in Europe have suffered heavy losses as support for less conventional political parties has risen. In France for instance, Francois Hollande recently became the first Socialist president in 20 years by capitalising on sentiment on former president Nicholas Sarkozy’s mismanagement of the economic crisis. Similarly, traditional parties in Greece such as the New Democracy suffered their worst performances ever, while previously marginalised and extreme parties such as the Golden Dawn in Greece and the Pirate Party in Germany entered parliament for the first time ever1. The rise of such extreme fringe parties illustrates the public’s disillusionment with traditional governments and their desire for radical solutions.

In the United States, while levels of voter frustration have not been as intense as that in Europe, the crisis has nonetheless weakened the level of trust between citizens and the government. For instance, results from a Pew Survey found that 86% of respondents were frustrated (60%) or angry (26%), when describing their feelings about the federal government2. Such low levels of public trust tend to constrain policy making as governments tend to spend more effort in convincing voters of the merits of proposed policies.

Relationship between Governments and Markets

In addition, the crisis has ignited debates over the role of government in markets as well as redefined the public’s attitudes and values towards capitalism, redistribution and equality. In the United States for instance, the American public has traditionally supported capitalism and free market ideologies. However, the crisis has resulted in a shift in public perceptions of free market capitalism, as exemplified in the Occupy Wall Street movement, where public anger over government bailouts of insolvent banks has led to widespread protests against bankers. Furthermore, while high levels of income inequality tend to be tolerated by Americans due to their belief in equality of opportunity rather than outcomes, rising levels of income inequality has undermined the notion of allowing unfettered capitalism to reign free. Yet, the rise of the tea party movement, characterised by support of free markets and protests against “big government”, shows that such laissez faire ideologies remain deeply entrenched in the American psyche. Nonetheless, support for greater income redistribution, welfare programmes and regulation of corporations in the United States is likely to increase in the short to medium term as unemployment remains high and citizens face uncertain futures.

In contrast to traditional laissez-faire American attitudes towards capitalism, Europe’s welfare state tends to emphasise protection for its people. Indeed, social spending in the Europe supports labour market policies including unemployment benefits and pension systems. Unsurprisingly, the austerity measures enforced by European governments have thus been met with great resistance by citizens as many strikes have broken out as citizens battle for the preservation of the welfare state and the status quo. While welfare support is thus likely to increase in the United States, the welfare states of Europe are likely to shrink. That said, given the dominance of existing social institutions and attitudes toward welfare in the respective regions, political support for changes in the respective welfare systems is likely to be gradual. This is because political developments are often path dependent3, hence existing institutions and public attitudes in crisis-hit regions tend to affect future political developments.  

Relationship among Nations

The crisis has also altered the nature of international relations in national politics. In Europe, there are currently two interlocking strands facing the Europe narrative: while electorates across Europe are indeed becoming increasingly nationalistic, the region has also witnessed a shift toward a greater intertwining of national with regional politics. For instance, the recent elections in Europe saw the rise of several far right parties with strong nationalistic and anti-immigrant stances, such as France’s National Front and the Netherland’s Freedom Party. At the same time, national politics has become inextricably linked to regional politics: the electoral bid of French president François Hollande for instance, centred on discussions of the Eurozone’s policy framework, such as pledging to renegotiate the euro zone’s “fiscal compact”, rather than on domestic political change4. Looking forward, debates on national politics in the European Union are thus likely to centre increasingly on individual countries’ roles in the European Union and the future of the euro.

While there has been rising resentment against immigrants in both Europe and the United States due to the perceived threat they pose for locals in job searches especially as unemployment rates rise, anti-immigrant sentiment in America has not been as intense as that in Europe. Rather, fears over the decline of America’s presence on the global stage due to the global crisis seem to dominate. In a testimony given before the Senate Foreign Relations Committee for example, the economist Martin Wolf spoke on the importance of “restoring [the United States’] reputation and influence across the globe5”. Political discourse and rhetoric would thus likely emphasise America’s dominance in the global sphere. Meanwhile, America’s foreign policy stance is likely to be cautious and conciliatory as America copes with the domestic effects of its current economic crisis.            

Does the Crisis Reflect Political Theory?

While the political impacts of the crisis have indeed conformed to conventional political theory that incumbents tend to be punished during hard economic times, it should be noted that the crisis is not an isolated event but has instead occurred under a backdrop of larger underlying global trends. First, the rapid pace of globalisation has resulted in greater insecurity over jobs and hence increased xenophobia, as exemplified through growing anti-immigrant sentiments in America and Europe. Second, the crisis was due in part to structural issues facing the global economy, such as unsustainable debt levels in America and some European nations, and weak financial regulations. Third, many citizens are not well-prepared to cope with the inexorable rise of technology in the global economy and are hence increasingly left behind. The political consequences of the current economic crisis must thus be understood under the contexts of these trends, as governments would have to formulate policies to deal with the needs of their citizens and economies.  

Conclusion

The global crisis is as much a social and political one as it is an economic one. Indeed, as there exists a symbiotic relationship between politics and economics, political developments will likely shape the future of economic policy. In this regard, the trend of growing voter resentment and political turmoil in Europe does not bode well for global or national economies as it is likely to lead to a vicious cycle of weak and fractious governments that hinder recovery, thereby creating greater voter resentment. Rather, it is imperative for both governments and citizens to address the fundamental problems facing their economies – citizens should accept changes in their economies and societies while governments should show resolve in implementing reforms while ensuring that citizens are adequately prepared to meet the challenges of such structural changes. Importantly, politicians in crisis-hit nations should seek to rebuild trust in social and political institutions in their countries amid uncertain times ahead.

References: 
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  2. Pew Research Centre (2011, August 25). Obama leadership image takes a hit, gop ratings decline. Section 4: Anger and distrust in government. Retrieved from http://www.people-press.org/2011/08/25/section-4-anger-and-distrust-in-g...
  3.  Katz, M. B. (2010). The American welfare state and social contract in hard times. Journal of Policy History, 22(4), 508-529. Retrieved from https://webspace.princeton.edu/users/piirs/pdf/katz.pdf
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