Are democracies inherently fiscally irresponsible?

Anti-democratic forces around the world lead by a rising China have been quick to point to the European debt crisis as the inevitable result of parliamentary democracy. The argument is that your average voter, unable to understand the complexities of fiscal policy will inevitably vote for candidates supporting low taxes and high public spending. Looking at much of the industrialized world this appears to be true. Yet there are exceptions. The Swedish electorate appears to have learned from the Scandinavian crisis of the 1990's, since then consistently supporting parties committed to balanced budgets. Resulting in such absurd behavior as the government insisting on running a budget surplus during the worst period of the Financial Crisis of 2008 in order to avoid any charges of fiscal recklessness.

It might be that it takes a debt crisis like the one Sweden experienced in the early 90's and much of the rest of Europe is currently struggling with for the electorate to learn the importance of fiscal prudence.

Maybe more worryingly seeing the latest election results in Greece and to a lesser degree France one can question the willingness of the electorate to support the painful measures necessary to combat the crisis and restore fiscal health. It is no coincidence that it has been left to unelected technocrats to implement necessary but unpopular reforms in both Greece and Italy.

Should we fear President Hollande?

France got a new President and he is a socialist. Last time this happened was with Francois Mitterrand and he almost wrecked the French economy. Today Europe is in such a fragile state it is not just France that is in the danger zone if this President proves to be another Mitterrand.

How dangerous is he to the European Economy? Let’s look at the market, that’s what they are best at, evaluating risk. First we should note that Hollande has been the likely next president for a long time, so the effect we will see today will be that of a ‘very probable thing’ turning in to a ‘sure thing’. Still the effect has been clear, the Euro is down the stock markets around Europe are down even more, reflecting their expectations of this President being bad news for the European economy.

More worryingly bond yields in the European periphery are up, meaning the election results have made it more costly for them to borrow. Since high yields are the main reason for Europe’s current debt crisis this is indeed worrisome.

The thing that got the markets so worried is Francois Hollande’s promise to shift Europe away from austerity to growth. This is something I can partly agree with, Europe needs to do a lot more to encourage growth and some better off countries like Germany are too focused on austerity. The problem is that when I talk of encouraging growth, I mean liberalization, deregulation and privatization of the European economies, as productivity rises this should also boost growth. Given Mr. Hollande’s solid left wing credential I would guess that this is not what he means when he talks of promoting growth, he means increased government spending. More spending means larger deficits which in turn means higher bond yields and if bond yields rise high enough countries can’t pay for their own debt and we have a debt crisis.