Lost in discussion of the European debt crisis is the threat it poses to the health of liberal democracy. Not liberal in the American context, but “liberal” as used to describe a government organized around the rule of law and individual liberties. The debt loads of the European South are not only causing a fiscal crisis across the region—they are causing a democratic one.

Greece is not ruled by popular vote and legislative rulemaking, but by an unelected troika and a government with little ability to govern in the people’s interest. Granted, this is the result of years of overspending, overpromising, and insufficient governance, but the larger, more disturbing issue is the condition, functionality, and even the legitimacy of democracy in Greece. The legitimacy of democracy and liberal individual rights are critical to repayment of debts, but they are also essential to avoiding states with elected strong men. An unfortunate new class of democracy is in its infancy. The debt democracy is here.

Democracy, specifically the brand based on a durable constitution, divides power among many constituencies. This creates a system in which it is difficult to consolidate power in the hands of a single executive. One consequence of the debt crisis has been the complete disenfranchisement of individual choice in government affairs in favor of outside interests and “austerity.” Until very recently, creditors have bypassed the natural dynamics of democracy in favor of imposing budgetary discipline on irresponsible sovereigns, while paying little, if any, attention to the long-term effects of austerity on the liberal-democratic process.

The concentration of power in a debt democracy lies not in elected leader, but in an extranational or nongovernmental entity with the de facto power to impose its will on the debtor. The unelected are in control of the domestic decision mechanism, i.e. the money, and sovereignty of the mass citizenry is lost to the power of the outside few. Policies adopted under the aegis of fiscal consolidation result in the inability to govern, and demands of creditors to reduce government deficits and employment drastically reduce the populations’ feeling of political enfranchisement. Is it so difficult to comprehend the election of a strong man, when one is already in place?

Courts cannot be taken seriously when there is no apparatus to enforce their rulings, and the contractual obligation to pay pensions becomes unenforceable when there is no money. Greece must not overlook the broader consequences of delayed elections, the imposition of a technocratic government, and mandatory job and wage cuts. A basic tenet of a liberal society is the rule of law. The breakdown and renegotiation of these contracts between the people and their government begins to disturb this premise. The debt democracy struggles not only to keep it domestic policy apparatus from crumbling, but also to maintain the integrity of its legal framework, and thus its legitimacy.

Crises, and the dramatic, forceful changes that accompany them, are a recipe for political turmoil. Preserving democracy and freedom through such time is pivotal. Safeguards against tyranny in a subverted democracy cannot be sacrificed to the goal of repaying debt at all costs. The most common way to measure the outcomes of austerity and restructuring programs is the interest rate on debt issued to the public. This is much too narrow a view, when the price of placating investors is the end of liberal governance itself.

A budding debt democracy is likely to search for a new way to rule, to overthrow its occupiers so to speak. The temptation is to elect a powerful, nationalistic executive. This is perfectly understandable, since there is already an immensely influential entity dictating the course of the country—a country that has already been shaken from its historical method of governance. Electing a leader with a will to implement internal change and provide strong leadership is not a concern in and of itself. The problem is the potential for this leader to subsume power in the name of reform, and construct a centralized, dominant position in the executive branch. It is this shift towards an elected, illiberal government that must be defended against in the periods of reform. In addition to the economic transformation, we must watch for the shifts in political power.

Debt democracy is in some ways the symptom of a much large and deep-seated phenomenon. Fiscal deficits and debt financing have allowed much of the developed world to spend on social programs and policies. Declining interest rates over the past thirty or so years have allowed governments to borrow and sustain this borrowing. Used to finance popular programs and thwart economic crises across the past couple of decades, the debt had remained, until the recent financial crisis, mostly an afterthought. The ability to maintain low rates of borrowing can be sustained for a prolonged period of time—Japan is an example—but it will not last forever. The West must be wary of the debt democracy, and the possible outcomes, when conducting policy.

At its extremes, debt is the great limiter of political capability. We must take seriously the inability of these governments to act as an arbiter for their people. The risks if we don’t include not only sovereign-debt crises, but also a rising disenchantment with liberal democracy itself.

Samuel Rines is an economist with Chilton Capital Management in Houston, TX.

Image: Athens Indymedia. CC BY-SA 2.0.