Rise of the Autocrats

Liberal Democracy Is Under Attack

Autocratic leaders and wannabes, from Putin to Trump, are making political inroads around the world. In recent years, Western liberal democracy has failed to live up to some of its core promises, helping to fuel the current wave of illiberalism. By DER SPIEGEL Staff

Photo Gallery: The Era of the Autocrats

Russian President Vladimir Putin isn't actually all that interested in football. He's more of a martial arts guy, and he loves ice hockey. But when the World Cup football championship gets started on Thursday in Moscow, Putin will strive to be the perfect host. The tournament logo is a football with stars trailing behind it, evoking Sputnik, and a billion people will be tuning in as Putin presents Russia as a strong and modern country.

During the dress rehearsal, last summer's Confed Cup, Putin held an opening address in which he spoke of "uncompromising, fair and honest play ... until the very last moments of the match." Now, it's time for the main event, the World Cup, giving Putin an opportunity to showcase his country to the world.

The World Cup, though, will be merely the apex of the great autocrat festival of 2018. On June 24, Turkish voters will head to the polls for the first time since approving President Recep Tayyip Erdogan's constitutional reforms last year. The result of the vote will in all likelihood cement his claim to virtually absolute power until 2023 or even beyond. Should he miss out on an absolute majority in the first round of voting -- which is certainly possible given rising inflation in the country -- then he'll get it in the second round. The result will likely be a Turkey -- a country with around 170 journalists behind bars and where more than 70,000 people have been arrested since the coup attempt two years ago, sometimes with no grounds for suspicion - that is even more authoritarian than it is today.

And then there is Donald Trump who, after turning the G-7 summit in Canada into a farce, headed to Singapore for a Tuesday meeting with North Korean dictator Kim Jong Un. And many pundits have argued this week that the greatest beneficiary of that summit was actually Chinese President Xi Jinping, the man who poses a greater challenge to Western democracy than all the rest.

At home, Trump is continuing his assault on the widely accepted norms regarding how a president should behave. He has the "absolute right" to pardon himself in the Russian affair, he recently claimed -- and then he went off the rails in Canada, picking fights with his allies and revoking his support for the summit's closing statement by sending out a tweet from Air Force One as he left. Trump, to be sure, is an elected president, but he is one who dreams of wielding absolute power and sees himself as being both above the law and above internationally accepted norms of behavior.

The Backward Slide

The upshot is that global politics are currently dominated by a handful of men -- and only men -- who have nothing but contempt for liberal democracy and who aspire to absolute control of politics, of the economy, of the judiciary and of the media. They are the predominant figures of the present -- and the decisions they make will go a long way toward shaping the future ahead. The globalized, high-tech, constantly informed and enlightened world of the 21st century finds itself in the middle of a slide back into the age of authoritarianism.

And this is not merely the lament of Western cultural pessimists, it is a statement rooted in statistics. A recent study by the German foundation Bertelsmann Stiftung found that 3.3 billion people live under autocratic regimes, while the UK-based Economist Intelligence Unit found that just 4.5 percent of the global population, around 350 million people, live in a "full democracy." In its most recent annual report, issued in January of this year, the nongovernmental organization Freedom House wrote that in 2017, "democracy faced its most serious crisis in decades." It went on to note that "the right to choose leaders in free and fair elections, freedom of the press and the rule of law are under assault and in retreat globally."

How can this global trend be explained? Are autocrats really so strong, or are democrats too weak? Is liberal democracy only able to function well in relatively homogeneous societies where prosperity is growing? Why do so many people doubt democracy's ability to solve the problems of the 21st century, challenges such as climate change, the tech revolution, shifting demographics and the distribution of wealth?

The optimistic Western premises -- that greater prosperity leads to more freedom, increased communication leads to greater pluralism, and more free trade leads to increased economic integration -- have unraveled. Following the end of the Cold War, the American political scientists Juan Linz and Alfred Stepan said in 1996 that Western democracy was "the only game in town." Now, though, it would seem to have lost its attraction. The expectation that democracy's triumphant march would be impossible to stop has proven illusory. China is currently showing the world that economic success and societal prosperity are also possible in an authoritarian system.

The fact that established dictatorships in the world, such as those in Belarus, Zimbabwe or Vietnam, aren't showing any signs of change is only part of the problem. Rather, everywhere in the world, authoritarian phases are following on the heels of brief -- or more extended -- experiments with democracy, a development seen in places like Egypt, Thailand, Venezuela and Nicaragua, for example. At the same time, liberal democracy is eroding in many countries in the West.

Perhaps the greatest danger, though, is the increasing attraction of autocratic thinking in Europe. Some elements of such systems are sneaking into Western democracies, such as the growing contempt for established political parties, the media and minorities.

In Italy, a new government was just sworn in under the leadership of Matteo Salvini, an avowed Putin fan. In Hungary, Viktor Orbán just won a landslide victory in parliamentary elections held, according to OSCE election observers, in an atmosphere of "intimidating and xenophobic rhetoric." Polish voters are set to go to the polls next year, and there too, the right-wing nationalist PiS stands a good chance of emerging victorious.

Across the Atlantic, the U.S. under the leadership of Donald Trump has thus far resisted sliding into autocracy, but only because the institutional hurdles in the form of the judicial and legislative branches of government have managed to hold their ground. Nevertheless, liberal democracy is under attack in precisely the country where it first emerged.

Anxiety is likewise growing in other Western democracies. "Until recently, liberal democracy reigned triumphant. For all its shortcomings, most citizens seemed deeply committed to their form of government. The economy was growing. Radical parties were insignificant," writes the Harvard-based German-American political scientist Yascha Mounk in his book "The People vs. Democracy." But then the situation began changing rapid: Brexit, Trump's election and the success of other right-wing populist movements in Europe. The question, Mounk writes, is "whether this populist moment will turn into a populist age -- and cast the very survival of liberal democracy in doubt."

The Western political system, Mounk writes, is "decomposing into its component parts, giving rise to illiberal democracy on the one side and undemocratic liberalism on the other." The one, he argues, is dominated by manipulated majority opinion while the other is controlled by institutions such as central banks, constitutional courts and supranational bureaucracies like the European Commission that can operate independent of direct, democratic debate.

"Take back control" was the slogan used by the Brexiteers during their successful campaign. Indeed, the feeling of living in an era in which they have lost control is likely a common denominator among all European populists. Taking back that control is something they all promise.

It is combined with the desire to shake off the corset that allegedly makes life in the West anything but free. All the laws, rules, decrees and contracts that dictate to people, companies and entire countries how to behave. What they are allowed to say and what not. What they can buy and what is off limits. How things may or may not be produced. This desire to apply a new set of self-made, simpler rules to the world is feeding the popularity of the autocratically minded.

These days, it is rare that democracies collapse under attack from armed, uniformed adversaries. Such images belong to the past; the coup d'état has become a rarity. On the contrary, many autocrats have come to power by way of the ballot box, govern in the name of the people and regularly hold referenda to solidify their power.

But once in power -- in Turkey, Venezuela or Russia -- they bring the institutions of democracy under their control. They tend not to be committed ideologues. Rather, they are strategists of power who used ideologies without necessarily believing in them themselves. Furthermore, they don't generally wield violence indiscriminately, another difference to the murderous regimes of the past. Sometimes, a journalist loses their life, or an oligarch ends up in jail. But otherwise, the new autocrats are much subtler than their totalitarian predecessors. Generally, a timely threat issued to insubordinate citizens suffices. And they are particularly adept at the dark art of propaganda. They know that many people have become insecure and are afraid of the future and foreigners. They have learned how to augment those fears, so they can then pose as guarantors of stability.

China's System Works Well

The Beijing airport lies like an enormous red manta ray in the city's northeast, one of the world's largest buildings. Following four years of construction, it was opened in 2008 and is now the second busiest airport in the world. But the airport's three terminals are already hopelessly overcrowded, so a new, even larger airport is currently under construction to the south of the city. It is to be opened in 2019, also after just four years of construction.

Only very few people doubt that the new airport will open on time. The past 40 years have demonstrated that most government forecasts end up being quite accurate, both the positive ones and the more negative prognoses, both the general ones, and the more specific.

When President Xi Jinping came into office in 2013, China's economy was already the second largest in the world. Today, five years later, it has grown by another 50 percent. Hourly wages have tripled in the last 10 years and household disposable income has doubled. Even the poorest Chinese are faring better than they were just a few years ago and they expect to see their incomes continue rising.

That expectation is one of the Communist Party's primary instruments of power. Political scientists speak of "legitimacy through performance," a classic leadership principle of authoritarian developing nations. China's rulers have pushed this principle to the limit, with government experts thinking in terms of decades and in global dimensions. Because they are undisturbed by individual interests and the election cycles seen in democracies, their plans tend to be realized. Thus far, the mixture of planned and free-market economy has worked well.

But the economy is but one of several instruments. The Communist Party's power, China expert Minxin Pei has written, is today based on four pillars: robust growth, sophisticated repression, state-sponsored nationalism and co-opting social elites.

China is also setting new benchmarks when it comes to the second pillar. The melding of Leninism with technology has given birth to an unprecedented surveillance system. The internet, seen in Western democracies as a tool of free speech, is increasingly used in China as a means of social control, as a mood barometer and instrument of manipulation.

At the same time, the regime disseminates a grand narrative of the fatherland on state media and the internet, referred to as the "Chinese Dream" or the "Renaissance of the Chinese Nation," depending on the context. The message is clear: China, a leading political and economic power until the outbreak of the Opium Wars in the mid-19th century, is returning to "center stage," as President Xi put it at the 19th party congress in October, following more than 100 years of degradation and colonialism. It is an effective narrative on two counts: Domestically, it serves to solidify a nationalist consensus while at the same time radiating Beijing's growing self-confidence to the world at large.

Thus far, the country's leadership has been satisfied with the ideological and economic projection of its power. In contrast to its geopolitical rivals USA and Russia, China has avoided military adventures such as those in Ukraine or the Middle East. But the country's aggressive behavior in the South China Sea and its arms buildup clearly demonstrate that it might do so in the future.

One year ago, Beijing hosted a noteworthy summit focused on the most ambitious development project of the century: The New Silk Road. Recep Tayyip Erdogan came from Turkey as did Rodrigo Duterte from the Philippines, Viktor Orbán from Hungary and Vladimir Putin from Russia. They parked their government airplanes on the tarmac of the airport in the Chinese capital and headed for the Great Wall, where Xi presented his vision of a new world. It was a meeting of the like-minded. Western politicians were also present, but they seemed strangely sidelined.

The New Silk Road is the core of China's 21st century development policy. At first glance, it looks like a vast infrastructure project that will connect China with Africa and Europe. In truth, though, it is a plan for a new world order dominated by China.

China, he said, will set an example and connect the West and East in "peace, harmony and a better future." China, the country's president said, is "ready to share practices of development with other countries, but we have no intention to interfere in other countries' internal affairs." The word "dynasty" came up five times in the speech and "invest" appeared nine times. The terms "democracy," "rule of law" and "freedom of opinion" were missing entirely.

The Chinese dictatorship of development poses the greatest economic, political and intellectual challenge to the liberal world order. Because of its size and population, China creates economic dependencies that smaller countries on its periphery simply cannot escape. But even politicians and business leaders in Western industrialized nations fall victim to the dynamism and efficiency of the Chinese model.

"The China One Belt, One Road," Siemens CEO Joe Kaeser said at Davos in January, using the formal name of the project, "is going to be the new WTO, like it or not."  

Racism, Nationalism and Corruption: What Populists Have in Common

It is indeed easy to become overwhelmed by the numbers. By the 25,000 kilometers of tracks for high-speed rail that have been laid in the last 10 years. The massive cities that have appeared out of nowhere. Such accomplishments are particularly awesome from the point of view of a place like Germany, where transportation policy is far from being adequate to face future challenges, where the mobile and broadband network is hopelessly insufficient, where public construction projects have recently made all the wrong kinds of headlines.

Furthermore, many Chinese companies spend almost as much on research and development as their Germany competitors. The era when China was dependent on innovations from the West is approaching its end. In the development of artificial intelligence, companies in China are neck-and-neck with Silicon Valley.

Migration, climate change, technological development, demographics: Nowhere are such challenges so openly discussed as they are in Western democracies. Yet we often seem unable to address them. Freedom, it would seem, is not a necessary precondition for entrepreneurial or societal creativity.

That is an extremely uncomfortable realization. The belief that the guarantee of individual freedoms makes our system superior to others is at the very core of our self-image. What if it's wrong?

There are, at the very least, alternatives. China seems to have found one of them.

For many centuries, Chinese civilization was extremely well developed culturally, technologically and militarily. But around 200 years ago, the West left China behind, a development connected to the Renaissance, to science, research and weapons technology. None of that, though, is merely a Western privilege anymore, which is why that era could now be coming to an end. It is not an inevitability, but it is certainly possible.

Russians View Putin As Historical Figure

One year ago, pollsters asked Russians to name the "most outstanding people of all time and all nations. Lenin was named in the results, as was Czar Peter I., Napoleon and the dictator Josef Stalin. But among all of the deceased leaders of the past was one who is still alive: Vladimir Putin, in second place behind Stalin.

Though he is still the country's leader, Russians already view Putin as a historical figure. He is no longer a politician, but the mythological embodiment of an entire nation. "As long as Putin exists, Russia exists. No Putin, no Russia." That is how a senior Kremlin official formulated it in 2014.

Voters would seem to agree, with a large majority re-electing Putin in March of this year even though he didn't even bother to present a campaign platform or even to campaign at all. Nobody, it would seem, expects a program for the future from a historical figure. And Putin, as has become abundantly clear, doesn't have much to offer for the future. His promise is the past: Russia's return to great-power status. "Make Russia Great Again" is his only promise.

And Putin has delivered returns on that promise. Following the chaotic years under his predecessor Boris Yeltsin, Putin was able to re-establish the authority of the Russian state. In a brutal war, he defeated Chechen separatists and brought the chaos in his country to an end. He also brought the media, business leaders and the political opposition under his control. All of that gave at least the appearance of stability.

More than anything, though, Putin has given Russia its voice back on the world stage. China may have emerged as a serious challenger to the West's position of dominance, but Russia is an antagonist. And it can't really do more than that, with its economic output roughly on par with that of Spain. But Putin has given back to his people the feeling of being a global power as they were during the Soviet era -- without demanding all of the sacrifices that Soviet citizens were required to make.

The wars in Eastern Ukraine and in Syria have required a relatively limited amount of resources and not much in the way of personnel either. When possible, mercenaries and dubious volunteer fighters have been sent. To exert influence on elections around the world, a couple hundred hackers and trolls are all that's necessary.

The result is that Putin has managed to successfully relegate the ignominy of 1991, when the Soviet Union disintegrated, to the history books. Even if Russians themselves may feel weak, humiliated and neglected by the state and impoverished by corruption, at least they have one consolation: Russia has "risen from its knees," as is often said in the country.

That alone, however, wouldn't be sufficient to make the "Russian Model" attractive to many in the West as well. For that, Putin is necessary. The president himself is Russia's offer to the rest of the world, this embodiment of masculinity who still allows himself to be photographed shirtless even though he is 65 years old. Putin embodies the longing for an unbroken, unambiguous identity that seems to have gone missing in pluralistic, heterogenous societies. A desire for a kind of patriarchal state of nature free of #MeToo, headscarves and transsexuals and led by a strong, charismatic, capable leader.

In contrast to the totalitarian rulers of the 20th century, the Russian president is not in pursuit of some deeper truth or of an ideology he seeks to impose and spread. In contrast to Xi and Erdogan, Putin isn't even a member of a political party. Instead, the Kremlin and the media it controls seek to undermine the belief that such a thing as truth even exists.

Russia seeks to wield influence both directly and indirectly. Russian hackers have attacked the German parliament, the Democratic Party in the U.S. and Emmanuel Macron's movement En Marche. Russia is also thought to have played a role in the Italian election and the Brexit referendum as well. Russia is waging war in Ukraine but acts as though its own soldiers and military advisers weren't even there.

Democratic systems don't have many tools at their disposal to confront these asymmetric attacks. Currently, the response is almost always that of waiting until the storm has passed.

That, though, is exactly the kind of weak response that Putin and his allies expect from the liberal West.

From a historical perspective, liberal democracy of the type currently practiced in the West is a recent development. According to Samuel Huntington, the political scientist who passed away in 2008, it expanded in three waves. The first, he argues, began at the beginning of the 19th century with the rise of the American constitutional state, with 29 additional countries joining that group by 1926. The second wave began after 1945 and by the beginning of the 1960s, there were 36 democracies. The third wave began with the Carnation Revolution in Portugal in 1974 and continued to grow, with the number of democracies tripling after 1989.

A Lost Promise

The end of the Cold War, fellow political scientist Francis Fukuyama wrote in 1989, marks "the end point of mankind's ideological evolution and the universalization of Western liberal democracy as the final form of human government." It was, he wrote, "the end of history." And by the end of the millennium, there were more than 100 democracies in the world.

In Europe, liberal democracy thrived on the rubble of World War II. It embodied the optimism of the postwar years as prosperity grew, many people were able to afford a vacation for the first time and could buy homes and cars. But at least since the 2000s, the certitude that children will have it better than their parents no longer applies. Globalization is one reason, as is the fact that global prosperity growth now largely takes place in China and elsewhere in Asia.

One of the most important promises of liberal democracy has been that it can guarantee perpetually increasing prosperity. The fact that this promise can no longer be fulfilled today is one of the causes of its current crisis.

Another is rooted in the fact that postwar European societies -- following the genocide, expulsions, resettlements and newly drawn borders that came out of World War II -- became more homogeneous than they had been before the war. But since then, all Western European societies have become more diverse and the same process has long since begun in Eastern European countries as well. And it's not just about ethnicities and ancestry, but also about sexual, cultural and religious identity.

This atomization of identity has played into the hands of authoritarian parties within liberal democracies because the development has paralyzed the political system. For decades, the political systems of most Western democracies were dominated by two political camps, the center-left and the center-right. But this dualism no longer exists: With the end of homogenous societies, the spectrum of political parties has also splintered. Established centrist parties must join forces to form a government if they don't want to enter a coalition with populists.

The Contagion in Europe

That has been seen in many European countries in recent years, including in Germany following last September's parliamentary elections. Because votes were shared out among so many different parties, none of the possible coalitions stood for a clear ideological direction. All of them were merely pragmatic solutions to a challenging math problem and none of them was particularly inspiring.

The result is that in parliamentary democracies like most of those in Europe, the liberal-democratic system is no longer able to offer voters real political alternatives. Except those offered by parties that stand in opposition to liberal democracy, such as right-wing populists. Fittingly, perhaps, Germany's contribution to that ilk is known as the "Alternative for Germany," or AfD.

Jaroslaw Kaczyinski, head of the governing nationalist-conservative Law and Justice (PiS) party in Poland, has coined a term to describe the phenomenon: "Imposybilizm" or "impossibilism." For Kaczyinski, the term serves as justification for his efforts to erode democracy. And he ascribes to it a number of different meanings: a bureaucratic constitution, exaggerated concern for the country's minorities, overwrought fear of how Poland is viewed abroad, "cowardice" and "opportunism." All of that, Kaczyinski believes, prevented the liberal government that came before his own from enacting effective policies for the "little people."

To defeat this "impossibilism," PiS is laying claim to more and more powers. Kaczyinski apparently would like to see the separation of powers mitigated in order to grant political leaders greater leeway. His party has already largely disempowered the country's constitutional court.

Kaczynski's political approach is also an answer to the "we have no other choice" politics of necessity that have been pursued in the West since the 1990s -- an approach that lost its credibility during the financial crisis when it became necessary to save large banks from collapse. Suddenly, there was sufficient money to do so even though money had previously been lacking to refurbish decrepit school buildings or build affordable housing. The same politics of necessity characterized the response to the euro crisis, during which treaties, rules and the financial markets limited the scope of action that could be taken by governments suffering from the crisis. The resulting feeling of impotence proved a boon to nationalists and populists across Europe.

And despite warnings from all sides that it would be too expensive, PiS did in fact introduce a child benefit of 500 zloty (117 euros) per month. It is anti-impossibilism in practice. And the message to voters was clear: Anything is possible, and we'll do it for you.

Prime Minister Viktor Orbán in Hungary has adopted a similar approach, one which has kept him in power for eight years and recently got him elected for four more. His people now occupy not only all key positions in Hungarian ministries and agencies, but also in universities, clinics, theaters and courtrooms. He has also managed to bring a large part of the economy under his control by way of a network of companies that are well-disposed toward him.

There is no censorship in Orbán's empire, but there also is hardly a newspaper in the country that isn't published by a friend of his. Those who rebel against the political views of Orbán's Fidesz party don't lose their freedom or their lives as was the case in old-fashioned dictatorships. They lose their jobs.

Yet the "illiberal democracy," as Orbán himself calls it, isn't undemocratic per se. Elections are held and the prime minister has a majority of the electorate behind him. It's just that the system is no longer liberal. The rights of minorities have been limited and the separation of powers weakened.

But "impossibilism" only partially explains the rise of illiberalism in Eastern Europe. There is also an authoritarian heritage that, beginning with the monarchies of the 19th century, survives to the present day despite the two intervening world wars and the decades of communism. The collapse of communism in 1989 did not erase it either, and the much touted "return to Europe" merely serves to conceal it. Societies don't change very quickly. Particularly given that the new elites often got their start as functionaries in the previous system. And given that, while capitalism has led to greater economic prosperity, it has come at the cost of greater insecurity.

Viktor Orbán himself was once a proponent of liberal renewal before he became a ringleader of illiberalism.

The paradox is that without EU membership, which is supposed to uphold the norms and values of democracy, Orbán's system would quickly collapse. It only works within the framework of a community bound together by solidarity, an otherwise liberal environment from which money and mandates flow into the country, allowing Orbán to distribute them among his friends and sycophants.

If the EU were in a position to punish Orbán and Kaczynski for their transgressions, their strutting would quickly come to an end. But it isn't quite that simple.

The complex system of EU rules was configured from the very beginning for liberal democracies. Their foundation is the belief that the future belongs to democracy and that Europe will continue on the path toward becoming an "ever closer union." An allowance was made for countries that wanted to leave the union. But a country that weakens its democratic institutions yet nevertheless wants to remain part of the bloc? There are no tools in place to deal with such a situation. An examination of a country's adherence to the rule of law, which could theoretically end with a member state losing its voting rights, must be decided on unanimously. It is unlikely that that would ever happen.

None of that would be quite so dramatic, perhaps, if these developments weren't taking place at a time when the most powerful democracy in the world is rapidly losing credibility. Because it is being led by a man who holds little respect for democracy. To be sure, there have been U.S. presidents in the past who were less than perfect exemplars of democracy, who overthrew elected leaders and launched ill-advised wars. But they nevertheless sought to spread the idea of freedom and human rights, combined with the promise of prosperity, into the world at large.

The Frustrated Autocrat

Now, though, we have Donald Trump, a man who apparently gets along better with political leaders like Duterte, Erdogan, Xi and, most recently, North Korean dictator Kim Jong Un than he does with democratic leaders like Angela Merkel and Canadian Prime Minister Justin Trudeau. Based on what he says in person and on Twitter, based on his plans and the way he makes personnel decisions, based on the way he mixes his office with his business empire and, finally, based on the way he constantly insults the news media, he seems to be more of a wannabe autocrat than a reliable proponent of liberal democracy.

One-and-a-half years after his inauguration, it isn't his erstwhile adversary Hillary Clinton -- a woman who he promised to lock up -- who is under investigation, but Trump himself. Trump has not managed to destroy the institutions of state and, aside from tax reform, hasn't managed to implement a single one of the ground-breaking plans he promised. The U.S. president, one could argue, has become something of a poster child for the stability of democracy.

In their new book "How Democracies Die," political scientists Steven Levitsky and Daniel Ziblatt write that Trump had wanted to follow the playbook of an authoritarian ruler. But the president "has talked more than he has acted, and his most notorious threats have not been realized."

For the time being, in other words, Trump can be seen as a frustrated autocrat.

Still, the long-term damage is likely to be immense. The populists of this world now have an ally in the White House and U.S. Ambassador to Germany Richard Grenell even said recently that he hopes to strengthen conservative, anti-establishment movements in Europe. Trump's former chief strategist Stephen Bannon was recently in Rome celebrating Italy's new government as the next domino in a complex chain that, he says, will ultimately lead to the EU's collapse.

It used to be that America promoted the spread of democracy. These days, however, it is promoting the spread of populism.

The autocrats and illiberals of the 21st century have many similarities. They are both racist and nationalist, and they constantly evoke an external threat that must be kept in check. They also harbor distrust of real or perceived elites, of the privileged who have purportedly forgotten the language of the common people. They make campaign promises that can only be financed through massive borrowing and huge debts. They despise democratic institutions.

They also share a penchant for promising to restore some grand past. Trump's motto is "Make America Great Again." President Putin promises the Russians national glory. Erdogan conjures up the return to the greatness of the Ottoman Empire. Viktor Orbán has erected statues throughout his country commemorating Hungary's glorious past. In Poland, the PiS has even passed a law forbidding any share of the responsibility for the Holocaust being attributed to the Polish nation, as if historical truth was subject to present-day law.

History, they believe, must be a source of pride. Otherwise, it is false.

The opposite can be observed in liberal democracies. Admitting responsibility for past crimes is practically one of their structural characteristics. This is not only true of Germany, but also of the United States, where the debate continues today over slavery and its consequences. French President Emmanuel Macron has described his country's colonialism in Algeria as a "crime against humanity."

No modern democracy believes it can avoid coming to terms with its past. Under that tacit agreement, only those who learn from the crimes of their grandfathers can create a better society.

But authoritarian forces reject this claim, it is one of their trademarks. For AfD Chair Alexander Gauland, the Nazi era is only "a speck of bird shit " relative to the achievements of Germany's long history and his party is calling for the country to turn its back on its culture of remembrance of the atrocities it committed during WWII.

Among Brexiteers in Britain, there is no small number who would like to restore the lost British Empire. In Donald Trump's America, white nationalists glorify racism in the southern states that were defeated in the Civil War with the president's tacit approval.

Vast Patronage

Once they come to power, enemies of liberal democracy have another commonality: corruption. Almost all of them are corrupt. And this despite the fact that almost all have risen to power on the pledge that they will put an end to corruption.

This also applies to Donald Trump, who as president benefits his own family business, issues pardons to political friends and whose daughter Ivanka suddenly benefited from Beijing registering trademarks for her company in the course of negotiations with China.

Be it Putin or Erdogan, the Communist Party of China or Fidesz in Hungary, they all rule through a complex system of patronage. Autocratic rule is based on finely spun dependencies. This has always been the case, and nothing has changed in the 21st century.

Even show trials and death sentences against corrupt officials and party leaders like those seen in China cannot prevent corruption. Greed is human, and it stretches to all corners of life. That's why the separation of powers in a constitutional state is one of the most effective means available for combating corruption, even if it is unable to prevent every instance.

The ancient Greeks believed in a cycle of political systems in which a monarchy would be succeeded by tyranny. This, in turn, is gradually replaced by aristocracy, oligarchy and democracy. After mob rule, a monarchy follows again. Simply because people are never satisfied. Because stable conditions make things comfortable and comfort leads to decadence. Is this where we've arrived now?

After 1945, liberal democracy provided the framework for European unification, the social welfare state and the Ostpolitik policies of detente between Western and Eastern Europe. None of these achievements was without conflict. But that was also the point: identifying problems, offering solutions, mediating conflicts and building societal consensus time and again. It was one of the reasons why liberal democracy prevailed in the Cold War. It also happened to be economically and militarily superior. It was simply the better system.

But these days, that's no longer considered a given.

'Democratic Recession'

American political scientist Larry Diamond refers to the finding that the number of functioning democracies is shrinking again as the "Democratic Recession." But why? "The most important and pervasive answer is, in brief, bad governance," he wrote in a January 2015 essay in the Journal of Democracy.

In fact, the reversal of liberal democracy's global reputation coincided with serious failures on the part of the West: the disastrous Iraq War, which began under false allegations and undermined the credibility of Western parliamentary systems around the world, and the global economic crisis, which shook confidence in the Western economic order after 2007.

But that's looking at the very big picture. There are also smaller examples. It was 18 years ago, to name one of them, that the Süssmuth Commission in Germany, an independent panel appointed by the government to recommend immigration policies, presented a proposal for the country's first comprehensive immigration law. Nothing came out of it. Germany is an important destination for immigrants, but the country has proven incapable of regulating immigration. The way the country addresses technological advancement will be decisive in determining Germany's economic future, and yet the government still hasn't come up with a comprehensive tech strategy. The German economy is highly reliant on its car industry, but instead of hailing the end of the era of the internal combustion engine, the government instead protects corporate profits.

This list could go on and on. Climate change, demographics, technological development, the coming transformation of the working world and the distribution of wealth are but a few items on that list.

Germany has had a number of different government coalitions during this time -- the center left together with the Greens, the conservatives together with the business-friendly liberals and the conservatives and the center-left. The fundamental problems have often been discussed, but there have been too few attempts to seriously tackle them. At least that's how many people feel, not least because great visions often wind up as small compromises in democracies.

With the Marshall Plan, liberal democracy once had its own New Silk Road. If the money that the U.S. pumped into Europe between 1948 and 1952 were translated into today's dollars, it would amount to about $135 billion. The idea was to make Western Europe liberal, democratic and able to stand up to the Soviet Union. That was the plan. And it worked, as we now know.

And it wasn't just about money. Liberal democracy in Germany was also reinforced by the soldiers sent by the Americans, the British and the French who were stationed in the country for almost 50 years. It was supported by educational programs, economic cooperation and through institutional interdependencies. These efforts all had to be fought for and implemented with an enormous amount of effort - all in the belief that this system was the best one possible.

And that it is beneficial to democracies when other countries adopt the system as well.

Our problems today are different than they were then. Germany no longer has any war rubble to clean up. At issue today are the consequences of global capitalism and technological developments, migration and the fear of refugee influx. But we were once able to solve such problems. Merely recalling those times isn't enough.

By Christian Esch, Maximilian Popp, Jan Puhl, Tobias Rapp, Christoph Scheuermann and Bernhard Zand

Emerging markets face a dollar double whammy

The Fed must adjust its balance sheet shrinkage to limit the effects of less liquidity

Urjit Patel

Over the next few years, the government’s net issuance of debt will stabilise, whereas the Fed’s balance-sheet reduction will keep rising © AP

Dollar funding of emerging market economies has been in turmoil for months now. Unlike previous turbulence, this episode cannot be attributed to the US Federal Reserve’s moves on interest rates, which have been rising steadily since December 2016 in a calibrated manner.

The upheaval stems from the coincidence of two significant events: the Fed’s long-awaited moves to trim its balance sheet and a substantial increase in issuing US Treasuries to pay for tax cuts. Given the rapid rise in the size of the US deficit, the Fed must respond by slowing plans to shrink its balance sheet. If it does not, Treasuries will absorb such a large share of dollar liquidity that a crisis in the rest of the dollar bond markets is inevitable.

Consider the scale of both events. Starting in October 2017, the Fed began reducing reinvestment of the coupons it receives from debt securities holdings. That shrinkage will peak at $50bn a month by October and total $1tn by December 2019. Meanwhile, the US fiscal deficit is projected to be $804bn in 2018 and $981bn in 2019, implying net issuance by the US government of $1.169tn and $1.171tn, respectively, in the two years.

So, the withdrawal of dollar funding by the Fed, as it reduces its reinvestment of income received, is proceeding at roughly the same pace as that of net issuance of debt by the US government. Over the next few years, the government’s net issuance will stabilise, albeit at a high level, whereas the Fed’s balance-sheet reduction will keep rising.

This unintended coincidence has proved to be a “double whammy” for global markets. Dollar funding has evaporated, notably from sovereign debt markets. Emerging markets have witnessed a sharp reversal of foreign capital flows over the past six weeks, often exceeding $5bn a week. As a result, emerging market bonds and currencies have fallen in value.

When the Fed announced the normalisation of its balance sheet, the full extent and details of the Trump tax cuts were not known. Both scale and timing of the US fiscal deficit have been a surprise to markets.

Chart showing correlation between US debt issuance and Fed balance sheet reduction

The US central bank has shown admirable sagacity in its rate increases since they were first telegraphed in statements of the Federal Open Market Committee in 2012. Indeed, its flexible approach has played a pivotal role in maintaining global financial stability.
 The Fed was reasonably consistent in its forward guidance on the first rate rise. Nevertheless, it extended the period for exceptionally low levels from “at least through late 2014” in 2012 to “well past the time that the unemployment rate declines below 6.5 per cent” in December 2013.

Forward guidance was updated from March to October 2014, and in March 2015, to reflect the sensitivity in timing the first rise in the Fed funds rate to match inflation outcomes. In sum, the Fed carefully adjusted the pace to evolving macroeconomic conditions. Global spillovers did not manifest themselves until October of last year. But they have been playing out vividly since the Fed started shrinking its balance sheet. This is because the Fed has not adjusted to, or even explicitly recognised, the previously unexpected rise in US government debt issuance. It must now do so.

The good news is that there is an option available to the Fed that does not require it to change the overall policy direction. It can simply recalibrate its normalisation plan, adjusting for the impact of the deficit. A rough rule of thumb would be to reduce the pace of its balance-sheet contraction by enough to damp significantly, if not fully offset, the shortage of dollar liquidity caused by higher US government borrowing.

Such a move would help smooth the impact on emerging markets and limit effects on global growth through the supply chains that span both developed and emerging economies.

Otherwise, the possibility will increase of a “sudden stop” for the global economic recovery.

That might hurt the US economy as well. Circumstances have changed. So should Fed policy. It would still reach the same destination, but with less turmoil along the way.

The writer is the governor of the Reserve Bank of India

Italy’s Slow-Motion Euro Train Wreck

Nouriel Roubini , Brunello Rosa 

Picture of Euro coins in the box of a street performer

NEW YORK – The arrival in power of a populist, Euroskeptic government in Italy has focused investors’ minds like few other events this year. The yield differential, or spread, between Italian and German bonds has widened sharply, indicating that investors view Italy as a riskier bet. And Italian equity prices have fallen – particularly in domestic bank shares, the best proxy of country risk – while insurance premia against a sovereign default have increased. There are even fears that Italy could trigger another global financial crisis, especially if a fresh election becomes a de facto referendum on the euro.

Even before Italy’s March election, in which the populist Five Star Movement (M5S) and the right-wing League party captured a combined parliamentary majority, we warned that the market was being too complacent toward the country. Italy now finds itself in more than just a one-off political crisis. It must confront its core national dilemma: whether to remain shackled by the euro or try to reclaim economic, political, and institutional sovereignty.

We suspect that Italy will compromise and remain in the eurozone in the short run, if only to avoid the damage a full-scale rupture would cause. In the long run, however, the country could increasingly be tempted to abandon the single currency.

Since Italy returned to the European Exchange Rate Mechanism in 1996 – after withdrawing from it in 1992 – it has surrendered its monetary sovereignty to the European Central Bank. In exchange, it has enjoyed much lower inflation and borrowing costs, resulting in a dramatic reduction in interest payments – from 12% of GDP to 5% – on its massive public debt.

Still, Italians have long been uncomfortable with the lack of an independent monetary policy, and that sense of lost control has gradually overshadowed the advantages of euro membership. The adoption of the euro has had massive implications for the millions of small and medium-size enterprises that once relied on periodic currency devaluation to offset the inefficiencies of Italy’s economic system and remain competitive.

The inefficiencies are well-known: labor-market rigidities, low public and private investment in research and development, high levels of corruption and of tax evasion and avoidance, and a dysfunctional and costly legal system and public bureaucracy. And yet several generations of Italian political leaders have cited “external constraint,” rather than domestic necessity, when pushing through the structural reforms required for euro membership – thereby reinforcing the sense that reforms have been imposed on Italy.

The loss of monetary sovereignty means there are effectively two chains of political command in Italy. One extends from the German government, through the European Commission and the ECB, down to the Italian presidency, treasury, and central bank. This “institutional” chain of command ensures that Italy meets its international commitments and maintains strict adherence to EU fiscal rules, regardless of domestic political developments.

The other chain of command starts with the Italian prime minister and extends through the government ministries that are responsible for domestic affairs. In most cases, the two chains of command are aligned. But when they are not, a conflict inevitably ensues. Hence the current crisis, which came to a head when the prime minister-designate tried to appoint the Euroskeptic economist Paolo Savona as Italy’s next economy and finance minister without first consulting the other chain of command. The appointment was duly rejected by the Italian president.

Let us return to the question of whether Italy will now choose to break free of its straitjacket. Despite the euro’s advantages, it has not delivered for Italy economically. Italy’s real (inflation-adjusted) per capita GDP is currently lower than it was when the euro experiment began in 1998, whereas even Greece has managed to register growth, despite its depression from 2009 onward.

Some would explain this poor performance by arguing that the eurozone is an incomplete monetary union, and that its “core” countries like Germany drain labor and capital from “periphery” countries like Italy. Others might counter that Italians failed to conform to the rules and standards, and to implement the reforms, upon which a successful monetary union is based.

But the real explanation no longer matters. The prevailing narrative in Italy holds the euro responsible for the country’s economic malaise. And political parties that have either openly or implicitly called for leaving the eurozone currently hold a parliamentary majority, and would likely retain it in another election later this year or in early 2019.

If Italians were confronted with the choice of retaining or abandoning the single currency, recent polls suggest that they would initially decide to stay, for fear of a run on Italian banks and public debt, as Greece experienced in 2012-2015. But the long-term costs of remaining in a club dominated by inherently deflationary, German-dictated rules might tempt Italians to leave. That decision could come in the midst of another global financial crisis, recession, or asymmetric shock that pushes several fragile countries out of the euro at the same time.

Like the United Kingdom’s Brexiteers, Italians might convince themselves that they have what it takes to succeed on their own in the global economy. After all, Italy has a large industrial sector that is capable of exporting worldwide, and exporters would benefit from a weaker currency. Italians might be tempted to think: Why not escape the euro before those industries fold or end up in foreign hands, as is already happening?

If Italians do eventually go down this path, the immediate costs will be borne by domestic savers, whose nest eggs will be redenominated in depreciated liras. And the costs would be still greater if an Italian exit precipitated another financial crisis with bank holidays and capital controls. Faced with these possibilities, Italians – like the Greeks in 2015 – might blink and stay. But they also might decide to close their eyes and take the plunge.

Though Italy would be better off staying in the eurozone and reforming accordingly, we fear that an exit could become more likely over time. Italy is like a train whose engine has derailed; it might be only a matter of time before the cars behind it start coming off the track.

Nouriel Roubini, a professor at NYU’s Stern School of Business and CEO of Roubini Macro Associates, was Senior Economist for International Affairs in the White House's Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank.

Brunello Rosa is co-founder, CEO, and head of research at Rosa & Roubini Associates, and a research associate at the Systemic Risk Centre at the London School of Economics.

What Instability in Jordan Means for the Middle East

By Allison Fedirka

For years, Jordan has been a fairly stable country in an unstable region. But this weekend in Jordan was uncharacteristically tense, as thousands of demonstrators took to the streets to protest government austerity measures. Within days of the outbreak of the protests, Prime Minister Hani al-Mulki resigned and King Abdullah II ordered Education Minister Omar al-Razzaz to form a new government. How much does it really matter that a small country like Jordan is experiencing the sort of social unrest that is normal in its chaotic region? Potentially quite a bit.

Jordan has seen far worse macroeconomic conditions before, but the latest protests stem from economic problems that reach far deeper, to the lives and livelihoods of average Jordanians. Jordan is a small country with limited natural resources. It can do little to control the price of imported goods and depends heavily on external financing for economic development and stability. As it has done in the past, the Jordanian government turned to the International Monetary Fund in 2016 for credit to deal with a growing budget deficit and debt. As part of the IMF’s restructuring plan, the government implemented austerity measures that included cutting subsidies on over 150 goods and commodities. Particularly harmful was the removal of subsidies on staple food items and the introduction of a 10 percent tax on agricultural goods that were previously exempt from taxes. Public protests against rising bread prices started six months ago with a handful of unemployed people in isolated locations and evolved into organized demonstrations involving multiple groups and thousands of protesters. The government has tried to alleviate some of the pain related to rising prices with direct cash transfers to low-income individuals, but the issues were structural – and those types of issues don’t go away overnight.

Jordan occupies a strategic location in the Middle East, wedged between Israel and Saudi Arabia, two of the region’s leading powers. To its north and northeast lie Syria and Iraq – the region’s main hot spots that have drawn in regional and global powers like Iran, Turkey, Russia and the United States. Jordan initially was concerned about the crises in Syria and Iraq because of the fear that the Islamic State would spread into Jordan or that the waves of refugees fleeing these countries might reach its borders. Indeed, Jordan is now home to 660,000 Syrian refugees, nearly 7 percent of its total population. But the threat of IS expansion in the Middle East has largely subsided, with the group now relegated to sleeper cells and isolated pockets of territory. Nevertheless, Syria and Iraq still present a host of challenges for countries in the region, and if those countries took a turn for the worse, Jordan would likely be among the first to suffer. For this reason, Jordan’s relative stability matters greatly in the Middle East and beyond.

Israel, for example, will undoubtedly keep a close eye on developments in Jordan. It shares its longest border with Jordan, and a majority of Jordanians are of Palestinian origin. Jordan relies heavily on Israel for its national security, and Jordan helps Israel contain potential threats. But Israel is vulnerable at the moment – Israel Defense Forces are on alert due to escalating instability in the West Bank, Gaza, Golan Heights, Sinai Peninsula and Lebanon. Israel becomes increasingly exposed as stability in the region deteriorates and Iranian proxy groups become more active. Israel doesn’t need another conflict erupting along its borders. It will do what it can to keep Jordan stable and prevent a power vacuum from developing there.

The United States also has a strong interest in Jordan, which has long been a reliable military partner for Washington. In the fight against IS, the country served as a critical logistics hub. Its Muwaffaq Salti air base, located near the Syrian and Iraqi borders, was essential in fighter-bomber missions targeting IS territory. The U.S. has about 2,800 troops in Jordan to help train local forces and reportedly has Patriot missiles stationed there as well. It has also invested billions of dollars to secure this relationship, including $3.75 billion in loan guarantees since 2013. In terms of defense, the U.S. co-developed the Jordanian military’s five-year procurement plan, and U.S. law allows for expedited review and an increased value threshold for arms sales to Jordan. In February, the two countries signed their third memorandum of understanding, a deal that will provide Jordan more than $1.27 billion in foreign assistance per year over five years, a 27 percent increase from the previous agreement. Though the pace of operations against the Islamic State has slowed and the U.S. is trying to reduce its military presence in the Middle East, Jordan remains a valuable partner for the U.S., and anything that might compromise this relationship is a threat to U.S. interests. The protests do not rise to this level right now, but Washington will remain vigilant nonetheless.

Then there’s Iran, which has a vested interest in weakening Israel. Tehran has forces in both Syria and Iraq and is trying to expand its influence in the region, particularly through proxy groups. According to Al-Jazeera, this weekend’s protests in Jordan were led in part by a youth movement called Hirak Shababi, which Israeli intelligence accused in 2016 of being directed and funded by Hezbollah, Iran’s longtime proxy in Lebanon. The Israeli Defense Ministry promptly outlawed the group, which it considered a Palestinian umbrella organization. Though Iran has not been directly linked to the group’s operations in Jordan, the possibility must be raised given how it would help further Iranian interests in the region.

The Jordanian monarchy has thus far managed to keep the social unrest in check. It has found ways to make modest changes to the government to show that it is responding to the public backlash. (From May 2016 to March 2018, the Cabinet was reshuffled six times.) Attempts to prepare the public for the subsidy cuts through media campaigns appear to have failed. For now, the social unrest in Jordan has not threatened its core security relationships, but there is no guarantee that this will remain the case. The country still needs a way to address its underlying economic problems in the long term, and Iran’s potential role in fueling the unrest complicates the situation even further. But one thing is certain: Major instability in Jordan would have consequences for the entire Middle East.

The Canard About Falling Incomes

Don’t believe the government’s consumer-price index, which is obsolete.

By Andy Kessler

           Photo: iStock/Getty Images 

As election season approaches, chants about the hollowed-out middle class predictably grow louder. Wages have been flat for decades, we’re told. “In 1973, the inflation-adjusted median income of men working full time was $54,030. In 2016, it was $51,640,” the New York Times breathlessly reported last year. Sounds awful. Except it’s nonsense. Cast a leery eye on anyone who uses 1973 as a base—it was a high-water mark before a deep recession. But the real red flag—what makes this argument totally bogus—is the phrase “inflation-adjusted.” 
The odoriferous offender is the manufacturer of inflation data, the Bureau of Labor Statistics. After the creation of Social Security in 1935, Congress would occasionally bestow vote-winning gifts on retirees in the form of benefit increases. In 1975 Congress switched to automatic cost-of-living adjustments based on a consumer-price index, or changes for “a market basket of consumer goods and services.” That’s food, rent, electricity, T-Mobile, Netflix .

Forget for a moment that some of that didn’t exist in 1975. As consumer items got more feature-rich and complex, the BLS simply couldn’t note the absolute price of, say, a microwave oven. So the bureau came up with the indulgently named hedonic quality adjustment, defined as “decomposing an item into its constituent characteristics, obtaining estimates of the value of the utility derived from each characteristic, and using those value estimates to adjust prices when the quality of a good changes.”

It’s a better measurement but still inaccurate. Here’s a thought experiment: Think about your car’s automatic emergency braking, sometimes known as precrash or collision avoidance. It has been an increasingly popular option in recent years. By 2022, it will be standard on most cars. Some silicon sensors and a few pieces of code—today it costs maybe $50 to produce. But what’s it worth?

Let’s do a little hedonic decomposing of our own. Before these sensors, you would have had to hire a person to ride shotgun and constantly watch for potential collisions and slam on the brakes for you. In 2016 the AAA Foundation for Traffic Safety estimated the average driver spends almost 300 hours a year in the car, logging more than 10,000 miles. Paying someone even $10 an hour to stare into traffic means that over five years, collision avoidance is worth nearly $15,000. Double if you want someone to look out the back window, too.

Does this show up anywhere in the consumer-price index? Of course not. One of the most lifesaving features has dropped in cost by three orders of magnitude in less than a decade. To the BLS, it’s practically nonexistent.

Then there’s that hunk of glass and plastic in your pocket. Your smartphone is your newspaper deliveryman, librarian, stenographer, secretary, personal shopper, DJ, newscaster, broker, weatherman, fortuneteller—shall I go on? The mythical man of 1973 certainly couldn’t afford $100,000 or more for dozens of workers at his beckoning.

By the time the BLS puts something new in the CPI basket, it’s already cheap, so it misses the massive human-replacement price decline. The CPI is good at freezing a lifestyle and standard of living and showing how it gets more expensive over time. Great. But the CPI absolutely doesn’t take today’s technology-infused lifestyle and work backward to show how much more expensive it would have been in 1973. Yet that’s what pundits infer when they talk about a hollowed-out middle class. How would the BLS reverse-decompose artificial intelligence and Alexa? Good luck with that.

The CPI is obsolete. The feds should more accurately rename it the CDI, for Currency Debasement Index. Most hedge-fund managers I know rely on the CRB Commodity Index, which tracks everything from oil and hogs to molybdenum and orange juice, as a proxy for inflation. The Bureau of Economic Analysis and the Fed also use hedonic adjustments for inflation, meaning that official measurements of gross domestic product and productivity are also massively understated.

Worse, that undermeasured hedonic cost decline driven by technology has allowed price increases to sneak in elsewhere without triggering classic inflation fears. Have you bought tickets to a professional basketball game lately? Studied your hospital bill? Rented an apartment? Bought smelly cheese, organic balsamic vinegar or a textbook? 
Don’t believe the numbers—at least not the government’s numbers. Former Fed Chairman Alan Greenspan was on to this in 1996, saying the optimal level of inflation was “zero, if inflation is properly measured.” Freezing today’s lifestyle and going backward, I estimate a “true” median income of $347 in 1973 against the $51,640 of 2016. Today’s middle class isn’t hollowed-out. It’s living high on the hog.