Finance Damages Democracy – and Brexit Will Make it Worse!


The ‘do or die’ Brexit deadline this Halloween has come and gone without bringing much certainty about the policy and political landscape going forward. UK voters who hoped for a clear-cut end of the Brexit saga were disappointed as big questions remain unanswered while new ones have been added: What will the December election bring? Will there be a second referendum? A different deal? A further extension? 

There seems, however, one definite outcome of the Brexit process: UK democratic institutions have been hollowed out permanently. Individual politicians have certainly contributed to this outcome. However, it would be too easy to blame the disintegration of democracy in rich countries entirely and exclusively on Johnson, Trump, and the like. Rather more systematic and structural trends are at play, which raise the old question of whether capitalism and democracy are compatible or rather contradictory systems. The claim that capitalism will usher in democracy, since free markets rely on an open societal order, or at least fundamentally weaken authoritarian regimes, has been proven untenable. This is particularly clear as the Chinese Communist Party tightens its grip over social media, using information technology to survey ever-growing parts of Chinese people’s lives.   

It is striking though that among rich countries the crassest examples of democratic disintegration are unravelling in the two Anglo-Saxon economies which have been hailed as economic success stories during the 1990s and early 2000s: the UK and US. Much of their growth spurts over this period was fuelled by the increasing size and influence of their finance industries and so is the current hollowing-out of their democratic institutions. In brief, we are currently experiencing the effects that financialisation has on democracy. Of course, capitalism and democracy are generally difficult to reconcile as convincingly argued by Polanyi. The fact that a democratic order calls for equality of all citizens before the law and provides all of us with the same vote, while our economic order simultaneously introduces a strict hierarchy based on ownership is possibly the clearest illustration of the conflict between democracy and economic order. But it is further stoked under financialisation. This blog post unpacks how financialization affects democracy in a variety of ways, through three examples, namely social provisioning, the Euro crisis, and the Brexit saga.

Financialisation and Social Provision

The growing size and networked character of the finance industry, as well as the complexity of financial products explain the anti-democratic influence of financialization on our societies. The networked character of the industry has to do with the geographical concentration and tight institutional linkages within the industry, but also the revolving door into public institutions and regulators. Andreas Nölke discusses these finance industry characteristics brilliantly and in detail in his contribution to the International Handbook of Financialization

But why should a shift of influence from large manufacturers to large financiers make such a societal difference? After all, the German automotive industry does not seem exactly thrilled about citizens’ demands for more environmentally friendly transport and makes sure to influence German public authorities in its favour. For one, finance is potentially more footloose than other industries, making relocation threats in case unpopular policies are introduced more credible and more pressing in the eyes of policymakers. More important, however, appears to be the sheer complexity of modern financial contracts and instruments. Politicians and civil servants often seem at a loss when trying to understand the workings of financial instruments such as interest-rate swaps. In fact, local authorities across Europe have lost millions in the aftermath of the 2008/9 financial crisis through such investments. As a result, policy decisions around financing of service provision , and ultimately about the policy design of the social service itself, are left to financial experts, undermining democratic oversight (especially where an innovative format is used such as social impact bonds in the UK or tax increment financing in the US, I discuss both of these in more detail here). Hence, whether the local shelter for homeless people receives funding for three or ten years is no longer a decision about people’s wellbeing and how we as a society would like to treat the most vulnerable among us, but about the design of financial instruments. This then leads to grotesque situations where social housing cannot primarily cater to the poor because the bond holders that finance the project favour tenants who can reliably generate income to meet rent payments.  

The influence of financiers on policy design of core state functions such as infrastructure and social provision is highly problematic. Financial investors have very different priorities from the average citizen, meaning from most voters; and the two sets of priorities can end up clashing. On the local level this might not be easy to spot. In the example above, it would be desirable to have an extended funding period to tackle homelessness. But is this such a big deal? Surely, maturities could be readjusted. When translated to the macroeconomic level the clash becomes starker: investors holding government bonds, for instance, have an inherent interest in debt repayment even if it is at the cost of urgently required public spending such as the upkeep of roads and bridges, which if neglected will be more costly to repair or even replace. Streeck coins this the conflict between the people, meaning citizens with a vote, on the one hand and market people, meaning government bond holders, on the other. When push comes to shove, it seems that policymakers tend to prioritise their promise to financial investors to repay debt over the promises they made to their voters. 

Financialisation and the Eurozone Crisis

The eurozone sovereign debt crisis illustrated this favouring of financial markets by politicians rather dramatically as I discuss in a recent article that reviews Adam Tooze’s excellent book Crashed. During the eurozone crisis democratically elected leaders were pushed out to preserve the trust of financial markets into the commitment of eurozone governments to repay their debt. French and German officials schemed repeatedly to oust other eurozone leaders when they started questioning austerity policies. This included the Greek Prime Minister Papandreou who in late 2011 suggested a referendum on freshly announced austerity measures; and was followed by Berlusconi, the Italian Prime Minister, forced to resign since he was perceived to be too populist to push through austerity measures.  

The increased use of financial markets to raise funds for government spending through bonds which in turn are traded in very liquid secondary markets is referred to as the financialisation of sovereign debt. Until the 1980s or so, many governments would rather passively manage their debt, raising funds with a few trusted banks. This also meant secondary markets, where holders of government bonds buy and sell these financial investments among themselves, were much less used. Sovereign debt financialisation undermines democratic oversight. During the eurozone crisis, Jean-Claude Juncker as the head of the Eurogroup of eurozone finance ministers claimed that to safeguard financial markets it was necessary to be secretive and in fact, as he put it, ‘insufficiently democratic’. Because ‘[w]hen it becomes serious, you have to lie’ (quoted in Tooze, p. 382). 

Financialisation and the Brexit Saga

The Brexit saga equally shows how financialisation can interfere with democratic processes. There is some evidence that financial elites might have placed larger bets on ‘Remain’, skewing public perception that the outcome of the Brexit referendum will be tight but most likely in favour of staying in the EU. In actual fact, most bets – if on average smaller in value – were placed on ‘Leave’. Given the wide – and often not very sophisticated – use of political betting odds in reporting this is likely to have influenced public discourse and potentially even people’s voting behaviour. Some financial companies, especially hedge funds, made large profits from the unexpected referendum outcome, ‘shorting’ the pound, effectively betting on a depreciation in the UK currency as the Brexit vote triggered an outflow of financial investment. Brexit-supporting politicians like Rees-Mogg reportedly benefitted in quite a substantial manner from the weakening pound. Hence, while most of UK business was horrified at the prospect of a disorderly Brexit, hedge fund managers backed the Tory candidate who seriously embraced that policy option through campaign donations. Arguably, there would be very few winners from a UK crash-out, but hedge funds shorting the pound and equity of UK companies would definitely be amongst them. 

Ewa Karwowski is a Senior Lecturer in Economics at Hertfordshire Business School, University of Hertfordshire, Hatfield, UK, and Senior Research Associate at the University of Johannesburg, South Africa. She works on firm finance, financialization, and development.

One thought on “Finance Damages Democracy – and Brexit Will Make it Worse!

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s