GeoLegal Weekly #25 - One person, One vote, One time?
Political change or system change? That’s the assessment we need to make when we look at elections in historic democracies like the US and France.
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In How Democracies Die, Daniel Ziblatt and Steven Levitsky argue that citizens often select populist and anti-democratic leaders democratically and enthusiastically at the ballot box, and thus, give such leaders an opportunity to take advantage of polarisation and dissatisfaction to consolidate power and undermine democratic institutions, including the justice system. This book may well be our guide in 2024.
Two Truths and a Lie
From nearly two decades of political analysis, I’ve learned two core rules. First, over a long enough time horizon, most democracies experience mean reversion. That is to say that they may suffer one government that pulls policies further to the left or right, only to have the pendulum swing back and moderate when voters return to the polls. Second, I’ve learned that businesses are resilient - they face crisis after crisis and carry on in new incarnations for decades and some for centuries.
However, there’s a myth that the current cycle we are going through in places like the US and France is just politics as usual. If you look at financial markets, they seem to be behaving that way. However, it is not. Elections are usually about politics. These elections are about the systems themselves.
You can tell because there’s no real debate over policy shifts. Republicans are not zeroing in on who is likely to be Trump’s VP. Democrats don’t seem to care who an alternative to Biden might be - only whether one is on the table. Nobody seems focused on who would have power in a French National Rally-led government. None of this is about who is raising more money or landing the best debate punchlines.
No, what we have right now are elections where the entire system is at stake. That violates the first rule of mean reversion and renders the second rule of resilience inapplicable. We are headed into new territory where a new mindset is needed.
One person, One vote, One time?
Biden performed miserably in last week’s debate. He validated all the concerns that were facing him about his age, and his defense that you can’t debate a liar only landed with the already converted. If this were a normal political cycle, the conversation of throwing out the incumbent president - who nobody seriously challenged in the primaries - wouldn’t be on the table. Not even if it appeared they were going to lose badly. That’s because politics always swings back: If Biden were to lose to a traditional Republican, Democrats would simply focus on how to slow down their agenda until they can mount a comeback.
Instead, there is full blown panic, which is allowing the center of gravity of the Democratic party to move toward building name recognition and support for an alternative candidate four months out from the election. Nearly every liberal newspaper is calling on Biden to leave the race.
That type of panic only happens when something much greater is at stake. This evokes fears akin to Middle East and North African elections where democracy brings risks of “one person, one vote, one time.” In effect, Democrats are concerned that Trump’s authoritarian tendencies might put them at a permanent disadvantage where they might never win again.
That may sound over the top, but there’s certainly evidence of creeping expansion of the power of the presidency and of Trump’s willingness to push the limits beyond that. Businesses generally favor Republicans (I’ve written elsewhere about how 70% of business leadership teams vote Republican) so perhaps the specter of a permanent Republican majority has some form of silver lining for them. However, few businesses want an environment where it is impossible to influence through the traditional legislative means they are all accustomed to and where policymaking really is centralized in one person.
Whether Biden steps aside or does not makes very little difference in this election. If he remains in the race, Democrats will have a low-enthusiasm candidate facing a high-enthusiasm challenger in Trump. While I’ve long ago hung up my professional US politics forecasting hat, it’s hard not to expect Trump to win in that dynamic. If Biden steps aside, Democrats have a whole host of mediocre options to replace him - none of whom have the name recognition to start neck and neck in the polls with Trump. While panic could create its own enthusiasm amongst Democrats about backing a challenger, the odds would still be long they can pull it off. If I were the president, and I realized the system was at stake, I’d bet on the latter. But I’m not the president (yet? I kid).
France
In France, the situation is different but the stakes are just as high. On the heels of a drubbing in the EU elections, President Emmanuel Macron called snap parliamentary elections which resulted in a strong showing by Marine le Pen’s National Rally (RN). This raises questions not just at the level of France’s own political system, but also that of the EU (which should be of greater concern). That parliamentary loss would discipline Macron - who was accused of authoritarianism when cutting off debate about raising the retirement age - is cold comfort.
One scenario of concern is that France could end up with a technocratic government that is unable to do anything but pull together single issue majorities. As of this writing, most pollsters have the RN emerging as the single largest party in the Assemblee Nationale, coming close to, but not attaining an absolute majority. If the RN gets a majority it will presumably nominate a PM (Jordan Bardella) who will be at loggerheads with President Macron, something that could force him to call an early Presidential election. But if the RN does not get a majority, or close enough to one, it could refuse to form a government, forcing that non-party outcome which would persist for a year until new elections.
Some European countries have coasted for longer stretches without governments. Famously fractious Belgium (which has separate Flemish and Walloon versions of just about every point on the political compass) once went more than a year without a government. But this is France– a member of the UN Security Council and the EU’s sole possessor of nuclear weapons in a world on fire. That’s not a good outcome.
The second scenario of worry is around a new government fundamentally shifting relations with Europe. In economic terms, if Germany is Butch Cassidy, France is the Sundance Kid, an indispensable part of the dyad that has powered European integration for over 60 years. In many respects, the EU has been very good for France, allowing it to punch above its economic and political weight in the world. It gets to run Anglo-American style fiscal and current account deficits without the bond market raising its eyebrows the way it does when Spain or Italy do the same thing. Its farmers get to block trade deals. It has provided two ECB Presidents, the most influential head of the European Commission (Delors was the EU’s shepherd), and is pretty much always guaranteed one of the top EU jobs. Now it risks delivering a government that outright rejects these victories as such.
Does le Pen know this? To some extent, yes. This explains in part why she backed away from her plans to exit the euro. But ONLY to some extent: the RN’s goals are to challenge core tenets of the EU and cherished beliefs of Germany on fiscal probity. Whether challenging EU fiscal rules or free movement of people, the RN would be gearing up for a fight that could rattle what’s left of the EU.
A drawn-out battle between a France dominated by the RN and EU institutions could lead to bond-market pressures that look like (or even worse than) the height of the Eurozone crisis in 2011. Except that France was then more a standby victim of fears that Italy might follow Greece into some kind of debt restructuring, rather than being the proximate political cause of the troubles. Germany has already said it would object to the ECB acting to control French bond yields under such circumstances. And it is unclear that the ECB even would do so--Draghi's original "Whatever it takes" speech and all subsequent ECB commentary on the subject have talked about "unwarranted" spread-widening, implying that there is such a thing as "warranted" spread widening. A broad-based challenge by France to the single-market would almost certainly qualify as the latter. This could be transmitted throughout the global financial system by rising concerns about the counterparty risk associated with leading French banks.
The RN's rise in France has paralleled broader shifts to authoritarian national populism in several other countries in Europe. The animosities of these parties have targeted the "woke" left (with this terminological import now being nationalized as "wokisme") and immigrants in particular. Supranational technocracies are a particular bugbear, which also makes the EU itself a target, even if membership in it might confer net economic benefits that are not readily apparent. In Hungary, Viktor Orban seems to managed to use the powers of the state (which include distributing or withholding EU funds) to combine authoritarian tendencies with clientelism on a vast scale. The strength of rival political traditions in France and the complexity of the French economy will likely make "Orbanization" much harder for the RN to pull off, but that in turn could lead to more open conflict between the party and its opponents in the form of strikes, demonstrations and perhaps even violence.
The Failsafe is Failing
Generally speaking, when all goes badly in presidential or electoral politics, you can rely on the courts to keep the system in check. Courts will often be a steady hand, rejecting sweeping legal challenges. Supreme Court season in the US this year was anything but. We’ve seen the Court given substantial (and worrying) immunity to presidents who will no longer have to fear legal consequences for official acts. We’ve seen the court strike down well settled precedent on how federal agencies interpret unclear acts of Congress. We’ve seen lower courts become abused for nationwide injunctions. We’ve seen both parties accuse the courts of political prosecutions. The list goes on.
Rather than be bastions of stability, the courts are becoming politicized and weaponized just like the political system itself. That means that should an election require intervention from the courts, its conclusions are less likely to be viewed as truthful by opposing parties.
In fact, there’s an interesting question about directionality - is the problem that the courts are being weaponized or is the weaponization of courts a sign of democratic erosion? It’s probably the latter. Research generally supports the idea that justice system erosion is the first sign of the death of democracy. Courts are indispensable institutions in democracies and their erosion, whether through executive-led attacks, delegitimization, and court packing initiatives, or through the court’s own anti-democratic rulings, threatens democracy. Democracies today are less likely to be overthrown through violent coups, but rather through an incremental process of democratic erosion and democratic backsliding, which citizens often do not notice until it is too late. When authoritarian-leaning candidates are elected, the courts and the justice system are of key importance and one of the first and most important institutions they capture to remain in power. We’ve seen this in recent years in Hungary and Poland as well as Brazil and Venezuela, to name a few.
Now we may well see this in the US.
What do you do about it
It’s hard to build resilience in a world where the system is at stake of becoming much more authoritarian or of jeopardizing long-running institutions like the EU. Succeeding in a soft authoritarian environment is a very different set of skills than in a democratic environment. It means currying favor with a narrow set of yes-(wo)men who surround the new leadership rather than playing traditional legislative games. It means taking your business agenda and aligning it to the same populist imperatives that brought the leader to power. It means not swimming upstream to push priorities that don’t align.
In order to do this, the most important thing you can do as a business is understand your current vulnerabilities. When the entire system is in question you need to think much more about adaptability across your operations. In business as usual scenarios, you may be concerned about tweaking your approaches to comply, being up to date on the latest directives, etc. This is what modern legal and compliance departments are built to do to perfection. Today’s world calls much more for putting yourself in a position to be able to adapt quickly to dramatic changes in the foundations.
That means reflecting on the countries where you operate. In some markets, you no doubt rely heavily on clear, agreed-upon legal precedent to guide decision-making. In some markets, you take for granted that the bureaucratic process works even if its annoying, because you know what to expect, what the risks are and what the impacts of those risks might be. When those places are undergoing shifts, you may not notice until it is too late.
So, your biggest vulnerabilities become the critical business functions that can’t be easily adapted. In such a scenario, breaking down silos, empowering new voices and making sweeping strategic shifts when needed will be rewarded. Standing still will be tantamount to giving up. To prepare, you should ask yourself:
Who is empowered to make decisions quickly and in what areas?
What is the process for putting together a quick-response team and the engagement approach once that is done?
How can we incorporate more dynamic/agile approaches into teams and areas of the company (like legal) that may normally say, “we do this because this is how it is done”?
Where do we have knowledge gaps? Is there expertise that we don’t have in-house? How quickly can we tap into new knowledge as needed?
None of this is easy or fun. But welcome to the world in 2024.
-SW
PS-Thanks to David Bender for the inspiration for this piece, Karthik Sankaran for wisdom on Europe and Steve Heitkamp for thoughts on how to navigate this environment.