Image: Anthony Mirhaydari

Anthony Mirhaydari

In the thousands of years of human history, law by popular consent has been the exception, not the rule. Domination of unruly populations by strongmen, warlords, tribal leaders and monarchs is much more common than democracy.

Why? For one, it's easier to get big things done. But also because democracy and humanity's innate selfishness don't mix -- especially when it comes to money. It's easy to lose our way, voting for low taxes and higher benefits, while allowing things like the housing bubble or the deficit problem to build unchecked.

But people power can also be a catalyst for good, which I think is happening now.

Late last year, in "Why all signs point to chaos," I warned that strict austerity from governments, especially in Europe, was making harsh economic realities even worse. Higher fuel and food prices only add to the toxic mix. When this has happened historically, people get angry. Social disorder follows. But positive change can come out of it.

Economists see this phenomenon, too. In fact, what inspired that column was a study that found protests, labor strikes, political upheaval and even riots and assassinations increase as people are faced with higher taxes and fewer benefits, along with joblessness and stagnant wages. This kind of chaos was in decline for most of the past 20 years.

It's on the rise now, with last year's Arab Spring being answered by political upheaval in Europe and the rising popularity of fringe parties -- just a preview of the turbulence to come. (As I wrote last week, the United States isn't immune, as it faces its own fiscal cliff in just eight months.)

The stage is set for socioeconomic turmoil on a scale not seen since the 1970s and 1980s -- turmoil that rich-world countries won't be able to avoid unless leaders take drastic action to lighten the load on the many at the expense of the few. Otherwise, the people will elect someone who will. And if they can't, they'll take to the streets.

Long term, this turmoil could be a positive. But, for the moment, welcome to chaos.

Where there's smoke

The first act started in March in Europe and accelerated this week, sending shudders through global markets. I'll spare you the long and tortuous history of the eurozone debt crisis, which started more than two years ago, but here are the highlights:

  • Many eurozone countries, particularly Greece, Italy, Portugal, Spain and Ireland, are suffering from uncompetitive economies, bloated governments, rising debt levels and deep budget deficits.
  • These are caused by lax enforcement of European Union limits on national deficits, Germany's trade mercantilism, lax banking regulation and the fallout from excess credit creation during the 2002-2007 boom. The European Central Bank, worried about slow growth and high unemployment in Germany, kept interest rates low. But that was too low for fast-growing countries like Spain and Portugal, leading to housing and credit bubbles.
  • Three nations have already required bailouts from the eurozone to stay afloat, and the worry is that Italy and Spain will need help, too.
  • In response, Germany and other AAA-rated members of the eurozone, along with France, are pushing for harsh budget austerity in a bid to restore market confidence and keep Italian and Spanish borrowing costs down.
  • But this austerity -- read: cuts in government spending and payrolls -- is deepening a new eurozone recession and causing the weaker countries to rebel against the central authority's mandate.

In early March, new Spanish Prime Minister Mariano Rajoy, under pressure with youth unemployment north of 50% as the country sinks into recession, announced that his government would go a little easier on the economy. He set a deficit target of 5.8% of gross domestic product for 2012, rather than the 4.4% target Spain had agreed on with European Union leaders in Brussels. This still translates to a massive 2.7% cut to economic growth this year in an economy that's already in recession.

The EU and the paymasters in Berlin balked, though, and the target was pushed back to 5.3%. This was the catalyst that sent Spanish and Italian borrowing costs climbing again and helped slam the brakes on the multimonth stock rally here at home.

The problem isn't just in the weaker EU nations. This week, the Dutch government -- one of the five AAA-rated eurozone countries and a fervent supporter of the austerity-led approach to Europe's woes -- collapsed after members balked over domestic budget cuts.

In France, the results of the first round of voting suggest the left will capture the presidency for the first time in 24 years. Polling suggests Socialist candidate François Hollande will win and force a renegotiation of the EU's strict budget agreement. He would balance the French budget one year later than current President Nicolas Sarkozy, and he favors steep tax hikes on the rich rather than deep cuts to state spending.

Meanwhile, in Greece, officials have taken a knife to 2012 growth forecasts, as protests and labor strikes continue. It's becoming increasingly clear that the country has no future in the eurozone. The head of German economics institute Ifo said in New York this week that there's "no chance for Greece to become competitive" unless it exits the eurozone and restores the drachma.

"If Greece is kept in the eurozone, there will be ongoing mass unemployment. But if they exit, they will see a very sudden recovery," he said, as lower prices boost competitiveness. Something similar happened in Iceland after that country devalued its currency, the króna.

Both Greece and France will hold elections May 6. The Dutch are expected to vote in September. Democracy is reasserting itself in Italy and Greece after unelected technocrats favored by Brussels and Berlin were installed in Rome and Athens. Elections have already swept away governments in Slovakia, Ireland, Portugal and Spain.

The threat is that the conservative Franco-German alliance that has been steering Europe through this crisis with maxims of "austerity before bailouts" and "bankers before taxpayers" will collapse. A breakdown increases the risk that a country such as Greece will exit the eurozone due to a lack of rescue funding.

And it increases the risk that Germany, realizing that it's milked all it can from the euro (via massive trade surplus with the weaker peripheral countries) packs up and leaves rather than providing more rescue funding. Without Germany -- the eurozone country with the deepest pockets -- there is no orderly resolution to the debt crisis.