The rate for travel insurance depends critically on where we go and what we do there. A hiking tour through the Amazon rainforest comes at a higher premium than a stay at a health spa at Lake Geneva. This is not because insurance companies dislike adventure travellers, nor do they want to dictate where or how we spend our holidays. The difference in premiums simply reflects the difference in risk. The likelihood of contracting a tropical disease, being bitten by a strange bug, or requiring helicopter transport differs between the two destinations, and consequently, so do the premiums.
Under conditions of competition, there is not much that any individual insurer can do about the premiums. If an insurer exaggerates the actuarial risk of adventure travel, as an excuse for an excessive price, adventure travellers go somewhere else. If an insurance company equalised the premiums – on ‘fairness’ grounds, say – spa guests would go somewhere else. (Unless, of course, they are prepared to cross-subsidise adventure travellers.)
In financial markets, it works much the same way. Differences between interest rates charged to different borrowers reflect differences in credit risk, as assessed by the borrower’s past record, but also by their present behaviour. Creditors may charge higher rates to borrowers who do X than to borrowers who do Y, but it would be nonsense to claim that they want to ‘force’ Y upon them, or ‘demonise’ X. It is simply a reflection of the higher credit risk associated with Y compared to X.
This is one of the basic flaws in the economics of Alexis Tsipras, who, apparently, has become the Guardian’s new poster boy. His message is simple: the Eurozone’s sovereign debt crisis is a struggle between ‘the people’ and ‘the market’. ‘The market’ wants austerity; ‘the people’ want high levels of government spending. Yet it is the former that holds the reins: insubordinate governments are punished with higher interest rates and obedient governments rewarded with lower ones. Thus, too many eurozone governments do what ‘the market’ wants and not what ‘the people’ want. How dare the financial markets, who have no democratic legitimacy whatsoever, force their will on democratically elected governments. How dare they override the true will of the people.
Tsipras is merely the most strident advocate of a narrative that is popular all over the eurozone: financial markets have undermined democracy. We, the people, must regain control over our destiny. It is not just an angry response to austerity measures in debt-crippled economies. Under the heading Primat der Politik (primacy of politics [over markets]), it is also very fashionable in Germany.
But that does not make it any less flawed. Firstly, there is no monolithic entity called ‘the (financial) market’, whose actors decide collectively on interest rates or credit volumes. The financial market is simply a meeting point for lots of individual borrowers and lots of individual lenders. When we say ‘the market’ ‘punishes’ a particular government policy, it is just a metaphorical way of saying ‘many savers believe that this policy makes a default more likely’.
Secondly, whether or not behaviour Y raises the credit risk has nothing to do with the decision making mechanism that has led to Y. To go back the introductory example, the health risk of a trip through the rainforest is determined by objective factors, such as the prevalence of malaria-carrying insects. We can pick our holiday destinations individually, or we can relegate it to the collective (‘democratic’) sphere, by creating a National Tourism Service and holding an annual referendum over where we should all go this year. But the risk is the same in either case; it is independent of our decision mechanism. We cannot vote the mosquitoes away. In that sense, they, too, are profoundly undemocratic.