WORLD VIEW:The euro may be the victim unless disenchantment with the EU is tackled, writes PAUL GILLESPIE
YOU CANNOT have deep globalisation, democracy and national self-determination all at once, according to US economist Dani Rodrik. You can have at most two out of the three.
If you choose globalisation and democracy you must give up on the nation-state. Keeping the nation-state and choosing globalisation means giving up on democracy. And combining democracy and the nation-state means giving up on globalisation.
Rodrik calls these choices a “fundamental political trilemma of the world economy” in his book The Globalisation Paradox. While they are not altogether stark alternatives, in that some combinations and compromises are possible with the three objectives, Rodrik invites his readers to think the logic through.
Hyperglobalisation plus democracy implies global governance, on which there is neither political nor popular consensus. Democracy plus the nation-state implies cutting yourself off from the rest of the world. And the nation-state plus globalisation limits democracy.
Rodrik believes democracies have the right to protect their social arrangements, and that “we need smart globalisation, not maximum globalisation”.
A smarter, better version is best sought by creating a thin layer of international rules, leaving substantial room for national governments to manoeuvre.
Rodrik recognises that the EU is an exception that tests the rule by trying to achieve all three goals at once. It is a work in progress, an experimental form of transnational governance
which has yet to prove its credentials.They are being sorely tested in the current financial and eurozone crises, he argues.
Rodrik’s “trilemma” framework is fruitful because, unlike most economists, he brings politics fully into his analysis.
Irish economist Kevin O’Rourke uses it to explore the political dilemmas faced by governments as they try to resolve the Greek and other eurozone troubles (see his April 15th post on irisheconomy.ie).
As he puts it: “EMU [economic and monetary union] solves the political trilemma by abandoning national monetary policymaking, and delegating it to a technocratic central bank. The fact that this has occurred without fiscal union, or common banking policies, can be well understood within the trilemma framework.”
Regarding fiscal policy, O’Rourke continues: “The combination of the nation-state and democracy has prevented deeper political union: German voters (among others) do not want a transfer union, while Irish voters (among others) do not want a common tax system.”
He suggests that a more logical policy trade-off for Ireland would be an end to regulatory competition in the financial sector in return for cutting interest rates, rather than increasing corporate tax.
As for Germany, one must recognise its political disenchantment with the EU in any discussion of the euro’s future, as pointed out in these pages by Derek Scally on Tuesday (“Merkel being undone by ill-defined relationship with EU”).
Some 63 per cent of Germans have little or no faith in the EU, according to an Allensbach poll in January, while up to 70 per cent do not see Europe as the future of Germany. Another poll shows 60 per cent of Germans regard the euro as an inconvenience compared with 32 per cent who perceive it as advantageous.
Scally quoted a senior foreign ministry figure: “We stuck to the old Kohl rhetoric for too long and then shifted too quickly to the current economic, monetary rhetoric with nothing in between. In a situation like this, when the populists are playing on people’s emotions, we could really do with someone at the top who is able to bring some passion to the debate.”
German chancellor Angela Merkel is universally found wanting in this respect.
A recent paper by Ulrike Guérot and Mark Leonard of the European Council on Foreign Relations asks how Europe can get the Germany it needs.
They propose that Germany needs a new narrative in its own interests to avoid a two-tier EU. It needs to work with other big states on security and put its economic might at the heart of a push to develop an EU more capable of writing global rules, rather than “going global alone”.
Speaking in Dublin this week, Guérot, who is from Germany, emphasised the emotional, demographic and generational sides of Germany’s European disenchantment. The populist narrative about Greece captured the German public imagination and was not properly challenged on its general applicability: “We are victims, we pay, they cheat us.”
Germany is poorer, older, emptier of people and more unequal than outsiders realise. Only 38 members of the Bundestag held seats before the hugely important generational change after reunification.
An impermeable barrier separates economic narratives in Germany and elsewhere, including on its banking system.
Even prominent writers such as Wolfgang Münchau are regarded as anti-German at home. His influential suggestions that partial debt forgiveness, a small fiscal union and a eurozone bond would resolve the crisis do not therefore get a hearing.
Whereas foreign policy used to drive domestic politics in Germany’s approach to Europe, the reverse is now true, making it far more complex.
Unless progress is made in Germany towards creating a new transnational narrative of EU politics, Rodrik’s trilemma may claim the euro as a victim.