(This is the English-language text of an interview published in the Swedish journal Respons)
The main argument in The Globalization
Paradox is that we can’t simultaneously pursue economic globalization,
democracy and national determination, but at most have two out of three. You
also write that EU was the exception that tests the rule. Well, hasn’t the
on-going crisis shown that this trilemma definitely also holds true for the EU?
And hasn’t the crisis revealed that the European nations are not so similiar as
it may have appeared? The differences between North and South Europe are
perhaps so great that such a large union is an unrealistic project, not to
mention the Eastern Europe?
Indeed.
When I wrote that the EU was the “exception that tests the rule” I meant that
the trilemma applied equally well there, and that the Euro zone was in fact a
case in extremis of the trilemma. My thoughts have been further confirmed by
developments since the book was completed.
Assuming that European nations do not want to give up democracy, the
only choice that exists is the one between political integration and economic
disintegration. Either Europe will make the leap to a fiscal and political
union, or it will have to give up on a common currency and the dream of a truly
unified single market. That is what the
trilemma suggests and the reality that the region has been living.
You are
right that I may have exaggerated the similarity and unity that exists within
Europe – or even the Euro zone. Perhaps I did not emphasize sufficiently the
tension between deepening the union and broadening it with increased
membership.
Building
a political community, without which fiscal union cannot happen, requires the
development of a sense of common political fate and destiny. Historically, this
has been always an elite-driven project. France was not born a nation; it became
a nation because it was made into one by its political and intellectual leaders
through education, ideology, and a common narrative. In Europe, unfortunately,
the reaction of leaders like Angela Merkel, at least at the outset of the
crisis, was to emphasize the differences between North and South instead of the
commonalities. She allowed the crisis to
be presented as a narrative of profligate, lazy Greeks versus hard-working,
thrifty Germans – and not as a story of mutual dependence. With that as a background, it is hard now to
change course and make the case for a common political destiny.
So, even
though the differences between nations are real, it is also the case that
political leaders have fallen short in rising above their very short-term
interests.
Globalization can perhaps be said to have
reduced inequality in the world. Large parts of the Chinese population has
risen out of poverty – if that can be attributed to globalization as such and
not the Chinese way of adapting to it. But is there a connection between
globalization and inequality within countries? It seems much easier to
further accumulate wealth for the very rich in a deregulated economy.
There is
no question that globalization has aggravated inequality within countries. But we need to think of globalization in this
context as part of a cluster of developments: new technologies, greater
emphasis on markets, decline in unionization, and fiscal paralysis of many
states. All these have had the consequence of raising the returns to skills and
talents and reducing the bargaining power of blue collar workers and those who
are unable to move across national borders with the same ease as capital.
But
there are exceptions too. One of the
most encouraging trends in the last couple of decades is the decline in
inequality in Brazil, Chile, and many other Latin American countries, which
have traditionally been among the most unequal in the world. This shows that
broad social programs as well as more narrowly targeted anti-poverty programs
can still be pursued and are effective in open economies.
This interview for the magazine Respons
is intended to follow after a review of 4 new books in Swedish about the crisis
of the EU, written by Sverker Gustavsson, professor of political science at
Uppsala. The four Swedish authors he is discussing – Mats Persson, Johan
Norberg, Stefan de Vylder and Björn Elmbrant – writes from different political
positions, but all agree that it was a fundamental mistake to create a monetary
union without a fiscal union. A fiscal union would have made it possible for
the EU to transfer resources between countries and reduce the tensions that the
common currency creates. Do you agree with this assessment, that a monetary
union ought to have been accompanied by a fiscal union? Is a fiscal union a
realistic project? Is it even desirable, or ought EU to take a different
course, perhaps aim for a more limited economic union, which would allow the
nation states to protect their social arrangements? Further, would a collapse
of the eurozone necessarily be a bad thing? The nation-states may then perhaps
be able to adopt policies more suited to their actual conditions and interests?
Sweden for instance is doing fine outside the eurozone.
Pretty
much all my economist friends in Sweden were in favor of joining the Euro. I
haven’t encountered one who hasn’t changed his mind.
Yes, the
idea that monetary union requires fiscal union has now become conventional
wisdom. But it doesn’t go nearly far enough. What makes the U.S. a sustainable
monetary union is not just that it operates within a fiscal union. It is also that there is a common legal
system (to deal with bankruptcy and cross-state bank liabilities), common
deposit insurance and financial regulation, a true lender of last resort (in
the form of the Federal Reserve), much greater labor mobility across state
borders, and a federal constitution that severely curtails states’ sovereignty. Perhaps most importantly, the system is
underpinned by a federal political system
which allows the residents of each state to directly elect their
representatives in Washington, D.C., who can then represent their interests and
argue for the kind of economic policies that these residents want pursued.
European
political integration need not directly follow this model, but whatever form it
takes, there is a very long way to go. Fiscal union in itself will not do the
trick unless there are democratic mechanisms of accountability and
representation that backs it up.
Which of
course forces us to ask the question whether we can and really should try to go
that far. It turns out Sweden did do the
right thing by staying out of the Euro zone. Now it benefits from having its
own currency, its own fiscal policy, and its own financial regulations. It remains the master of its own fate to a
much greater extent. It remains a highly globalized economy, but has set its
ambitions on this score at a somewhat lower level than the Euro zone countries.
Perhaps
the Euro zone should similarly take a step back. Ultimately, that may well be
the right answer. The difficulty is how
to engineer a retreat from a single currency when there is no obvious legal
mechanism for doing so and when so much debt would have to be redenominated,
reconfigured and redistributed. And how to do this in a manageable way when the
slightest indication from governments that they are considering a break-up of
the euro zone would cause a market panic and stampede out of the weaker
economies.
It’s a
nightmare just to think about it. And
yet, it is not clear if there is a realistic alternative. That is Europe’s dilemma. Either more
political Europe, or less economic Europe.
There is no stable in-between.
The support for such a fiscal union,
which also would be a transfer-union, seems rather eager among the populations
in Europe, especially in those countries that will be paying, like Germany and
Finland. To be politically possible, redistributions of this kind seem to
demand a strong sense of affinity between those involved. It could be done between
East and West Germans, but perhaps not between Germans and Greeks or Italians.
If you look at the welfare states historically, they were able to transfer
resources among the populations, but those nations were also homogeneous, like
Sweden. Isn’t it dangerous to aim for a fiscal union when popular support for
crossnational transferences is so weak – dangerous in the sense that it might
create a general backlash against the union?
Yes you
are right, but as I explained earlier, the difficulties are in part due to the
framing of the crisis by Northern European leaders at the outset. Once you
present the crisis as a result of Greek duplicity and profligacy, it becomes
difficult to go back to your constituency and ask that you help the Greeks out
with yet another bailout.
At its
bottom, this has nothing to do with morality. The economic fact is that the
assumptions on which German lenders and the Southern borrowers acted have
proved to be wrong and now both are in trouble. Neither Greek and Spanish
borrowers, nor German and Dutch lenders can be absolved. This is a crisis of
economic interdependence, not of morality.
Political leaders missed the chance of explaining this to their
electorate.
So the
result is that we are where, as you suggest, the backlash is as likely to come from
exasperated Northern countries as from Southern countries deep in economic
crisis.
It is
easy for an economist like me to blame it all on lack of political leadership –
and God knows economists were at fault too, by consistently making
over-optimistic projections on Greece, Spain, and so on – but this is where the
ultimate blame lies.
Your position is that democracies have
the right to protect their social arrangements. However, the European Court of
Justice has consistently decided against the national arrangements, forcing the
countries to adapt to globalization, according to a report by Martin Höpfer
Armin Schäfer at Max Planck Institute. http://www.mpifg.de/pu/mpifg_dp/dp12-5.pdf
In your book, you point to the fact that
a small group of central bankers made all the important decisions concerning
financial globalization before WWI. They didn’t need to consult the people.
Isn’t this a parallell to EU today? A small elite, far removed from people in
general, makes all the important decisions? And won’t this also this time
provoke a reaction?
Precisely. That is why we have the trilemma. The more
Europe has moved in the direction of the single market without Europeanizing
its politics, the greater the democratic deficit has become, and the bigger the
backlash.
That is
why the new fiscal compact is problematic. It represents the same technocratic
mindset that tries to squeeze all countries into the straitjacket of common rules,
without simultaneously enabling democratic discussion and deliberation over
those rules. Inter-governmental agreements are no substitute for democratic
practices that transcend national borders.
Let me
clarify something on the relationship between democracy and economic
integration. It is perfectly OK for
executives and legislatures in democracies to sometimes restrict their freedom
of action – through delegation to autonomous bodies or signing of international
agreements. In fact, such restrictions may enhance the functioning of
democracies.
But
there is no guarantee that the delegation/restriction that takes place to
advance economic globalization necessarily improves the functioning of
democracy. Globalization-enhancing rules
may overlap, but are not the same as democracy-enhancing rules. Europe is now
at the point where it is single-mindedly pursuing the former agenda, not the
latter one.
The world was globalized before WWI and
then a disastrous backlash set in. Are we heeding for a I backlash today? Many
things are different of course. Europe has not been devastated by a war like
WWI. Since fascism and national socialism were closely connected with the war
experience, this backlash will perhaps not be so extreme. But it could still be
a dangerous reaction, fueling intolerance and political extremism. In your
article The end of the world as we know it you seem to be considering such a
prospect. What can be done to avoid it?
There
are reasons to be optimistic that a generalized cataclysm of that sort is less possible
today. Too many things have changed: states and their social protections are
stronger (which limit the social costs and disruptions) while political support
for market mechanism is also stronger (making a generalized return to
protectionism less likely). And these
are two sides of the same coin: generally markets have expanded alongside
government-provided social insurance.
One of
the interesting things after the 2008 financial crisis was how little trade
protectionism ensued. This was the most significant crisis since the Great
Depression, and yet there was very little increase in trade barriers. We can attribute this to that double
development.
The
exceptions are societies such as Greece and Spain which are in extreme
distress, and are rapidly losing both of the advantages I just mentioned. The radicalization of politics in these
countries is quite a realistic possibility.
As for
Europe at large, I do think an eventual break-up of the Euro zone can have
serious political repercussions as well.
This will be seen inevitably as the collapse of the European project,
and will severely tarnish the credibility of centrist politicians, who have
been the project’s main supporters. It will be extremist groups that will
benefit.
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