Deep down, the crisis is yet another manifestation of what I call “the political trilemma of the world economy”: economic globalization, political democracy, and the nation-state are mutually irreconcilable. We can have at most two at one time. Democracy is compatible with national sovereignty only if we restrict globalization. If we push for globalization while retaining the nation-state, we must jettison democracy. And if we want democracy along with globalization, we must shove the nation-state aside and strive for greater international governance.
Chris Bertram references an article by Rodrik in 2000 in which “mass politics” replaces “democracy” in the trilemma.
In the 2000 article, Rodrik discusses Friedman’s “Golden Straitjacket” where “mass politics” is the disappearing bit:
the shrinkage of politics would get reflected in the insulation of economic policy-making bodies (central banks, fiscal authorities, and so on) from political participation and debate …. (p. 183)
And he appears to suggest that part of the “disappearing bit” would be that noted by the BBC’s Stephanie Flanders
Around the world, central banks started to get the power to run monetary policy for themselves. This was not just because they were outside politics, but because the belief they were outside politics actually made it easier for them to do their job: popular expectations of inflation were more likely to stay low.
That is and was a real and tangible benefit to Bank of England independence that Mervyn King is understandably keen to retain.
Now the deficit is public enemy number one, and once again, the argument is that things will be better for everyone – including the elected government – if its freedom of manoeuvre is more tightly constrained.
That is why independent experts like the IFS have cautiously welcomed the idea of an OBR [Office for Budget Responsibility], though they think the details will need to be carefully worked out. But even the greatest fans of this new institution may still stop to ponder what has been lost – and what has been gained.
The crisis has revealed how demanding globalization’s political prerequisites are. It shows how much European institutions must still evolve to underpin a healthy single market. The choice that the EU faces is the same in other parts of the world: either integrate politically, or ease up on economic unification.
Before the crisis, Europe looked like the most likely candidate to make a successful transition to the first equilibrium – greater political unification. Now its economic project lies in tatters while the leadership needed to rekindle political integration is nowhere to be seen.
The best that can be said is that Europe will no longer be able to delay making the choice that the Greek affair has laid bare. If you are an optimist, you might even conclude that Europe will therefore ultimately emerge stronger.
Possibly… To re-quote Stephanie Flanders
But even the greatest fans of this new institution may still stop to ponder what has been lost – and what has been gained.