Euro crisis: The shrinkage of politics?

Via a post by Crooked Timber’s Chris Bertram.  Here’s a point worth considering from Dani Rodrik on the growing crisis in the Eurozone.

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.

Back to Dani Rodrik and a focus on the EU

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.

, , , , , , ,

  • DC

    I was going to say that I had been engrossed with the ins and outs of this over on Spiegel, but to cut a long post short, simply – what a right mess this place is in both across UK and Europe.

    What a complete shambles – nations debted up to the hilt. It’s going to be spending cuts all round unless some amazing device is created and sold or a cure for cancer is found and marketed globally for massive profits – and such ‘trickle’ downs.

    What about if the euro were to collapse? What would happen to the ECB and all those Irish bonds gobbled up inside?

    What a mess and what a close run thing in saving euro land – at least for a while.

    The UK picked the wrong war, the war on terror – it’s always been a war with capitalism – this isn’t even capitalism with a human face as no one knows of these apparent no ones operating the financial markets.

    I’m sure these market players and financiers do have faces, surely they do – don’t they?

    They should be forced to register their names and addresses like politicians do – then they might not get so cock sure of themselves if they knew Jo/e Public knew where they lived.

    Might put off the speculators anyway – that’s why the hedgefunds are kicking up a stink – I believe the EU is seeking more transparency over “for whom are you doing it”.

    Politics only has itself to blame for dropping the war on capitalism and taking up instead what is now seen as ill-thought-through political idealism – whether that of the single currency or indeed those issues of ‘war on terror’ and UK ‘humanitarian interventionism’. All countries seem to be suffering from ‘too big to fail’ – well not immediately – so long term massive debt repayments through public spending cuts and tax rises seem to be the response.

    Maybe feudalism wasn’t that bad a thing after all….?

  • SammyMehaffey

    Apart from threatening speculators/hedge fund operators with violence I fail to see anything constructive in your post. Perhaps you were tired and emotional.

  • DC

    Yes it is a negative reflection, but the point is there is little positive to be said on what has happened.

    In philosophical terms there is something constructive – keep your eye on the money and be wary of claims of value whenever proper price is something different entirely.

  • SammyMehaffey

    Taking the republic of Ireland situation there must be a case for leaving the Euro, resurecting the Punt and devaluing it on a one for one basis by 50% of its Euro value.

  • Mack

    DC –

    I think you are being overly harsh on hedge funds above. I presume incidentally that is what you refer to when you say ‘capitalism’? Or are you also berating those who lend their savings (acculumated capital) to governments by purchasing their bonds?

    We’d be a hell of a lot poorer without functioning capital markets.

    Greece has much worse fundamentals (Euro membership aside) than Argentina had when it defaulted on it’s debt back in the early 2000’s. To recap on what that means – investors in Argentine debt – including a large number of ordinary citizens through pension funds – didn’t get back the money they leant to the Argentine government (some will recieve just 35c on the $1).

    It’s perfectly rational and sensible for market participants to force governments – either the Greek government or the EU – to make changes to ensure that any money lent in future can be repaid (even if that means default on outstanding debt). Attempting to ban the type of attack Greece experienced could make things much worse. The imbalances within Greece would continue for longer (getting much larger) , Greek interest rates would be much lower for longer (fooling the government into thinking they were solvent), but then would explode as ordinary long only bond investors panic and bailed out as bond prices collapsed (from a much higher bond price than todays).

  • Mack

    Just as an addition to the above – the only circumstances under which a speculative attack on Greece would have been net destructive would be one in which the Greeks where intending to rebalance their economy but were attacked before they could do so. Given that they’ve spent the last 10 years lying to the EU about the state of their economy – that they tax their own elite very lightly (and in many cases not at all), that corruption / tax evasion are endemic. I think it is highly unlikely that Greece was on the cusp of reform.

    Or to look at it yet another way – had this attack occured in 2002 the cost would be much lower and the Greeks, today, much wealthier and the Eurozone much stronger..

  • Mack

    I’m sure these market players and financiers do have faces, surely they do – don’t they?

    They’re (big hedge fund owners / managers) on Bloomberg TV and other finance TV stations as talking heads all the time.

  • Greenflag

    ‘this isn’t even capitalism with a human face ‘

    Capitalism doesn’t have a human face . It can’t have . In the war of economic competition between states and multinational corporations the only ‘protection’ which most people have against Orwell’s totalitarian boot stamping on the human face for ever, is legislation enacted by democratic governments . Work safety , minimum wage , hours worked , vacation /holidays , trade union membership , health care , child labour etc etc etc . All of the latter hard won ‘benefits’ are at risk in the developed world in the war of global multi national capitalism against the faster growing state capitalist authoritarian emergent states such as China , Russia , Brazil etc etc .

    We may believe we have come a long way from the conditions imposed during the dark satanic mills days of the industrial revolution but we should never forget that progress is not guaranteed for all .

  • Greenflag

    ‘I’m sure these market players and financiers do have faces, surely they do – don’t they?’

    They have but they don’t like to see the light of day in most cases . The EU is seeking more transparency from people who can only make money by being non transparent . Consider again the Goldman Sachs executives being interrogated by the US Senate committee and try to recall the ‘sneering ‘ stance of the ‘money men ‘ at the people’s elected representatives ? Consider the arrogance here in Ireland of some of our own ‘masters of the universe’.

    It appears at this early stage that both the USA and UK are somewhat terrified of imposing ‘transparency’ on the hedge fund tyros deeming that that would somehow restrict capital investment . Both the USA and UK Governments must suffer from the short attention span deficit condition that seems to be a hallmark of most consumers in their and other western societies 🙁

    For the UK which has 60% of it’s trade with Euro Zone members this issue is much more important than for the USA whose economy is much less trade dependent .

    ‘Maybe feudalism wasn’t that bad a thing after all…’.?

    It had it’s downsides 😉 but they certainly knew how to punish the ‘credit rating agencies ‘ of their time i.e the usurers and moneylenders .

  • Greenflag

    ‘We’d be a hell of a lot poorer without functioning capital markets.’

    Indeed . But is that not the point being made . The capital markets were NOT functioning . Peoples savings , pension funds and mortgages were being ‘gambled ‘ with by the world’s slickest financial con men while the people’s elected representatives either had’nt a clue what was going on or if they did -chose to ignore it ?

    When banks don’t or won’t or can’t lend money to small and medium size businesses for the latter to expand when interest rates are at an all time low then it’s safe to say that not only is there something rotten in the state of Denmark but across virtually the entire developed and developing world .

    The opening thread above lays open the underlying core issues facing all countries . There is not a whole lot that the smaller countries with stand alone currencies can do to defend themselves against speculative attack . If the Euro can’t defend itself against such and the only safe resort is the dollar then another major crisis of capitalism with ensuing economic chaos can’t be far off 🙁

    Wish I could be more constructive but wishes won’t push back the sea waves .

  • Mack

    Greenflag –

    That’s more an argument for sound financial regulation than a war on captialism or even just banning hedge funds.

    Peoples savings , pension funds and mortgages were being ‘gambled ‘ with by the world’s

    Important to note – life is a risk, there’s always going to be some risk. If there wasn’t – nothing could fail, nothing could succeed.

  • Greenflag

    Mack,

    I was not suggesting banning hedge funds or making war on ‘capitalism ‘ . In any event which ‘capitalism’ would that be . Our western so called free market version or the state controlled authoritarian versions extant in Russia , China , Brazil , India etc etc ?

    ‘ life is a risk,’
    Full marks for the obvious -I never said it was’nt nor that it should’nt be . There is risk and RISK for both individuals and national economies .

    Investing in the stock market or property is a risk . Trying to walk across an eight lane highway blindfolded with your arms tied behind your back and your legs manacled is not a risk -it’s certain death .

    Now while my trust in the financial probity and fiscal responsibility of government in our western democracies is at a low ebb and has been for more than a decade -my trust in the financial responsibility of the financial private sector in the broadest sense of that term is even lower .

    When half the population doesn’t bother to vote and most of the other half are lied to by both the politicians and the mandarins and Wall St then whither ‘democracy’ or perhaps a better question is when did it -i.e democracy actually die ?

    Perhaps the policy makers in Washington and London and elsewhere might want to reflect on that before they continue to export their version of “western ” democracy to the developing world . With control of 70% of the world’s oil supplies in state capitalist hands ( Brazil, Iran , Russia ,Saudi Arabia , Venezuela , China , etc ) what else has the West to fight with apart from it’s nuclear arsenals and demands for ever freer trade ?

    Credit default swops ? Collectivised debt obligations ? and the rest of the weapons of mass economic destruction conjured up by the innovative minds of a short sighted financial sector .

  • Greenflag

    What makes you think such a devaluation would stop at 50% ?

    Is it because it’s a nice round number ? Any hint of Ireland leaving the Euro zone would reduce the future punt in your pocket to Zimbabwean dollar levels . It would certainly help exports in theory if the buyers could be persuaded to buy now instead of waiting for prices to drop even lower in terms of their own currency .

    There is a case just as there is a case for a manned flight to Mars . The problem is that the astronauts /cosmonauts would’nt survive the long radiation exposure of such a journey and in present circumstances and conditions the ROI economy and it’s relative political stability might not survive a ‘euro ‘ exit .

  • DC

    That’s more an argument for sound financial regulation than a war on captialism or even just banning hedge funds.

    Mack my argument rests with governments taking their eyes off the money making institutions and the banks, losing sight of the psychological flaws with big capitalism – namely greed, which both Ahern and the last Westminster parliament succumbed to. Greed was seen in the form of banks over-reaching themselves in a bid to profit globally off the back of balance sheets leveraged *domestically* – then collapsing.

    Fictious finance fuelled massive bonuses and created fools good. The taxpayers are plugging the fools gold while the financiers walk away with the hard cash. Take Fred Goodwin’s pension – that pay out level was set on the back of the good times which were ultimately fictious based on faulty financial instruments, CDOs and other such derivatives.

    But going back to Sammy Mehaffey’s comment about threatening hedge funds with violence – it is the preserve of the State to hold the monopoly of legitimate force and the threat of using force – if you look at managing demonstrations and things that are law breaking or potentially lead to law breaking – even the force to keep you in prison and the force to criminalise things. The state has that role – so should hedge funds and financial markets be different?

    Come from it like this – the financiers were able to sell off debt by using marketised credit instruments, marketised money – digitised even, it created a way to make cash which ultimately saw debt being sliced and changing hands numerous, if not countless times over. In the end the process meant losing count of who owned what and how much.

    Now look at Joe Public, imagine if I owned a hire car shop and could lease out a vehicle for £100 per day. Then between 9 to 5 the next person could lease it out again to another person for hire at £115 and in doing so claim to lose proper liability. The next person could do the same. And again etc etc that when an accident happens and a vehicle damages a building or property causing £1000s no one was in the end liable because no one could be traced or refused to be identified properly as to who actually was driving at the time because between the day or even within the hour it was sold and on and on.

    If there was more transparency and the force to register names at each point of handover or liability placed firmly and fairly somewhere in the process in terms of paying damages then this might prevent reckless driving of the vehicle etc.

    I know it is a ropey example but I am exaggerating to stress the point of responsibility and transparency and the forces that should be in place to maintain this.

    Mack you might sanitise the war on capitalism term and term it yourself as regulation but let’s just see what happens whenever tougher regulation is announced; whether the big city capitalists and such financiers don’t call it a war themselves and decry it as totally unnecessary and self-defeating etc etc etc.

    Because regulating finance properly can be extremely difficult, time consuming and can quickly destroy political capital through having to tackle and win out over those vested financial interests – heavily embedded in certain corridors of power.

    It can ultimately cause many ‘scars on my back’.

  • Mack

    There are few points maybe worth considering here.

    1. The Hedge Funds did the regulators job – they brought down the investment banks and forced degenerated Eurozone economies and the EU itself to action. Had there been proper regulation in the first place, the profit opportunity never would have been there.

    2. Your description above of the market for debt is similar enough to how modern money works too. The banks create money by issuing debt (which is spent, deposited, multiplied up and re-issued as new debt / money). We’re always going have problems when debt can’t be repaid, the key is make sure the banks are not given the opportunity to destroy the financial system itself.

    3. You could recast your comments as ‘implementing capitalism’ rather than a war on capitalism. State bailouts and subsidies for failing industries (in this case banks) is corporate welfare – not capitalism. Capitalism requires that the investors (bond holders, share holders) be wiped out, not bailed out. And decent corporate governance would require reckless employees (executives like Seanie Fitz, Fingers and Goodwin) also pay a price..

  • DC

    Well said.

  • Alias

    Herman Van Rompuy, the President of EU Council, supports the Bilderberg agenda of world government and declared that 2009 would be the “first year of global governance” and that the Copenhagen Treaty will be “another step towards the global management of our planet”. So it’s no suprise that the EU is using common links between states to steal sovereignty from those states:

    “We are living through exceptionally difficult times: the financial crisis and its dramatic impact on employment and budgets, the climate crisis which threatens our very survival. A period of anxiety, uncertainty and lack of confidence. Yet these problems can be overcome by common efforts in and between our countries. 2009 is also the first year of global governance, with the establishment of the G20 in the middle of the financial crisis. The climate conference in Copenhagen is another step towards the global management of our planet. Our mission is one of hope, supported by acts and action.” – Herman Van Rompuy

    Of course the little fact that nobody voted for a world government (and if it is established nobody could vote for it)wouldn’t bother EU federalists because they don’t beleive in sovereign nation-states or in democracy. Nobody voted for Herman Van Rompuy to be president either: he was appointed by an elite and not elected by the public.

    http://www.europa-eu-un.org/articles/en/article_9245_en.htm

  • DC

    3. You could recast your comments as ‘implementing capitalism’ rather than a war on capitalism. State bailouts and subsidies for failing industries (in this case banks) is corporate welfare – not capitalism. Capitalism requires that the investors (bond holders, share holders) be wiped out, not bailed out. And decent corporate governance would require reckless employees (executives like Seanie Fitz, Fingers and Goodwin) also pay a price..

    You see many people say trouble with socialism is that it doesn’t work but on the flip side capitalism when left to the extremity of creative destruction doesn’t work either as it would bring down human life and ruin human welfare – not corporate welfare. Have you any idea what would have happened if nothing was done say in Ireland. Can you imagine it? It would have been like Argentina x 1000. What you’re asking Mack is that people withstand an 100mph car crash because if you can life moves on after and its all the better. But people don’t easily withstand 100mph car crashes so the government had to step in and buffer and pad the crash zones while still damaging the car in the process. Maybe irreparably so. But at least there are human survivors.

    And it shouldn’t be termed implementing capitalism for the reasons mentioned above, the wealthy are oozing all over the political, legal and parliamentary system and it becomes a battle to change finance – and you must know that that’s the case really.

  • Mack

    What you’re asking Mack is that people withstand an 100mph car crash because if you can life moves on after and its all the better

    Not at all. What I’m asking is that the people who took the risks investing in the banks – take the hit. I’m not suggesting that Ireland – or any other country – be left without a functioning banking system. I’m not an anarchist. If the state has to step in and create a new bank, to be sold later, then fine. But remember even though the banks are insolvent – the branch networks are there, the human capital is there, the computer systems are there, the deposit base (government backed to a reasonable limit) is there.. All of which have a value – regardless of the insolvency of the banks. These assets could be sold on – or provided to the creditors for them to run (say the German and UK banks who lent the Irish banks the money).

  • DC

    Not at all. What I’m asking is that the people who took the risks investing in the banks – take the hit.

    But they couldn’t do that at least not without ruining the national operations of finance, cash supply etc and ultimately ruining society and life.

    The upper echelons of finance needs to be enmeshed with some sort of public sector film that soaks up the excesses of such individuals – CEOs etc – those right at the top of these big financial institutions. It needs done without ruining the private sector employment and internal management and those very important strategic operations.

    As going back to force why should these institutions be permitted to operate inside states and societies, institutions with individuals able to take out millions on millions in bonuses well beyond their needs and social value, the case has to be made especially so in an environment of bailouts and increased direct taxation.

    The state can reclaim some ground and limit the shrinkage in effective national politics, even if that comes from nations and supranational bodies working together across the available networks.

  • Mack

    Well they are extracting millions in bonuses at the expense of their employers (the shareholders) – classic Principal / Agent problem in action. I agree they shouldn’t be allowed to do that.

  • Greenflag

    Mack ,

    ‘Capitalism requires that the investors (bond holders, share holders) be wiped out, not bailed out. ‘

    Exactly where does this capitalism operate in the ‘real ‘world as opposed to within the pages of an economics textbook ?

    ‘And decent corporate governance would require reckless employees (executives like Seanie Fitz, Fingers and Goodwin) also pay a price.’

    I don’t know what you mean by decent corporate governance but would it be anything like the decent corporate governance that sent 25 coal miners to a premature death in West Virginia a month ago while bribing mine safety officials and ignoring safety procedures ?

    Is there any real difference in an ethical sense between the behavior of the mine boss in the above case and the executives of Goldman Sachs who simultaneously sold investments to clients while betting and actively working to destroy the value of the same investments ?

  • Mack

    Greenflag –

    Exactly where does this capitalism operate in the ‘real ‘world as opposed to within the pages of an economics textbook ?

    Almost everywhere. The first time I ever bought shares £500 or so of hard earned savings was worthless two years later. The second company I worked for went bust. The current treatment of the banks is derogation of capitalism (and they’d be the first to foist market discipline on others)..

    Btw, on your Goldman Sachs example – those executives are employees not owners. Letting them govern themselves is never going to work – we’d need more active shareholders (and the only way to get that is to define industry best practices so that pension funds & other diffuse investors and the like hold them to those standards – or walk). Something like the ratings agencies for debt, but done right, might work..

  • Greenflag

    ‘But they couldn’t do that at least not without ruining the national operations of finance, cash supply etc and ultimately ruining society and life.’

    When the head of AIG Greenberg called the USA Treasury Secretary and Federal Reserve Chairman aside in the dying days of the last Bush adminitration his words were simple .

    ‘We will go under and take the entire American and World economies with us if we are allowed to fail .’

    What could the Bush administration or later the Obama administration do other than ‘obey’ the unelected Chairman of AIG ? The current recession would have been far worse had the politicians not acted as they did and the USA would have 50 million unemployed instead of almost 20 million . Even now several years after the ‘bail out ‘ foreclosures are still on the rise in some states and what are called ‘underwater ‘ mortgages are now 25% of all mortgages . If those still in such mortgages decide to walk away then the property market will take another dive wiping trillions more from people’s perceived ‘wealth’ thus ushering in another Wall St collapse in the Dow Jones and then it’ll be the 1930’s come again . Watch out then for irate little ex corporals wearing uniforms and demanding ‘final solutions’ for the hedge fund ‘traitors ‘ to the national interest .

  • Greenflag

    ‘I agree they shouldn’t be allowed to do that.’

    You do but they don’t . In fact their line of argument is that they deserve all those extra bonuses for destroying the world economy -adding 8 million to the american unemployment lines and wiping out trillions in stock and property equity even if much of the latter was just hype built on crooked paper .

    They further make the point that they would’nt do their particular line of highly skilled productive work unless they were paid astronomical sums and would simply go elsewhere .

    Well if they find another planet to destroy why not send them off on a one way interplanetary investor’s special to the Andromeda galaxy . It could be worth every cent the american taxpayers would have to fork up to at least get them past Jupiter .

    So the story is they ‘ll destroy the world economy if they continue to be overpaid and they’ll quit trying to destroy the world economy if they ‘re not overpaid ?

    Could that be an argument for eh not overpaying them duh ?

  • glencoppagagh

    When the head of AIG Greenberg called the USA Treasury Secretary and Federal Reserve Chairman aside in the dying days of the last Bush adminitration his words were simple

    FYI Hank Greenberg had resigned from AIG a couple of years before!

  • Greenflag

    Whether it was Greenberg or Willumsted or Sullivan is immaterial . IIRC Greenberg did’nt resign -he was deposed -pushed . The key point is that AIG were able to direct the US Government as to what the latter could and could not do . Nobody in the USA voted for AIG .