The Political Trilemma of Europe Apostolos Fasianos UADPhilEcon May 2012

The current debt crisis in Europe not only has disastrous economic impacts, but also reflects an undermining of democratic policies especially in the weaker nations of the continents periphery. EU has been criticized for its failure to develop accountable institutions that give the sense of representation and accessibility to the ordinary citizen. As Dani Rodrik posits, nations in the contemporary world economy face the political choice of accepting any two of national sovereignty, excessive globalization and democratic policies, but not the three of them. In the following lines we examine how well Rodriks scheme fits in the history of European economic regimes from the end of second World War till the current Eurozone crisis.

Rodriks Political Trilemma of the World Economy

Dani Rodrik (2000, 2010) tries to provide an understanding of the institutional implications behind the increasing integration of world economies. In doing that, he forms a conceptual schema where the choices of modern economies are presented. Namely, one can have any two of excessive globalization, democratic policies and national sovereignty. At most one of the three should be given up. We can prevent the national state from interfering to arbitrage in capital and goods market by moving its power towards a supranational legislative, executive and judicial authority. The result would be a sovereign state with very small power but a global environment with minimal

transaction costs that promotes globalization. Alternatively, we can preserve both economic integration and national sovereignty, however adjust the national economic environment so as to be attractive to international markets. The price one has to pay is to largely narrower the domain of mass politics. Finally, one can limit the importance economic integration in order to sustain democratic policies and a nation state. Noteworthy, in when democratic policies are mentioned, in line with Rodriks original analysis we refer to political systems where: the franchise is unrestricted, there is a high degree of political mobilization and political institutions are responsive to mobilized groups (Rodrik, 2000).

The Golden Age of Capitalism in Europe

The quarter century that followed the WWII in Europe is known as the Golden Age of Economic Growth, as real income increased twice as rapidly as over any other period (Eichengreen, 1996). With respect to the international institutional settlements, the period is characterized by a dominating Embedded Liberalism, i.e, a form of multilateralism that is compatible with the requirements of domestic stability (Ruggie, 1982). Put differently, from a class perspective, a compromise between labourers demands and capitalists activities, where the former would accept capitalist modes of production in return for democratic policies and a nationally regulated institutional environment that would promote social security, rising living standards aiming to avoid the mistakes that led to the Great Depression and the consequent deadly conflict (Harvey, 2007; Streeck,

2011). Coming back to Rodriks trilemma, there are certain elements in the period of Embedded liberalism that portray the lower side of the Rodriks triangle, i.e. the marriage of democratic policies and national sovereignty.

On

domestic

level,

Western

European

governments

followed

Keynesian

macroeconomic policies aiming to sustain full employment and allowed for collective bargaining between workers and industrialists. For instance, Eichengreen (1996) pointed that such labor-friendly measures functioned as coordination-enhancing mechanisms where, on the one hand, workers agreed to restrain now in return for more investment and higher wages later, and on the other hand, capitalists agreed to reinvest their profits. On a global scale, Europe benefited especially from the formation of the international institutions namely the Bretton Woods regime and GATT, which although promoted international trade and prevented discrimination among trade partners, ensured an

international environment for flows of goods and capital compatible with national sociopolitical goals (Eichengreen, 1996; Rodrik, 2011). As regards the capital account, the countries retained the ability to manage inflows and outflows of capital with capital controls. Whatsoever, the price of embedded liberalism was inflation. lthough, it initially served well as an instrument in sustaining full employment and settling

distributional conflicts, soon it raised to unsustainable levels threatening the prosperity of the Golden Age (Streeck, 2011)

Neoliberalism and Europes Democratic Deficit

In the late seventies, a combination of poor economic performance at home and external shocks led the Golden Age to a fall. European countries faced for first time the effect of stagflation, a combination of high levels of inflation and unemployment. Of particular importance is that the institutional settlements that functioned during the post-war years have been widely blamed for containing the seeds of the slowdown. Indeed, the dominant narrative describing the Golden Ages decay may be summarized on what Giersch (1985) called Eurosclerosis, i.e. an economic model characterized by excessive regulatory constraints and highly generous welfare states that negatively affect economic efficiency . In response to this slowdown several measures were implemented both in terms of national economic policy and of means of promoting European integration.

he era that followed the golden age meant clearly a departure from the lower side of Rodriks triangle. In particular, the Common Market, the most important pillar of the U, was formed on the basis of strengthening commercial ties among European countries by successively removing the national barriers to the flow of goods, capital and

people. Additionally, insulated supranational institutions were built, with most notable being the ECB, the European Court of Justice and the EC, aiming to regulate the economic and monetary activity in Europe. There is a number indications suggesting that the direction of Europes institutional position moved more towards the left side of Rodriks triangle, namely a combination of sovereign states and open markets, rather than towards a form of pan-european democratic governance.

The years that followed the fall of Golden Age European countries implemented a number of reforms. To refer some of them, the capital account for financial flows was liberalized while on the domain of international trade the member-states eliminated trade barriers among themselves as well as lowered tariffs on trade with the rest of the world. Moreover, European countries largely privatized utilities and previously stateheld enterprises such as Banking and telecommunications. As the process of European integration deepened, member countries agreed on building transnational insulated institutions, i.e. the ECB for ensuring price stability, the European Court of Justice as an enforcement mechanism and the European Commission that suggests laws and regulations on trade, agriculture, competition and other areas. As European countries were now unable to conduct monetary policy, control inflows of goods and capital and use the public utilities as employment buffers at bad periods, in effect they lost the instruments of macroeconomic management responsible for controlling domestic democratic needs (Scharpf, 2002, 2011). In return, they would be able to compete in international markets and enjoy moderate levels of inflation. Put differently, European countries gradually started to put on the Golden straitjacket, the one size-fit-all policies rules a country has to adopt in order to survive in globalized capitalism (Friedman, 1999). Indeed, the European nations achieved to be the best example of integration. However, the price of wearing the golden straitjacket is having domestic policy taken

away from public control. For example, it is clear current account convertibility and domestic labor standards may easily conflict. For example, other things held constant, the higher the level of labor regulation the less the rate of return on investment. Free borders for financial transactions allow investors to avoid national regulations by investing their money out of the country. On the top of that, the room for national mass politics tends to shrink even further considering that competition for international capital drives states to relax their regulatory standards.

In addition to this neoliberal bias in the formation of EU, there are several voices concerned with the degree of democratic participation and accountability in the EU. For instance, the only channel of direct accountability to the public, the European Parliament, is the weakest of the four major European institutions and lacks clear programmatic elections. Moreover, EUs institutions like the EC are insulated from public contestation, i.e, institutions which by design are not directly accountable to their voters or their elected representatives on the basis that they deal with Pareto-improving policy outcomes as opposed to redistributive value-allovative issues that call for majoritarian voting processes (Majone, 1998) . For instance, Moravcsik (2002) goes as far as to justify insulated institutions on the grounds of their role as dealing with issues with low salience in the minds of European voters.

As Europe was becoming more integrated and sovereign states room for mass economic policies started to shrink, no decisive complementary institutional structure transferring democratic governance from the nation-state level to Community level was formed, i.e. more positive integration (Scharpf, 1996). This is reflected on a movement towards the left side of Rodriks triangle.

The Eurozone Debt Crisis

The neoliberal transformation of Europe is not conducted linearly but in different degrees and at uneven tempos throughout the Community. For instance, while Scandinavian countries maintained a good deal of their welfare systems, in Anglo-Saxon and Continental countries the market became largely responsible for several policy areas such as education or insurance (Scharpf, 2002). Different philosophies among memberstates as well as varying levels of economic development did not allow a common framework for social policy in Europe (Scharpf, 2002). Nevertheless, EUs weaker countries, i.e. Greece, Ireland and Portugal found themselves in a stage where they could neither afford social transfers and public social services comparable to Northern Europe, nor could employ monetary policy or other forms of macroeconomic management despite fiscal policy. In this context, they took advantage of the EMU-led low interest rates and financed their economic growth and welfare needs largely by foreign credit. Noteworthy, this process has been parallelized to the role of inflation during the golden years, i.e. to introduce resources into distributional conflicts as compromise between labor and capitalist interests (Streeck, 2011). Interestingly, in the case of Greece the clientalistic state played the same role, also largely blamed as a contributor to the the debt crisis in the country (Tsakalotos, 2011). As Europes poorer countries continued to increasingly run budget deficits they found themselves with large sovereign debts, increased labor costs and low international competitiveness. The sudden stop in government borrowing for GIPS triggered the current Eurozone debt crisis.

s lending to Europes three weakest member stopped, their governments signed agreements with troika, the EU, the EC and the IMF for providing the necessary funds in return for fiscal consolidation and conditionalities on policy reforms. Again, issues of democratic legitimacy arisen. First, the Eurozone crisis has been largely managed by the insulated institutions and the Council of ministers - particularly Germany and France, leaving no room for the European Parliament (Schmidt, 2011). As we mentioned above, insulated institutions were picked for dealing with policies with no redistributive outcomes. However, in the context of the current crisis in Europe the ECB has not only been criticized for conducting monetary policy with winners and losers within the Eurozone, i.e. conducting monetary policy in line with the interests of the EUs wealthier member states by prioritizing inflation over unemployment (Krugman, 2011). Second, as PMs in Greece and Italy resigned, their successors were technocratic governments responsible for implementing troikas structural reforms. As these structural reforms are largely in line with the golden straitjacket prescription, it is fair to conclude that the eurozone crisis reflects a clear movement towards the left side of Rodriks trilemma, at least for EUs weakest countries.

Looking Ahead

Rodriks impossible trinity between national sovereignty, democratic policies and hypergloabalization describes well the historical developments on Europes economic policy and governance. The first twenty years that followed WWII, Europes political choice was national sovereignty and democratic policies. As the process of European integration proceeded, democratic policies were gradually challenged. However, national states retained the ability to manage the local discontent with side-mechanisms such as public debt. When the debt bubble burst, Europes lack of democratic legitimization was

brought on the surface. Countries with debt burden were forced abandon active economic policies and wear the golden straitjacket. Assuming that retaining democratic policies is a desirable prospect, Europe has two select between two paths: either to moderate its levels of integration by giving space to its member countries to influence policy on a domestic level, i.e. regaining monetary policy, or to promote positive integration by allowing the federation a more powerful monitoring role and strengthening its democratic institutions on a supra-national level.

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