Tuesday, July 10, 2012

Europe's Integration Problems

Dani Rodrik

A year ago last fall, as some may remember, I taught a course on European integration, focusing on cultural issues, mainly, but touching upon some economic and political points, e.g., the Euro as common currency without the equivalent of America's Federal Reserve system to oversee a common monetary policy and without a political center to make fiscal policy. Not that I foresaw any of the current difficulties -- I am too ignorant of economics for that. Others predicted such risks, of course, and the contemporary economic problems in Europe have a way of focusing one's mind, so I've learned to appreciate reading what economists write, even taking a certain grim pleasure -- though not shadenfreude -- in their vocabulary of misery:
So, let's say you have mastered the euro zone concept of "financial contagion." Maybe you even know a thing or two about the euro "doom loop," in which sickly banks and indebted governments threaten to drag each other down a death spiral.

Time now to learn a new buzzword, one that captures the anxieties of those seeking long-term stability for the euro currency union: "trilemma."

The term, coined a dozen years ago by a Harvard University economist writing about the global economy, has come to encapsulate the awkward political options confronting the 17 euro zone countries.

To make the currency union work for the long haul, euro countries' heads of state have generally concluded that they must more fully integrate their economies. But within their own countries, the political leaders have only shallow support for that idea, if not outright resistance, from voters.

According to the trilemma theory, drawn in part from studies of the economic crises of 1930s and 1940s, it is possible to have two of three things: deep economic integration, democratic politics and autonomous nation-states.

But under the theory, it is not possible to have all three.
Lovely terminology: financial contagion, doom loop, trilemma. And ever notice how the word "terminology" sounds so . . . terminal? As though the end is near? But to get back to the trilemma noted by Stephen Castle in this article, "Euro Zone Nations Wrestle With a 'Trilemma'" (New York Times, July 6, 2012). This trilemma has been articulated by the above-depicted Dani Rodrik, Harvard Economist, who also proposes a resolution:
So how does Mr. Rodrik, the Harvard economist, propose that Europe resolve its trilemma?

A solution, in his view, might involve giving Greek, Spanish and Italian voters a greater say over euro zone decisions through a transnational system of democracy.

"This would be something like the U.S. federal system . . . in which the federal government doesn't bail out state governments but looks after residents of Florida, California, etc. directly because they are represented through their congressmen and senators."
He might have added that the bicameral American federal system offers a democratic compromise in return for the loss of individual, autonomous nation-state sovereignty. Each state would have both 'congressmen' and 'senators' who represent the people of their respective nations. Moreover, the 'senators,' who constitute the upper chamber of the bicameral legislature, would retain for each state a degree of state authority (not quite autonomy, of course) and a measure of state power even for states with small populations, so as to not let them be swallowed up in the political system by the democratic power of states with large populations.

But this doesn't so much resolve the trilemma (if a resolution means retaining all three horns) as offer a compromise in return for the loss of nation-state autonomy, and individual European nations might be unwilling to accept that.

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