Markets have worked best where governments have been strong, not weak The greatest benefits of globalization have gone to those who have opened up selectively (the mosquito net approach) Globalization works best when it is not pushed too far
There are legitimate differences across nation states on the shape that regulatory institutions ought to take
Differences in history, culture, levels of income result in divergences in needs and preferences
National sovereignty
The Gold Standard model: narrow domestic policy space in macro, financial, tax, structural and other domains to minimize impediments to free flow of capital and goods
National sovereignty
Democratic politics
Problem: historically, this model has not been compatible with democracy (Great Britain 1931, Argentina 2001, Greece today?) Thomas Friedmans Coke and Pepsi analogy
Democratic politics
The Bretton Woods compromise: maximize democratic legitimacy at home Keynesian macro policies + welfare state + economic restructuring
Democratic politics
An explicitly incomplete globalization: Keynes and capital controls; The GATT model in trade
Inadequate regulation
Inadequate legitimacy
Democratic politics
Problems of the post-1990 model: push for hyper-globalization without the institutional infrastructure WTO + financial globalization Failures of legitimacy (trade) and of regulation (finance)
National sovereignty
Democratic politics
A third alternative: global governance Requires significant restraint on national self-determination and therefore regulatory, institutional, and policy diversity
Global governance
Yet institutional incompleteness has left the EU badly exposed to the crisis
The EUs misfortune is that the financial crisis caught it halfway in its process of institutional integration
The Federal Reserve stands ready to act as a lender of last resort to any Californian bank CA interests are represented in Washington and push for remedies (e.g., fiscal spending) Californians can easily move and seek jobs elsewhere in the U.S.
In return, there is no expectation that Washington, DC will bail the state govt. out
no bail out is rendered credible by above mechanisms, which limit the economic/political fallout
None of these things is true in Eurozone Consequently, a crisis within the Eurozone is more costly both in economic and political terms
Ad hoc arrangements to extend credit rather than automaticity Protracted financial crisis and deeper economic recession Mutual resentment on both sides
Complaints of German selfishness versus transfer union
Declining role of U.S. in global economy EU likely to remain preoccupied with own matters China and the other emerging powers place, if anything, greater emphasis on national sovereignty
rich nations to provide social insurance, address concerns about labor, environmental, health, and safety consequences of trade, and shorten the chain of delegation poor nations to position themselves better for globalization through economic restructuring all nations to create financial systems and regulatory structures more attuned to their own conditions and needs
Improved deliberation at home, not external constraints, is the right answer to democratic malfunction