A big project was started in the post-war world to let countries grow and prosper and compete without using wars to do The World is Not Flat
Precis:
A big project was started in the post-war world to let countries grow and prosper and compete without using wars to do so. That was the project of globalization. A sub- or lead-project under that was the European Union. Friedman’s famous book was the recent victory cry for the Globalization Project, a chest-thumping if ever there was one!
However, any keen observer would by now have concluded that the project was riddled with flaws. But that is not to say that the vision itself was flawed. It might be a better argument to say that the flaws are more from the project being not fully carried-through than from the fact of its existence, as Stieglitz had argued eloquently in his critiques.
In the video lecture below I use the crisis in the Eurozone to draw out some of the fundamental reasons why globalization has been winding along roads that lead nowhere, for quite some time. The concentrated nature of the Eurozone crisis and the fact that it is a rich-country problem, with all the proportional additional limelight allows us to see in that microcosm what half-baked globalization has done to the haves and have-nots among the nations of the world. And by examining that, it is hoped that we might also see that the solutions to globalization is perhaps not less but more of the dosage, undiluted.
Caveat: The rest of this review wont make much sense without first watching the video…
Detail:
A single global market and complete economic integration would mean that the countries would be too tied in with each other to ever even consider further internecine warfare. Surely no one would be daft enough to compromise their own interest so badly. Solving the problems of a war-ridden world by uniting it through trade. That was right up the alley suggested by Adam Smith in his civilizing process. Maybe trade and interdependence will get the world to behave. That was the hope of the globalizing project that replaced mercantilist philosophy that preceded it. And if any part of the world had to race to be civilized, it had to be Europe whom Gandhi had ‘burn’ed famously with his quip. Hence the European Project was to be the front-runner, the trail-blazer, the avant-garde, etc.
The video above is a lecture/discussion, wherein I argue that this European project was conceived as a roadmap to a fully integrated union that will replicate a US of A in Europe; and how the EU compromised on the tougher but necessary requirements of such a project and tried to get by with stop-gap solutions like convergence criteria and the like, which, in its turn, were not enforced. All this has led to a scenario which could derail not only the micro experiment (EU), but the macro experiment (Globalization) as well.
The European consolidation project rushed into first economic and then a monetary union while never slowing down to implement any integrated Fiscal controls/transfers. This is also the case with much of the thrust of the globalization project with its emphasis on open trade and liberalizing capital flows across borders.
It was understood from the beginning that this was going to be an issue, but it was hoped that it could be worked around. Imposing any sort of fiscal control was too anathema to be considered. It could easily be argued that any move in that direction would nip the project in the bud, with the nationalistic European Governments running away from any suggestion that dilutes sovereignty as much.
An Overdose of Fiscal Discipline
This meant that a lot of fiscal discipline was attempted, not by direct control but indirectly in the form of membership criteria. The focus on such fiscal rules had been justified by two beliefs:
1. That, inside a single currency union with a common exchange rate, monetary policy, interlinked interest rates and market integrated enough to cause contagion concerns, the fiscally irresponsible were less likely to be castigated by markets that might otherwise loose confidence and move away from investing in countries/currencies in danger of running into problems of high inflation or debt.
2. That such a country that got into trouble would not be able to devalue currency or adopt lose money policies, and would also not enjoy the sorts of automatic transfers that operate in federal countries. Then the only real option to absorb a shock would be greater borrowing by the government at the reduced interest rates available to them from market being lax…
Clearly, focusing on debt-to-GDP figures and enforcing strict limits seemed the best way to overcome the problems of an EMU that is not a Federal union.
Plenty of Gaps in Financial Regulation
However, some of the gaps as far as Banking and Financial system was concerned was ignored for too long in all this concern for Fiscal discipline. The new unified market and banking system under the ECB that was being created could not be said to have any sort of full fledged monetary policy capacity since the ECB was not even given overall responsibility for bank supervision, which stayed at national level, an arrangement that has since been deemed unsatisfactory, with the planned “banking union” giving supervision of most large European banks to the ECB. It also had no obligation to act as the system’s lender of last resort nor was there any sort of deposit-insurance system that was instituted. Without a Central Bank’s capacity to conjure money out of thin air, the system was left with no one with the capacity and obligation to protect the banking system, the depositors and the sovereigns - a huge potential problem once it took over the operation of monetary policy from national central banks. Without these basic functions and powers how can a central bank truly regulate. What mechanism can it have?
Moreover, the ECB’s one-size-fits-all interest rates (and exchange rates) is a one-size-fits-none arrangement - at the same time is might be too low for Germany and other strong economies and too high for weak Mediterranean countries like Greece with debt problems, or, at other times too low for overheating countries like Greece, but too high for Germany. The German domination over the ECB also meant that loose money policy, especially radical measures like a dose of American-style quantitative easing, was mostly anathema.
Enforcement? What is that?
Then to add on to these problems came laxity in enforcement: the fiscal criteria encapsulated in not-so-bad-ass sounding schemes like the “excessive deficit procedure,", stability and growth pact, etc. However, from the very beginning the rules against excessive deficits and public-debt levels were interpreted flexibly. And once Germany and France colluded to block any official rebuke or sanctions for letting their budget deficits rise above the Maastricht ceiling of 3% of GDP and rendered it toothless, the gutting of the Fiscal requirement were complete. From then on, so the story goes, all semblance of fiscal discipline was abandoned.
All this meant that problems were only waiting to happen. And the relaxed entry of some of the mediterranean countries (one does not say no to Plato! :) ) helped precipitate this very fast.
Greece: The Petri-Dish Case
The circumstances that led to the Greek crisis, via the good pre-2008 times, and the way it was handled/botched is used as an example to show up some of these flaws and deficiencies and to highlight what needs to be done to make EU a success.
The Blame Game
It is argued that the blame should be placed on both:
1. those who created such a death trap of a currency union, to begin with, followed by the reckless borrowers and the irresponsible lenders of the first decade of EMU
2. the lax policy response later from the ECB, IMF and the stronger nations of the EU who could have limited the fallout but failed to act decisively.
It is true that the deficit countries used the low interest rates unproductively and profligately. Not to mention the fact that the complacent financial markets utterly failed in their allocation of credit and calculations of risk. Getting markets to impose discipline on governments had been one reason for enshrining the no-bail-out rule and forbidding the ECB from monetizing government debt. But this plan didn’t take into account the irrationality of markets flush with overconfidence and easy money in the pre-2008 global economy
Discipline the Markets!
Greece was plainly bankrupt. Its debt should have been cut early and decisively rather than late and messily, thereby giving private creditors the chance to dump Greek bonds. The losses would thus fall on those that lent the money to uncreditworthy countries.
This would have hurt the bad lenders early and made them more wary of speculation (contaminated by plenty of moral hazard!). It is important to enforce discipline on the rogue elements of the markets first if you expect markets to enforce discipline on the sovereigns, whether it be in the local pond of the European bond market or the larger international waters where the sharky portfolio investors hunt.
The Austerity Question
And finally, the bail-outs (of the lenders more than the borrowers in many ways) made the mistake of enforcing procyclcical austerity measures only worsening the recessionary impact of the economic cycle and plunging Greece further into the debt trap. With no functional monetary policy and toothless fiscal policy (once lending capacity was compromised), Greece had no options but to keep accepting the loans and the conditions.
The Dark Future of Grexit
After this, a few future options for Greece are discussed including the specter of Grexit.
Even if it may seem so today, it unlikely that the EU’s single market would survive the domino-effect-led implosion, and it would probably be followed by capital controls, trade barriers and, possibly, a return to world of mercantilism!
Avoiding the Doomsday; Preventing Radicalism
How to avoid such a scenario? It would require straightening the accountability and safety in the financial system, as is already in the works with talks of a “banking union. But what is also needed are the basics of a federal budgeting process that provides public goods and redistributes income between rich and poor citizens (and states). The EU has a tiny budget, no power of taxation and no powers to borrow. And the eurozone has no budget at all, even a modest one, that could make transfers when countries suffer a downturn in the form of unemployment insurances, etc.
This would protect countries hit by the flaws of EU to escape the worst of the problems that afflict its citizens such as high unemployment. This would then allow protection against the kind of civil unrest that took place in Greece. Besides, it would also prevent the easy radicalization of politics that happen in countries where the citizens have to endure clear and present hardship even as neighboring nationals seem to living in prosperity. Slow growth and high unemployment have been radicalizing politics and intensifying rejection of both national and European politicians. So the next crisis may well be political. Anti-EU, anti-immigrant and anti-establishment parties of all colors are on the rise. Only a EU-level budget to protect the losers of “globalization” can help fight this tendency that can easily lead to protectionism across the weaker economies and thus soon among the stronger economies.
Intrusive Economics
Instead of these steps, the “economic governance” created in recent years is a soup of incomprehensible jargon: six-pack, two-pack, fiscal compact, Euro Plus Pact, European semester, annual growth survey, excessive deficit procedure, macroeconomic imbalances procedure, “contractual arrangements” for reform, and much more.
All this amounts to an unprecedented intrusion by an unaccountable EU bureaucracy that satisfies nobody!
Just as in the case of globalization, the nations on the periphery are more and more afraid that the run of the core economic system is being run by the in-countries and their institutions: that increasingly the European Union and the euro zone are deciding matters without sufficient democratic control. As the eurozone (or the western world with respect to globalization) integrates further and more intrusively, it is running into a huge potential row about the legitimacy and democratic accountability of its actions. Indeed, it is this, rather than the financial markets, that could pose one of the biggest risks to the EU’s future. As we can see the same concerns are present if we examine the international institutions such as WTO, IMF and the United Nations. The intrusions are inevitable and lack of democratic control only precipitates fear and distrust from the out-group countries, which happen to be most of the world!
The eurozone’s financial system was sufficiently integrated to spread contagion, but not integrated enough to provide resilience. It has no central budget or other means of absorbing asymmetric shocks that hit one or two countries disproportionately. Hence, when the crisis hit, the euro zone had no means of giving assistance to countries that got into trouble.
A bit of imagination should suffice to see how each of these conditions of integrated markets, contagion and no resilience applies to the globalized international markets as well. Greece paid a disproportionate price of the US’ regulatorial slackness and the 2008 crisis, so did many others across the globe. There was no system to make sure that they were protected in some manner. The markets are irrational and the international institutional system is built on a willful ignorance of this fact. We cannot have true globalization with only markets running it, just like couldn’t have had any sort of true democracy if it was merely laissez-faire that guaranteed it.
Global Federalism…?
The eurozone and the globalizing world should look to the United States and ask itself: why does the prospect of default by one state not call into question the existence of the dollar? The short answer is that the United States is a single federal country, while the euro zone is a much looser confederation of sovereign countries who are willing to contaminate one another, but not willing to help one another out.
Europe’s real folly and the folly of the globalization project as a whole was not to look for the gains from opening up of trade, financial integration, exchange-rate stability and economic efficiency, even if they might have been overstated. The madness was to believe that these benefits could be obtained on the cheap, without the political constraints, economic flexibility, financial transfers and risk-sharing mechanisms of genuine integrated markets, i.e., federations.
Clearly the answer is in some sort of Federalism, not only for the Eurozone, but also for the world? And it is worth building, and fast!
After all, Europe’s (and globalization’s) malaise is not one that time alone can heal. Delay is likely to make things worse, not better. Even if the the financial panic is kept in abeyance, the economic and political crises may well deepen. Right now the political momentum is towards fragmentation, not integration. Unless the euro zone (and by extending the argument the globalized world economy) is redesigned with greater determination, in particular through greater risk-sharing, it is unlikely to recover economic vitality. And unless the euro (and globalization) can be shown to deliver prosperity and well-being, public support for the EU Project (and the Globalization Project) will inexorably ebb away.
The eurozone crisis has the potential to destroy the European project. Something of great value may thus be lost through carelessness or timidity.
The Grecian Prod
But on the other hand it also has the potential to prod Europe and the broader world into quickened action to make sure that economic integration is attended by fiscal safety-nets and fast reductions in the accumulating democratic deficit with respect to the institutions that govern that economic integration.
The hope is that this realization and the prod for quicker action can be had from the high profile case of Greece where most of the flaws and the urgent reforms have been highlighted. Hopefully Europe will stop finding its way gradually like a blind man stumbling form one wrong turn and crisis to another before stumbling on the right room and instead sit down and chart out a roadmap for the destination it really wants to reach.
The steps to this are laid out as first having a system of transfer in place, via ECB first by making it a lender of last resort and then moving to a more integrated fiscal union and eventually a political union by the gradual addition of democratic accountability. A dreamy euro-federalist vision is thus put forth, and it is hoped that it does not bring forth much derision from the realist among the viewers!
All this can thus be connected back to the idea of globalization with a hope that eventually we might achieve similar results for the world as a whole. In short, the euro-federalist dream is extended to include another dreamy hope that the nation state system that was propagated by Europe, will hopefully be transcended by the same Europe. The EU experiment has much significance it the grander scheme of things on how the world will look like a century or so from now and the best sort of effort has to be made to make it work, even at the cost of some sovereignty or pride.
The World is Not Flat
And, one last thing: Before someone asks, “Why review this book for discussing all this?”, let me answer:
Friedman argued that the world is flat — because of Globalization.
However this whole argument would indicate that the world is not flat, because Globalization is not complete, it is not even past the first leg of the race. And the flattening of the world wont happen unless we aim for real globalization, unless the race is fully run, all the hurdles jumped.
The world needs a lot more flattening to even out the very rough edges — the edges that cut all too easily. This is because flatness is not based on merely economic or trade considerations. It has to be based on democratic accountability, when clearly the international organizations are going to have an ever more intrusive role in national matters.
If not the opposite would result — the nations would reject the international organizations and challenge their legitimacy. And the whole project depends on this legitimacy not being challenged. It could be that occasional prosperity might dampen the force of these questions, but in an integrated world crises will surely be more common and so will contagion, and then the only thing that can save the institutions and the whole globalized system is accountability and true democratic legitimacy. Globalization has to be built on democratization and not merely on ships or aviation fuel.
That then was a bloated summary of a video which is in fact much simpler and non-technical. Again, pls do watch the video and let me know if it was fun. :)...more
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