Leaving the EU and Dani Rodrik’s ‘inescapable trilemma’

Rodrik-Unholy-Trinity-Political-Trilemma-World-EconomyThe deed is done. I have not posted much on the UK’s EU referendum in this blog, as despite casting my vote for us to remain in the EU, I feel that the latter is a deeply imperfect set of institutions and, within that, the structure and evolution of the eurozone have been very damaging to many of its members, not least economically, and in ways that have yet to be resolved.

I am posting a link here to a blog post from Professor Dani Rodrik of Harvard on what he calls the Political Trilemma of the World Economy. Although the post is from 2007, it offers a useful way to think about the relationships between globalization, democracy and the nation state. This of course applies to EU member states, who have pooled sovereignty upon the altar of deeper economic and political integration. It is worth a read.

To sum up, Rodrik says that we can choose two of three from (1) deep economic integration, (2) democratic politics and (3) national sovereignty. In the case of EU membership, we have (1) and (2) but have given up (3) to some degree.

In the post war Bretton Woods system, which included capital controls, fixed but sometimes adjustable exchange rates, overseen by the IMF and World Bank, we had (2) and (3). The system became a victim of its own success as capitalist economies grew relatively rapidly and became more open to international trade. It broke down when the US abandoned its currency peg to gold in the 1970s amidst rising inflation and unemployment, a productivity slowdown and global economic imbalances.

If a country chooses (1) and (3), then it will have to give up certain domestic objectives that a democratic society might wish to achieve, which involve intervention in the marketplace and public provision. This was the case under the original gold standard during the 19th century, as Rodrik notes. An exchange rate fixed to gold requires an interest rate which varies so as to achieve external balance in trade and financial flows, which will sometimes conflict with internal balance (high employment and low inflation, with savings equal to investment). The capital controls of the Bretton Woods system were an attempt to achieve both, although even this worked imperfectly. Having said that, under Bretton Woods, many capitalist economies achieved full employment, moderate inflation, and rising wages for the majority of workers during the 1950s and 60s. Recovery from the devastation of war was in many cases rapid. The fact that the system eventually broke down should not diminish the economic and social achievements of the period.

So the UK is on its way out of the EU, and the vote was won by a slender margin of four percentage points with a 72% turnout. We have apparently, in Rodrik’s schema, chosen (2) and (3) and, although the outcome of any negotiation is uncertain, we will have diminished (1) which could well reduce our prosperity over a number of years. This is disputed by many of those who campaigned for ‘out’, as they claim that we will be freer to make trade deals with the rest of the world beyond the EU. This could take a long time to play out, and in the meantime other economic, social and political developments could have all sorts of effects on the destiny of the UK. For the moment, we are in quite a quandary.

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2 thoughts on “Leaving the EU and Dani Rodrik’s ‘inescapable trilemma’

  1. An emotionalised issue – here are a few fragmentary thoughts: “deep economic integration” — well, the Warsaw Pact had deep economic integration – what I am saying is: one must look at the true quality of integration in a given case—to say it works well in the EU strikes me as a challengeable proposition.

    No one has convinced me yet that reasonable economic integration could not be achieved without the usurpation of power by a central bureaucracy in the present form.

    “Deep economic integration” clearly does not work for many of the poor and the working class in the EU which has a highly defective currency betraying a neoliberal dedication to austerity and a refusal – in fact, inability – to operate fiscal policies.

    I do not understand the Left any more, which appears to represent the rather well-off, politically correct middle class nowadays that keep rubber-stamping the neoliberal policies of the powers-that-be.

    The working class is going a different way, voting against the EU, even against the Labour party. I wonder, who is going to take care of them politically.

    I can’t see how you are going to protect the interests of the working class in the absence of “a strong national state,” and I am scared of the massive undermining of democracy unfathomably supported by the Left—in Germany, we have been ruled—we have a passion for being ruled— by a coalition government unencumbered by an opposition for years—in addition to being constantly told: “that’s how Brussels decided.”

    • Thanks for this comment which is useful and thought-provoking as always. The deep economic integration that the EU has tried to promote has of course given rise to a customs union, which is much more than a free trade zone, due to the harmonization of a much greater range of regulations in product and labour markets, which requires supranational governance. But the failures of the project currently are surely undermining its support, which is a pity.

      I agree that the euro has proved a disaster and, although there are policies which could make it work much better, there doesn’t seem to be the political flexibility and will to make the changes needed. It would help the cause of the EU if the euro project had helped to promote prosperity rather than forcing countries into deep depressions producing high unemployment and then requiring further austerity. The package of neo-liberal reforms that have followed in a similarly undemocratic way have been just as shameful on the part of the troika.

      Maybe the EU cannot be reformed, in which case it might break up eventually, which would surely lead to new conflicts and divisions. But as you say, whatever happens, there is a class of people that have been left behind by globalization. For real reform, there needs to be some kind of alliance between the working and middle class to put in power governments that will begin to promote their interests as a whole once more. I don’t know if this requires stronger nation states, but it does require a different package of policies for the euro which benefits nation states. And if the middle classes see their interests as tied to those of the elite, more inclusive societies for the poorest seem like a pipe dream. So it could be more of the same, which could lead to further social conflict and divisive and unstable politics. A change of course is needed, but will it happen?

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