The 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.