Two trilemmas in Eurozone governance

by niamh on May 3, 2011

Following on from Henry and John’s piece on ‘hard Keynesianism’, here is another angle on the politics of the EU. Economic historian Kevin O’Rourke has an excellent paper setting out a very nice framework for thinking about the Eurozone. It was presented at a conference of the Institute for New Economic Thinking held recently in Bretton Woods (yes, surely a good venue for such an event). There is also a short summary here.

Kevin’s creative insight is to combine the impossibility theorems from two bodies of literature – Mundell-Fleming on monetary policy, and Dani Rodrik on global governance – and to show that the Eurozone occupies an uneasy half-way house in both economic and political governance. The particular merit of setting out the issues like this is that it demonstrates why there are no optimal policy solutions, only difficult trade-offs, with different potential losers in each case. It is an innovative and stimulating exercise in political economy that deserves to gain a wide readership.

Mundell and Fleming’s economic trilemma posits that you can only achieve two of three objectives in monetary policy: that is, open capital markets, domestic control over monetary policy, and fixed as opposed to floating exchange rates. ‘European Monetary Union has thus solved the economic trilemma in a particularly radical way: capital mobility combined with the complete abandonment of national monetary sovereignty’.

The political trilemma, drawing on Dani Rodrik’s work, says that if you go for increasing globalization, you cannot simultaneously have both nation-state politics and democratic accountability. If you want the latter two (as in the ‘Golden Age’ of postwar capitalism), you need restrictions on capital mobility. If you go for closer economic integration, you could do it by imposing all the adjustment costs onto your own citizens, as in the era of the Gold Standard. But as Polanyi and others have pointed out, this is hard to sustain without massive repression, and pretty well impossible in the long run with universal enfranchisement. So the alternative is to construct a collective decision-making capacity at the transnational level. As O’Rourke notes:

What makes European Monetary Union such a radical solution to the political trilemma is that it not only abandons national monetary policy-making, but delegates it to a technocratic Central Bank… Moreover, this has occurred without common Eurozone policies in complementary areas, notably financial and banking regulation; and it has occurred without a move towards a common fiscal policy, which most economists also regard as a desirable complement to a common monetary policy.

But the European project is also premised on the primacy of democratic politics and joint decision-making, and recent Treaty reforms have been aimed at bridging the ‘democratic deficit’ in the central institutions. This is difficult because national parliaments continue to enjoy greater legitimacy. There is strong citizen resistance to shifting more power to a federal EU level, however beefed up its democratic credentials. Similarly, the more fully institutionalized ‘Europe’ becomes, the more contentious the embedded policy commitments, particularly to the pro-competition pro-market agenda.

So the EU is a political halfway house that is both intergovernmental and technocratic. What the effects of the current crisis may be on all this is still a work in progress. Europe needs a common approach on banking regulation and resolution; it would benefit from having a centralized budget to smooth shocks. As O’Rourke notes, there are inter-country conflicts in democratically expressed preferences on both these issues.

There are also major class cleavages within countries in attitudes toward the EU itself, where ‘support for EMU is positive correlated with support for both globalization and the EU, …and is higher among the better educated, white collar workers, and retirees. On the other hand, it is lower among the unemployed, and those who consider themselves to be on the right politically’.

Looking jointly at the economic and political trilemmas, and at the peculiar EU hybrid, O’Rourke comments that, at the moment, ‘the combination of democracy and the national state is winning out, implying that we are stuck with a monetary union with serious design flaws’.

What will happen so? O’Rourke goes with Rodrik in noting that ‘when globalization collides with domestic politics, the smart money bets on politics’. On the other hand, he also notes the immense political capital that has been sunk into EMU and the enormous political as well as economic damage that its unravelling would cause.

Unfortunately economists only have two hands; it would be nice to know if there was a clear way through these troubled times.



Kevin Donoghue 05.03.11 at 10:50 am

It might be worth adding a link to Henry’s April 8th CT post about Kevin O’Rourke’s paper (not to imply that it isn’t worth revisiting).


bert 05.03.11 at 1:48 pm

Arguably there’s another trilemma: transnational labour markets vs. pay rates at market equilibria vs. universal suffrage.
The neoliberal model which combines the first two elements won’t long survive the resulting electoral discontent. To keep the electorate onside, either you complement free movement of labour with well-enforced worker protection (high and robustly indexed minimum wages, for example) or you mitigate competitive bargaining on pay by limiting the influx of foreign competition.

I suggest this in part because it offers the enticing possibility of your man from Trinity giving us three trilemmas.
Father. Son. Holy Ghost.


niamh 05.03.11 at 2:04 pm

Apologies, Henry’s nice piece commending Kevin’s paper, and another by Kate McNamara, must have slipped past me – it’s here:


Spock 05.03.11 at 2:34 pm

“If you go for closer economic integration, you could do it by imposing all the adjustment costs onto your own citizens, as in the era of the Gold Standard. But as Polanyi and others have pointed out, this is hard to sustain without massive repression, and pretty well impossible in the long run with universal enfranchisement. ”

Captain, there is a clear counter-example: Earth, North American Continental Region, the sub-region formerly known as ‘the United States of America’, during the period of the late-20th/early 21st century (pre-Stardate reckoning). This ‘country’, as you humans called them at the time, had a sharp change in it’s political structure in favor of the economic elites. This was reinforced by numerous propaganda methods, including the use of priests, who called themselves ‘Chicago Economists’, who fraudulently claimed that ‘economics’ was an apolitical field of study. As of the beginning of the Post-Bin Laden Era, after 40 years of clearly failed policies, those elements opposed to massive concentration of wealth were celebrating anything other than a total defeat as a victory (see Wisconsin, Koch devastation of). In fact, the elites were at that point openly able to champion a policy of massive redistribution of wealth upwards, and deliberate impoverishment of the majority of humans in the USA, and still win elections. This was widely aided by the total corruption of the ‘economic’ priesthood, which would rarely call out the ‘Chicago School’ frauds, even when evidence came through. In fact, there was a massive blurring of the ‘economist’ priesthood with flat-out propagandists, to the point where it was difficult to tell whether a piece of propaganda written by a simple propagandist, or by a priest, even one of the higher priests (e.g., an ordained member of the actual inner circle of Chicago). Even the mock Nobel Prize in economics was not a good indicator of reliability of ‘analysis’ (see Prescott, Eward for an example).


StevenAttewell 05.03.11 at 6:07 pm

Spock –

Looking historically, I think you can argue from the 1870s-1910 period that populist opposition to the costs of the dominant economic model were essentially blocked by the use of veto points by elites and the establishment of hegemony across mainstream political parties. However, those veto points aren’t universally strong throughout time, eventually there’s a breakthrough.

Same thing in Europe: as Polayni notes, the liberal consensus on the gold standard, free exchange, and balanced budgets was powerful enough that even socialist governments in Britain, France, and Germany clung to orthodoxy in the 20s and 30s. Eventually, the system collapsed all the same and was dramatically reshaped post-1945.

30-40 years is not out of bounds for “the long-run.”


Antoine 05.03.11 at 6:28 pm

you cannot simultaneously have both nation-state politics and democratic accountability. If you want the latter two (as in the ‘Golden Age’ of postwar capitalism)

This statement about a hypothetical golden age, which in France we call les 30 glorieuses would merit further scrutiny. Certainly in the case of France it can be argued that economic prosperity came at the expense of political liberty. That’s certainly the case after 1958, when de Gaulle’s coup put an end to the prerogatives of the parliament (scorned as “parlementarisme”), reinforced economic dirigisme and set up a kind of elective one-party regime (with control of the media, the ORTF) that continues to this day.


Henry 05.03.11 at 9:30 pm

No worries – and since I did not do much more than say ‘here is an interesting paper,’ value is being added.


niamh 05.03.11 at 9:38 pm

Henry, you are a scholar and a gentleman.
Great contributions on the various ways democratic contestation can be mobilized and institutionalized. Or demobilized and opposed. Which poses the question, Spock (or Doctor Spock, if I may?), how democratic is the US so?


Barry 05.04.11 at 1:01 am

Steven Atwell: “30-40 years is not out of bounds for “the long-run.” ”

Which says that the system can persist in this state long enough for a worker to enter the system, get scr*ewed over for his/her entire career, and enter retirement imiserated.

For my definition, that’s long-run. What is Polyani’s long-run?

niamh: “Which poses the question, Spock (or Doctor Spock, if I may?), how democratic is the US so?”

Which fits in with SteveAtwell’s statement from my point of view.

If ‘long-run’ can be defined as only applying to 50-100 year periods, and the USA doesn’t count as democratic, then what non-trivial point is Polyani making?


StevenAttewell 05.04.11 at 7:22 am

That institutions have a momentum of their own, but that it cuts both ways – once democratic movements overcome institutional inertia, their momentum carries for decades as well. Hence, even after the New Deal’s coalition splintered, many of its most important components survived to the present day.

FYI, Polayni’s period of liberal dominance in the face of protectionist discontent runs roughly from the 1890s-1930s.

However, I’d question why this is necessarily anti-democratic. It’s anti-populist and anti-egalitarian certainly, but traditionally this has worked through ideological hegemony that often is quite broadly shared – and it was open to undoing through democratic processes. Bensel’s Political Economy of American Industrialization is good on this.


niamh 05.04.11 at 1:08 pm

Thank you for this reference Steven.
And of course you are right about the slow and interleaved processes of change generated by the interplay between political coalitions and their changing social bases, the institutions that articulate them, and the changing discourse that legitimates one set of policy commitments over another.


StevenAttewell 05.04.11 at 9:41 pm

My one warning about Bensel – it’s extremely thorough, but it’s also a very old-school quantitative history, so it can be a bit of a chore to read. You may want to skip charts of patents and capital investment by county to get to the meat of the argument, unless that’s your cup of tea.

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