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Greek lessons for the world economy

05-14-2010 15:25 BJT Special Report: Europe's Debt Crisis |

Greek President Karolos Papoulias (C) hosts the Greek National Council of political leaders at the Presidential Mansion in Athens, capital of Greece, on May 10, 2010. The Council was convened to discuss the economic crisis that has hit hard the country. (Xinhua/Phasma)
Greek President Karolos Papoulias (C) hosts the Greek National Council of political
 leaders at the Presidential Mansion in Athens, capital of Greece, on May 10, 2010.
 The Council was convened to discuss the economic crisis that has hit hard the 
country. (Xinhua/Phasma)
BEIJING, May 14 -- The 140-billion U.S. dollars support package that the Greek government has finally received from its European Union partners and the International Monetary Fund (IMF) gives it the breathing space needed to undertake the difficult job of putting its finances in order.

Deep down, the crisis is yet another manifestation of what I call "the political trilemma of the world economy": economic globalization, political democracy, and the nation-state are mutually irreconcilable. We can have at most two at one time. Democracy is compatible with national sovereignty only if we restrict globalization. If we push for globalization while retaining the nation-state, we must jettison democracy. And if we want democracy along with globalization, we must shove the nation-state aside and strive for greater international governance.

The history of the world economy shows the "trilemma" at work. The first era of globalization, which lasted until 1914, was a success as long as economic and monetary policies remained insulated from domestic political pressures. These policies could then be entirely subjugated to the demands of the gold standard and free capital mobility. But once the political franchise was enlarged, the working class got organized, and mass politics became the norm, domestic economic objectives began to compete with (and overwhelm) external rules and constraints.

The classic case is Britain's short-lived return to gold in the inter-war period. The attempt to reconstitute the pre-World War I model of globalization collapsed in 1931, when domestic politics forced the British government to choose domestic reflation over the gold standard.

The architects of the Bretton Woods regime kept this lesson in mind when they redesigned the world's monetary system in 1944. They understood that democratic countries would need the space to conduct independent monetary and fiscal policies. So they contemplated only a "thin" globalization, with capital flows restricted largely to long-term lending and borrowing.

The Bretton Woods regime collapsed in the 1970s as a result of the inability or unwillingness - it is not entirely clear which - of leading governments to manage the growing tide of capital flows.

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