Wednesday, September 28, 2011

Another crisis and choice for European social democracy

Just following on from What Ed should have said.... I've had some thoughts about what the crisis means for social democracy. OK, I'm not the only one, and probably none of this is strictly original, but hear me out while I try to make sense of it to myself.

Scharpf's argument was that Keynesianism in one country was dead. The response of mainstream social democracy was to adopt orthodox fiscal and monetary policies which, depending on the reading, would either secure full employment, or at least prevent the worst outcome - 70s style stagflation. The idea was that stability could be achieved by national governments in the context of globalization by following the right policies.

The crisis has blown that idea out of the water. Although Greece is the exception that proves the rule, governments in many countries - Ireland, Spain, even the UK at a stretch - were actually ticking all the boxes, and were still roundly screwed by the crisis. The reason for this was that mobile capital creates such a high degree of uncertainty and volatility that government policies, no matter how carefully designed and credible, cannot compensate for the shocks financial flows bring about.

The conclusions we can draw are, in my view, point in diametrically opposite directions. We can pessimistically take this as a given, and design even tighter and more credible fiscal and monetary institutions to lock in stability and stave off financial volatility. Might work for Germany, I guess, but in the end it's only a matter of time before those rules too would be torn apart by financial shocks.

Alternatively, we can bring back capital controls. Now the technicalities of how this would work are not my area of expertise, and I doubt it is straightforward. However the alternative (see above) is surely worse. If even hyper credible commitments and ultra rigorous decision-making rules don't protect you from shocks, than it's hard to see what else can be done, save all of us attempting to become little westernized Chinas with 40% savings rates (yes, exactly).

So, it's got to be back to some updated form of Bretton Woods. That, or a descent into chaos.