Trilema Europeu

Euro Zone Nations Wrestle With a 'Trilemma'
By STEPHEN CASTLE
The New York Times, July 6, 2012


LONDON — So, let’s say you have mastered the euro zone concept of “financial contagion.” Maybe you even know a thing or two about the euro “doom loop,” in which sickly banks and indebted governments threaten to drag each other down a death spiral.
Time now to learn a new buzzword, one that captures the anxieties of those seeking long-term stability for the euro currency union: “trilemma.”

The term, coined a dozen years ago by a Harvard University economist writing about the global economy, has come to encapsulate the awkward political options confronting the 17 euro zone countries. To make the currency union work for the long haul, euro countries’ heads of state have generally concluded that they must more fully integrate their economies. But within their own countries, the political leaders have only shallow support for that idea, if not outright resistance, from voters.

According to the trilemma theory, drawn in part from studies of the economic crises of 1930s and 1940s, it is possible to have two of three things: deep economic integration, democratic politics and autonomous nation-states. But under the theory, it is not possible to have all three.
“To remain in the euro zone under current conditions, countries like Greece, Italy and Spain are increasingly being forced to give up decision-making authority to rules imposed by Germany,” said Dani Rodrik, the father of the trilemma theory.

“This is creating democratic stresses at home,” he said. “Ultimately, externally imposed austerity becomes incompatible with democracy at home.” Mr. Rodrik, professor of international political economy at the John F. Kennedy School of Government at Harvard, first wrote about the trilemma idea in 2000, well before the euro zone debt crisis began. But he said the euro problems presented a perfect illustration of his theory.

It is much more than an obscure academic debate. Almost everyone now accepts that much closer economic integration is needed to save the euro. But that raises the prospect of a reduced role for each nation-state within the currency bloc, and the creation of something closer to a federal structure for Europe, of the type that many of the original architects of the euro always expected to evolve.

...So how does Mr. Rodrik, the Harvard economist, propose that Europe resolve its trilemma?
A solution, in his view, might involve giving Greek, Spanish and Italian voters a greater say over euro zone decisions through a transnational system of democracy.
“This would be something like the U.S. federal system,” he wrote in an e-mail, “in which the federal government doesn’t bail out state governments but looks after residents of Florida, California, etc. directly because they are represented through their congressmen and senators.”
An alternative, Mr. Rodrik suggested, might be for those countries to leave the euro union, sacrificing greater economic and financial integration to regain sovereignty and democratic space.

“This is in essence the trilemma as it works out for the euro zone,” he wrote. “It says that economic union requires political union. The choice for Europe is either more political union, or less union — unless, that is, weaker countries are willing to give up on democracy.”
Another advocate of the theory, Nicholas Crafts, director of the Center for Competitive Advantage in the Global Economy at the University of Warwick, points to a historical parallel.
Under the 1944 Bretton Woods agreement, which proposed a system of convertible currencies and set up bodies including the International Monetary Fund, the side of the trilemma triangle that was sacrificed was economic integration, he said. Instead of merging economies, countries were permitted to limit the flow of capital across borders, giving them the freedom to pursue the economic paths they thought best.

The euro zone, Mr. Crafts said, is putting an unbalanced emphasis on fiscal union through tough rules on debts and deficits meant to prevent a repetition of the crisis. “But we also need some compensating rules on the pooling of risks,” he said. “This would be a fiscal union that people want to belong to it; that has something to do with the federal level helping a state and not just disciplining it with a harsh straitjacket.” But Mr. Crafts said the political realities of the euro zone might make such a federal helping hand difficult to create. “If you can’t deliver the federalism as well as the economic straitjacket,” he said, “you might see the euro zone breaking up.”