Bye, Bye Euro? A Problem of Political Economy

"Alas, it may now be too late for the eurozone. Ireland and the southern European countries must reduce their debt burden and sharply enhance their economies’ competitiveness. It is hard to see how they can achieve both aims while remaining in the eurozone." ~ Dani Rodrik

And the problem, on his account, is not one of venal, short sighted politicians (personal responsibility!) or of simply unfettering economic markets but of constructing effective centralized political institutions.

Capital Controls and Robin Hood

There is an interesting essay by Dani Rodrik here, commenting on the recent reversal policy on the part of the International Monetary Fund. The reversal concerns the legitimacy of controls on capital mobility of various sorts. At the end of the piece Rodrik endorses "a global financial transaction tax. Set at a very low level – 0.05% is a commonly mentioned rate – such a tax would raise hundreds of billions of dollars for global public goods while discouraging short-term speculative activities in financial markets." You can find the web page of a group pushing this "Robin Hood" Tax here. And you can find earlier, related columns from Rodrik here and Paul Krugman here

How to Proceed with Reforming Financial Markets

What follows is an excerpt from an Op-Ed by Dani Rodrik on international financial Regulatory reform. I especially like the italicized portion.

"Global coordination, like global governance, sounds good. But the practical reality is that it cannot deliver the tough regulations, closely tailored to domestic economic and political requirements, which financial markets badly need in the aftermath of the worst financial upheaval the world economy has experienced since the Great Depression.

In a world of divided political sovereignty and diverse national preferences, the push for international harmonisation is a recipe for weak and ineffective rules. That is one reason why international bankers love international coordination.

Many scholars of international relations consider the Basel Committee on Banking Supervision, the international body of regulators charged with devising a new set of global standards, as the apogee of international rule-making. Yet it is surely telling that this will be the third version of its guidelines in as many decades.

The last big idea the Basel committee had was that large banks should calibrate their capital requirement based on their own internal risk models. But the dangers of permitting banks to police themselves were made amply clear in the latest crisis.

When financial regulations are devised by a coterie of global regulators in distant venues, it is bankers and technocrats who gain the upper hand. Returning the process to national capitals would shift the balance of power to domestic legislatures and national stakeholders. Bankers and their economist allies may rue this, but it is as it should be. Politicisation is the necessary antidote to technocrats’ tendency to be captured by banks. Democratic accountability is our only safeguard against a return to light regulation.

Democratic accountability would also result in regulatory diversity — different countries doing their own thing — and that is not a bad thing, either. If the US wants to place size limits and tighter capital requirements on banks, it should be free to do so. If Europe wants to devise its own rules for credit-rating agencies and hedge funds, it should simply go ahead."

All that then is required is that the national law-making processes be extricated from the grip of national financial institutions.