Nation-states would have to give up some of their sovereignty to accommodate the forces unleashed by the flow of capital, labor and information, insisted globalization cheerleader Tom Friedman during the height of the booming 1990s.
If a state wanted to attract investment and create an environment conducive to economic growth, its government had to sacrifice some of its freedom to make economic policy, allowing global entities such as capital markets and multinational corporations to direct the government’s monetary and fiscal policies. As Friedman put it, governments needed to be tied in “the golden straitjacket;" otherwise, capital would flee to more capital-friendly economies.
Since it was inconceivable that governments would ask the heads of large private banks and corporations to decide whether they had to reduce deficits, curb inflation or change currency-exchange rates—choices traditionally made in democracies by the people and their elected representatives—political leaders handed the power to trigger the mechanisms that determine their nations’ economic policies to supranational entities and vested more power in the hands of apolitical central banks.
In the case of the European Union (EU), that “golden straitjacket” took the form of a common currency adopted by members of the eurozone and a European Central Bank (ECB), based in Frankfurt, setting monetary policy for the national governments and restricting their ability to embrace fiscal policies that expand deficit and ignite inflation.
In the United States, the growing prestige and power of the Federal Reserve under the chairmanship of Alan Greenspan, coupled with the increasing influence of Wall Street lobbyists on shaping legislation and policy making, ensured that the interests of investors would take precedence over those of voters when decisions on interest rates and fiscal priorities were made.
Voters in Europe and North America were willing to submit to what amounted to diminished democratic control over their economies during the 1990s and early twenty-first century for the same reason that Chinese citizens refrain from challenging their regime today: During times of economic growth and rising standards of living, voters seem to be less preoccupied with the quality of their political system. Eager consumers become apathetic voters.
During the period of economic prosperity in the West, it was the United States that remained in control of the global economy and set its rules. This forced painful changes in policies of emerging economies in exchange for assistance and investment during the financial crises in the 1990s. In the context of the EU, it was Germany and the German-controlled ECB that were supposed to encourage Greece and other southern economies to become fiscal and monetary clones of their northern eurozone brethren in exchange for never-ending flows of investment and financial aid.
But not only did the straitjacket start feeling tight in the aftermath of the financial crisis and the ensuing Great Recession; it also seemed to be losing its golden luster. Indeed, at a time of economic decline and lowering living standards, Americans and Europeans who could not consume as much as they did in the 1990s were turning into angry voters. They wanted to retake control of their political institutions and force them to set the rules of the economic game in a way that would respond to the interests of the majority of the people, which is how things are done in democracies.
You do not have to be an Occupy Wall Street protester or a member of the Tea Party to conclude that the erosion in state sovereignty and the placement of more economic power in the hands of the proxies of the global financiers and corporations have not benefited most of the citizens in the West. They found their tax dollars supporting the same multinational and globalized entities that were in business to make them more prosperous.
Friedman and other fans of globalization were correct in suggesting that removing the regulations that had limited the ability of capital to move easily across borders has helped accelerate global economic growth. The problem is that the nation-state has not disappeared, and most citizens of nation-states continue to live, work, consume and do business in the confines of national economies and societies that are subject to national rules and laws. Each national economy experiences different rates of growth and wealth distribution among its citizens, reflecting distinctive cultural identities, traditions and values, as well as political and economic choices.
From that perspective, the traits of industriousness, thrift and good government that characterize Germany and other northern European nations are at the root of their economic success and cannot be imposed through ECB policies on Greece, Italy and Spain, with their higher levels of job idleness, financial profligacy and corruption.
Notwithstanding the daydreams of cosmopolitan corporate executives, bureaucrats and intellectuals, the national identities and interests of the French, Germans, Greeks and Italians and other European nations remain vibrant and preclude the creation of a United States of Europe that could agree on common monetary and fiscal policies.