About Draghi's Jackson Hole speech

Dubious arguments with a depoliticising tone

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On August 25, 2017, the President of the European Central Bank, Mario Draghi, delivered a speech at the Economic Policy Symposium of the Federal Reserve Bank of Kansas City, Jackson Hole.1 Mr. Draghi’s theme was the openness of domestic economies to global trade, a prerequisite to realising the potential for sustained growth in the face of technological convergence and structural challenges.

The ECB chief draws from the experience of the European integration process to suggest that openness can deliver the normative ends of fairness, safety, and equity, provided there are shared institutions at the supranational level. The harmonisation of regulation engenders trust in cross-border market activities. A level playing field provides transparency, uniformity of rules and access to courts, as well as equal opportunities.

In the following sections I discuss Mr. Draghi’s insights at some greater length, while noting that, overall, his message is in the right direction, even though it leaves much to be desired.

Multilateralism requires democracy

Free trade is always instituted as such. States enact laws which guarantee the essentials of economic agency (property rights, legal persons, etc.) and which govern the market forces. Cooperation between states provides the platform for cross-border economic activities or emergent markets. Contrary to market fundamentalism, economics and politics are intertwined.

The global economy is subject to a degree of harmonised regulation. However, the capacity of powerful microeconomic agents to escape oversight or to exploit the loopholes between otherwise heterogeneous jurisdictions remains the norm. International trade has hitherto followed the archaic conventional wisdom of self-correcting markets and of unfettered capitalism as the only instrument of ensuring an optimal use of the factors of production.

Students of the European integration process are aware that such depoliticised view used to be the guiding principle of the euro’s architects. Indeed the institution that is now led by Mr. Draghi was originally conceived as the sole supranational entity for the nascent Economic and Monetary Union. There was no common fiscal policy, no base for tax policy harmonisation, no system-wide financial oversight with a view of the systemic aspects of financial integration, no economic governance underpinned by strong democratic conventions. In short, what still applies to the world economy used to be the case for Europe’s single currency area. The big microeconomic players, such as major banks and ‘technology giants’, get to reap excessive rewards while paying low taxes or having to conform to an otherwise favourable legal regime.

Contrary to Mr. Draghi’s selective view of Europe’s achievements in regulatory convergence, the legacy of the euro is one of misguided neoliberalism. It is only in recent years that policy makers are correcting the EMU’s design flaws. Still, there is much work that needs to be done on relevant areas, from economic governance, to a common budget that would support a European benefits system, to harmonised rules on taxation, a common deposit insurance scheme, as well as the overall need to raise the democratic standing and political outlook of the supranational architecture.

Mr. Draghi exhortations about multilateralism as a guarantor for sustainable openness are plausible and backed by Europe’s experience with economic/political integration. Nonetheless, he is noticeably quiet on substance. He seems to be sufficed with the mere presence of such multilateral entities. One can notice an indifference as to whether these provide for a fully fledged framework of institutional arrangements or, just as with the early days of the euro, a generic set of inadequate rules and underpowered regulatory bodies.

Multilateralism per se is insufficient. The downsides of international trade can only be offset by concerted action at the political front. This requires democratic institutions with the power to be actively involved in the distribution of resources so as to provide correctives to market failures as well as terminate abuses by oligopolistic actors (such as Apple’s sweetheart deals with the Irish tax authorities or the case of Google’s dominant position as a platform for advertisers). In short, there is a matter of sufficiency that needs to be considered. Multilateralism can only be peddled as a panacea when it is outfitted with all the necessary means for performing the ameliorative functions of a polity interested in the common good.

Without qualifying multilateralism we run the risk of being confined to a formulaic commitment to international cooperation. One that has no real interest in normative issues. Such can be the facade of an otherwise socially odious economic paradigm, where the distribution of wealth is disproportionate between states and among people; a system that ultimately is unsustainable. That too, is a key insight from the history of the European integration process—indeed an insight from the history of the euro—one that Mr. Draghi seems to blithely ignore.

Openness has to be contextualised

The implication from the above is that, unlike Mr. Draghi, we cannot speak about “openness” as a binary choice between free trade and protectionism. The policy mix is complex, social preferences and democratic choices are much more diverse, giving rise to a spectrum of possible worlds ranging from the extremes of autarkic protectionism to unencumbered capitalism.

It is pointless to insist on the depoliticised view of economics whereby free trade is a necessary good and anything that resembles a border, a confinement, or a barrier to it stands as an unmitigated disaster. Such simplistic reasoning must give way to an understanding of international trade as part of international relations. Politics is key to determining both the presence and the scope of international economic activity.

Again the European integration process serves as an example, though not in the way Mr. Draghi appears to suggest. The European single market, which remains a work in progress, has reached its current state gradually. It has taken decades of regulatory harmonisation and intense negotiations both at the technical and political domains. For the EU, “openness” is not some turnkey solution of dismantling impediments to trade in order to realise economic growth. Rather, it is a comprehensive legal order, underpinned by a whole range of democratic institutions and supranational agencies, that enable sustainable cross-border markets and economic activities.

Sustainability is the single most important criterion for determining the quality of trade. It is what policy makers should strive for. What we see in Europe’s current affairs, such as the expected revision of the posted workers directive, or any possible steps at tackling tax avoidance and tax base erosion, is an ongoing effort at eliminating elements that can render the single market inefficient, malfunctioning, and ultimately unsustainable over the long run.

What is being touted as “openness” can only withstand scrutiny if it is contextualised as the end product of an ongoing effort at aligning social expectations with economic realities. This is what politics does. It is why we need a European Parliament and eventually a directly elected Commission rather than just some technocratic body that regulates the single market. Or why we understand the need for the full political transformation of the Economic and Monetary Union.

And so, rather than couch the argument for trade in terms of the misleading binary of protectionism vs openness, we need to examine the proximity between different regulatory regimes and societies. One cannot disregard the normative evaluation of trade. Economic optimality is but one of the many issues that need to be accounted for. As such, any objection to proposed trade agreements ought not to be dismissed as some protectionist backwardness. Rather, it should be examined in light of its substance: that it may point at social-cultural disparities and a mismatch of expectations that cannot be ironed out only by means of approximating tariffs, import quotas, and the like.

Thus, the stigma that goes with protectionism all too often ends up being an exaggeration. The sustainability of economic activity and its spillover effects is of paramount importance. What matters the most is to be able to use trade (among others) as an instrument for bringing together different peoples, with the intention to forge stronger economic, cultural, and institutional links between them. This raises an issue of inter-state solidarity, where any downsides resulting from trade are offset by democratic decision making.

The European integration process shows us that trade is but a facet of a broader effort at “ever closer union”. It is why the EU cannot afford to be just a single market without powers over fundamental rights, social welfare, territorial cohesion, security and defence, and so on. Openness without politics is more likely than not to be unsustainable, for it is insufficient in aligning economic reality with social needs and expectations.

Here too, Mr. Draghi has chosen to misconstrue the lessons of the EU to fit his argument for free trade and his bias for technocracy that is ‘accountable’ to elected representatives (seeing how the ECB is practically immune to scrutiny).2 It is why he speaks about the European integration process in the same breadth as multilateralism, as some regionalised variant of the World Trade Organisation or whatever other ineffective international body. In truth, the European integration process is much more than ‘multilateralism’: it is an [ongoing] process of supranational state building, which ultimately encompasses every aspect of quotidian life.

Common politics is a prerequisite

All in all, Mr. Draghi is right to point out the need for multilateral convergence. It serves as a reminder that the one-sided worldview of neoliberalism has done much more harm than good in how world trade is regulated. Furthermore, the ECB chief is right to use the European integration process as a real world example of ensuring the sustainability of cross-border trade by having common institutions.

On the flip-side though, he has failed to formulate an argument that captures all of the lessons drawn from the EU’s history, current state, and medium term outlook. He seems to use Europe as a proxy for his well disguised narrative for depoliticised regulatory convergence. As such, he draws parallels between the EU and the WTO or the Basel committees, even though there are profound differences between them.

It is lamentable that at such an important symposium the view expressed by the head of Europe’s single currency is one that reflects the EU’s past. Mr. Draghi sounds more like the architects of the euro from the 1990s, who naively insisted on a monetary union without a fiscal capacity, a financial and banking union, and a common platform for democratic decision making. Us European citizens know all too well the longer term perils of (i) poorly designed institutional arrangements, and (ii) institutional frameworks that favour the technocrat over the politician by removing competences from the domain of democratic decision making.

What the world can learn from the European integration process is not some simplistic notion that “multilateralism works”, but all of the following:

  • Free trade between nations must be instituted gradually in concert with political convergence at the supranational level. Otherwise there arise inter-temporal injustices and abuses that persist from the moment of economic integration until they are addressed by any possible joint political action.
  • Common democratic institutions are necessary to provide for the ongoing alignment of social expectations with the realities in the economy. The conformity of corporations with oligopoly powers to regulations can only be ensured by public entities wielding sovereign authority. The same goes for market failures, including those with cross-border implications.
  • Cross-border trade has spillover effects and engenders emergent phenomena such as systemic financial risk that can only be addressed by concerted action at the supranational level. In the absence of mechanisms to regulate the inter-state aspects of trade, there can be no means of effectively dealing with phenomena that are not confined to any one domestic economy. A prime example is the euro crisis or the Great Recession in general.
  • Inter-state agreements raise issues of solidarity, so that any damages caused by exposing the domestic economy to international competition are offset by common political initiatives. Otherwise the benefits of trade are only reaped by a small minority of the general populace, leaving the rest unsatisfied. That also has unintended consequences, such as the rise in popularity of xenophobic parties.
  • Multilateralism that depends on generic rules and decentralised enforcement is a recipe for continuous friction and eventual failure. Only institutions with a broad-based mandate and sufficient enforcement powers can regulate affairs between states. The original design of the euro was a big mistake, partially corrected retroactively.

In conclusion, Mr. Draghi delivered a speech that could be read as a departure from neoliberalism’s fantasies for the depoliticisation of public life. Upon closer inspection, nothing could be further from the truth. The ECB chief conforms to the conventional wisdom of the economic establishment and conveniently presents a skewed view of the European integration process to support his case.

  1. Sustaining openness in a dynamic global economy. Speech by Mario Draghi, President of the ECB, at the Economic Policy Symposium of the Federal Reserve Bank of Kansas City, Jackson Hole, 25 August 2017. [^]

  2. I have argued at length why the ECB is practically immune to scrutiny. For an overview, see ECB independence: concept, scope, and implications. Published on April 2, 2017. [^]