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Brooks Wilson's Economics Blog: Globalization Causing Reliance on Markets?

Monday, June 8, 2009

Globalization Causing Reliance on Markets?

David Gauthier-Villars and Marcus Walker, writing for the Wall Street Journal in, "Across Europe, Left-Leaning Parties See Clout Faltering," June 8, 2009), exam recent election and polling results in Europe and find evidence that the economic crisis is benefiting the right, not the left as in the U.S.  They offer two reasons for the right's success.  First, the right has moved left.  I will call this the Schwarzenegger effect, and in America's right of center debate pits pragmatic politicians like Schwarzenegger, Powell, McCain and Bush against ideological purists like Limbaugh and Cheney.  Gauthier-Villars and Walker observe that
One reason is that as Europe tipped into recession, the right moved left -- appropriating some of the left's long-standing economic policies, including nationalizations and bailouts.

French conservative President Nicolas Sarkozy, for example, helped recapitalize French banks, earmarked six billion euros for the auto sector and lashed out at "rascal bosses" with huge pay packages.

In Germany, Chancellor Angela Merkel has planted her conservative camp firmly in the political center. Ms. Merkel has largely given up her former program of market-oriented reforms, and has gradually approved various kinds of state intervention to protect workers during the current recession, from bailing out carmaker Opel to subsidizing payrolls at companies whose export orders have collapsed.
Second, globalization has weakened national policy tools.  Some economists have argued that globalization of trade and financial markets would force governments into an international competition for efficiency and erode fiscal and monetary policy options.  Perhaps as an acknowledgement of greater interdependence, G20 members attempted to hammer out an international response to the financial crisis in the meetings in April.  Market oriented economists believe that reductions in policy options would be beneficial because the problems these policies introduce, cronyism, crowding out, inefficient spending, and inflation often outweigh their benefits.  The worldwide bailouts of banks and other firms suggest that many of the inefficiencies that market oriented economists hoped to eliminate remain even under a more competitive system.  Gauthier-Villars and Walker claim that the tipping point toward greater reliance on markets came with the signing of creation of the World Trade Organization in 1994.  If the authors are correct, the Clinton administration, and members of Congress that supported the GATT deserve kudos. 
In the past, there was a clear fault line between Europe's left-wing and right-wing parties. The left called for more social welfare programs and public spending. The right wanted the state not to interfere in market forces.

Globalization helped change that. With nations and companies vying on a global scale, it has become difficult for a country to separate the effects of public spending and budget deficits from its labor costs and capacity to compete in export markets. The key moment came as far back as 1994, some political analysts say, when the World Trade Organization was created and much of the world began shifting to a more free-market economy.

"The WTO marked the triumph of the market economy," says Dominique Reynié, head of Paris-based Foundation for Political Innovation. "Since then, the left has been unable to propose another route."

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