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Advice on strategic issues for governments

On having your cake and eating it

David Skilling
12 February 2017

F. Scott Fitzgerald once remarked that “The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function”. Many countries are grappling with the apparently conflicting imperatives of globalisation: to secure the economic benefits and to manage the domestic pressures. Can countries retain the ability to function?

One response is the Boris Johnson approach: to blithely assert that countries can ‘have their cake and eat it’. However, as the UK prepares to submit its Article 50 notice, it will soon discover that autonomy outside of regional integration does not give much genuine independence. Brexit is less a brave new world than a major strategic misjudgement: the UK will likely have to give its metaphorical cake away.

Other countries also struggle to function with the trade-off between autonomy and integration, veering between one idea and the other. In France, the two likely Presidential candidates have deeply contrasting perspectives. Mr Macron favours deep European integration, with a common economic and fiscal policy; whereas Ms Le Pen advocates withdrawal from the euro and a protectionist French-first policy that would likely lead to exit from the EU. Policy debates in countries from Italy to the US are also sharply divided between integration and protectionism.

There is clearly a rebalancing underway in advanced economies between international openness and domestic policy autonomy. In principle, some rebalancing between the dimensions of Dani Rodrik’s globalisation trilemma – giving up a degree of deep economic integration for democratic politics at the nation state level – could be useful. Some aspects of hyper-globalisation are not obviously welfare-enhancing. In practice, however, the danger is a less calibrated response: either an aggressive push for more integration or a lurch to a much more closed approach. Both approaches contain risks: the economic costs of protectionism, or the likely political unsustainability of ever closer union.

But as I travelled to Switzerland and Denmark last week from Singapore, I was in three countries that offer insights on how to square this circle of integration and autonomy. These three small countries have each prospered on the back of deep international economic engagement. But they have done so in a deliberate way, placing limits and constraints on aspects of integration to reflect local context and preferences.

Switzerland, although deeply integrated into Europe, is not an EU member, retains its own currency, an independent trade policy, as well as its neutrality. And particularly over the past several years, Switzerland has acted to manage its exposure to Eurozone monetary policy as well as to migration flows (although the latter has been constrained). Denmark is a committed EU member, but has chosen not to join the euro (relying instead on a credible peg). In several referenda it has voted against aspects of closer EU integration, and there have been tensions on migration. And Singapore, one of the world’s most open countries, has a tightly managed migration approach, a managed exchange rate regime, and sets domestic policy to compete with other locations.

These three small, highly open countries are balancing a commitment to integration with the domestic policy space to manage globalisation. These policy approaches have enabled these countries – and others in Europe, such as Norway and Sweden – to benefit from globalisation in a (relatively) politically sustainable way. Small economies deeply understand the economic, political and security imperatives to be in a larger grouping, but work hard to carve out space for policy autonomy. Indeed, small European countries, such as the Netherlands, have been at the forefront of challenging aspects of closer European integration.

This perspective is also a useful lens on Scotland: an economy that is demanding greater policy autonomy and for whom EU membership is an integral part of the case for independence. Scotland understands better than the UK how to balance integration and autonomy. Indeed, the strategic challenges to Scotland of a hard Brexit make a second independence referendum likely.

So small economies can be seen as the canaries in the mine of the global economy, providing insight into how to manage the conflicting imperatives associated with globalisation.

Europe is a good place to trace these dynamics out. My expectation is that the net result of these pressures, reinforced by elections in the Netherlands, France and Germany, will be to shift the EU towards a looser union. I expect centrifugal tendencies with a series of pragmatic fixes to specific issues (e.g. migration) that lead to increased space for national decision-making in the context of a strong single market. The key debate will not be around open versus closed, but the level at which decisions are taken (as I have noted previously, much of the public frustration is with institutions rather than with globalisation). The nation state will become more central, but I do not expect other countries to follow the UK’s example of exit.

The line distinguishing between areas in which a collective EU is needed to provide strategic heft (for example, to negotiate an FTA with China) and areas in which national policy autonomy can be exercised is likely to be redrawn. This will be a messy process, but I expect it will result in a more politically sustainable EU that remains able to support economic objectives. However, I have changed my view on the euro. My current assessment is that the euro is now on the wrong side of the globalisation trilemma, and that structural change in Eurozone arrangements is very possible. Greece may well act as the catalyst for this change.

These changes will have myriad implications for markets and economies in Europe. And elsewhere, much will turn on the extent to which advanced economies retain the ability to function, adopting a pragmatic approach to address the conflicting imperatives of globalisation.