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The states we are still in

From Gerhard Schrder to Massimo DAlema, via Tony Blair and the apostles of the Third Way, Europes politicians go on and on about less government and the weak state. In the same vein, many scholars argue that the nation state is a thing of the past. But these myths do not stand up to analysis. Worse still, they conceal the new configuration of power in the international system and lend legitimacy to the antisocial policies accompanying globalisation.


For 200 years capitalism was inextricably linked to the nation state. It emerged in the form of national markets, was based on national territories and relied on the state for support. Two nation states - Britain in the 19th century and the United States in the 20th - successively formed the hegemonic core of capitalism: each of them set the technological pace, set the rules of trade and production, and imposed the constraints of the world system. According to current wisdom, however, the bond between the nation state and capitalism is now coming to an end. Globalisation is said to be making the nation state obsolete, politics irrelevant and national sovereignty an empty shell. This alleged demise of the nation state and national sovereignty is part and parcel of the universalist claims of contemporary capitalism. For the first time in history, capitalism has spread its reach to the remotest parts of the world and posits itself as a global system. Neither British capitalism in the 19th century nor even the American post-1945 version was truly universal. Today, capitalism is said to have finally broken away from its national moorings. It has become, as it were, extra-territorial, rootless, identity-less.

Hence the withering away of the nation state. Reduced to a managerial role in which it strives to cope with economic constraints that are beyond its control, it watches helplessly as the balance of forces swings towards the global markets. Within its historical borders it has ceased to be the locus of political action and identity, of social cohesion and the general interest. Beyond its frontiers it often retains only the formal attributes of sovereignty. In short, the state is supposed to have become, at best, just one among a number of otherwise private players in the international system. At worst, to have lost control altogether and to be no longer capable of influencing the course of events. This view is particularly fashionable in Europe, where unification is proceeding by way of agreed transfers of sovereignty, but it does not stand up to an analysis of the origins of globalisation. It ignores the decisive role of the state in creating the global free market paradigm. It conceals the underlying aims of social policy. And it fails to appreciate the balance of power in the international system resulting from globalisation. Though in many parts of the world the state has indeed lost control, the fact remains that the American state has not withered away in the new free market utopia. On the contrary, US hegemony and sovereignty have been strengthened in spectacular fashion. In Europe, state power has been redeployed in accordance with the logic of globalisation to achieve economic unification. While the role of the state has been redefined (at the cost of growing social hardship), there has been no automatic weakening of state power. Just as the intervention of the British state was decisive in establishing a free labour market to promote the expansion of industrial capitalism in the 19th century (see Globalisation then and now), so the necessary conditions for the emergence of a global free market at the end of the 20th century have had to be created. The capitalist world economy in the period following the second world war was by no means a "free market". It was subject to a system of monetary regulation that ensured its

stability and predictability. The state, as guarantor of social cohesion, coordinated economic, industrial and labour policy at a national level. Globalisation is tearing apart this post-war social contract. The creation of a worldwide free market is rooted in a series of decisions taken by the US over the last 30 years which dismantled the post-war international monetary system, liberalised world markets and granted the financial sector an autonomy and power unparalleled since the golden age of British finance. The industrial capitalism of the "30 glorious years" after the second world war gave way to finance capitalism. And it is the financial sector - divorced from the economic foundations on which it rests - which now sets the pace, generates systemic constraints, and imposes normative behaviour. The US began by abandoning the system of fixed exchange rates established by the Bretton Woods Agreements in 1944 (1) and introducing a system of generalised floating exchange rates. There was a strong economic motive for the decision, which the US authorities took unilaterally in 1973. They were seeking to compensate for declining competitiveness and a growing national debt by exporting the countrys macroeconomic imbalances. The floating exchange rate system provided a flexible and efficient monetary tool that enabled them to avoid the adjustments that would otherwise have been required by Americas new situation as a debtor. In a system of fixed exchange rates and gold convertibility, the US would have been obliged, like every third-world country today, to pay for its indebtedness with a relative loss of sovereignty and highly unpopular domestic austerity measures. The new system also allowed the US to maintain a high standard of living at home by dipping into the planets savings. Thanks to its political power and to the dollar, which was the worlds only reserve currency, the US was able to keep its monetary sovereignty intact. Its allies could not question American policy without destabilising the institutional fabric and the cold-war security system from which they derived undoubted

benefits. The burgeoning US deficit was funded for decades by Japan and Europe. A decisive step was taken in the 1980s with the deregulation of the US finance industry, which paved the way for its globalisation via the Wall Street banks, brokers, hedge funds (2) and pension funds that dominate the worlds financial flows. Worldwide liberalisation in the 1980s and 1990s gave the US finance industry access to the savings of the newly industrialised and emerging countries, where rates of return were very high. In short, the establishment of a global free capital market was essential for the economic and financial wellbeing of the worlds leading debtor (3). This explains the continuity of US policy on financial liberalisation, the "Washington consensus". In 1985 Ronald Reagan set out to knock down barriers to trade, foreign investment and the free movement of capital between industrialised countries, especially in Japan. His successor continued this effort though the Enterprise for the Americas Initiative, designed to support free markets and the free movement of capital in the western hemisphere. "Previous administrations had pushed for financial liberalisation principally in Japan, but under President Clinton it became a worldwide effort" directed in particular at the new area of wealth accumulation in East Asia, "seen as a potential gold mine for American banks and brokerages" (4). The US secured the liberalisation of the Japanese financial system and the revaluation of the yen under the 1985 Plaza Accords through a mixture of coercion and cooperation typical of a hegemonic power. In so doing it inflated the bubble that eventually burst at the end of the decade. However, when it came to organising the forced march towards liberalisation of the newly industrialised countries, the government set itself on a war footing. The overall plan, coordinated by the US Department of Commerce, identified 10 rising economic powers from the Pacific to the Atlantic whose economies were to be opened up, and it

called upon all government departments from the CIA to US ambassadors abroad (5). As an emanation of the most powerful Western states that make up its membership, the International Monetary Fund legitimised this strategy. While some emerging countries and ruling castes have benefited from liberalisation, this does not alter the fact that it was imposed by coercion. As Robert Keohane and Helen Milner have pointed out: "During the 1980s intense political pressure was exerted by advanced industrialised countries on developing countries to open their economies ... the national economic regulations of developing countries were called into question" (6). Hegemony has many faces. In the early 1990s Washington set itself three objectives: to maintain the global balance resulting from the end of the cold war, to ensure its technological lead and military supremacy, and to create an economic environment favourable to its own interests. For the most part, these objectives have been achieved. Admittedly, international balances are not static and hegemony does not mean absolute freedom of action. But no country or group of countries appears able to constitute a political counterweight to the US in the foreseeable future, let alone call into question its primacy in the hierarchy of nations. As political pundit Thomas Friedman puts it: "In the globalisation system, the United States is now the sole and dominant superpower and all other nations are subordinate to it to one degree or another " (7). In other words, they ought to accept Americas "benevolent global hegemony". Benevolent or not, US hegemony is a fundamental reality that conditions the international political economy. The worldwide free market is strengthening the American model, which today relies on its strong comparative advantages in the post-industrial sectors of financial and cultural services, communications, leading-edge technologies and scientific-technical production. At the same time, a normative world

culture is emerging in the realms of economic activity, social practice and private international law. And it is the US which is laying down the new groundrules, i.e. the dominant economic norms (profitability, shareholder value), the regulatory criteria (ratings of companies and states), and the legal rules (international commercial arbitration). For instance, the behaviour of the markets is shaped by the ratings awarded by two major US private rating agencies, Moodys and Standard & Poor. Acting both as judge and party, they are imposing US normative criteria on the rest of the world (8). American capital thus operates in a universe of rules which it is constantly redefining and which determine the constraints of the international system. The US itself is not subject to those constraints. Nor has the American state lost control of the markets: the Federal Reserves decisive action following the stock market crash in 1987 and the US Treasurys intervention in 1994-95 after the collapse of the Mexican peso are obvious cases in point. The state also played a crucial though belated role in 1997-98 during the Asian crisis in preventing the collapse of international banking system and ensuring that liberalisation could continue. Within this overall primary hegemony, the other Western powers participate to varying degrees in a broader pattern of western hegemony vis--vis the "third world". Globalisation is institutionalising a new balance of power between states that hardens the sovereignty of some while reducing the autonomy of the others. The worldwide free market accentuates the disparity between the centres of capital and the peripheries. The players with knowledge and power lay down the rules; the others fall into line. Trapped in an international division of labour that forces them into often harmful specialisation, the most vulnerable third-world countries are

losing the last remnants of their sovereignty, while the newly industrialised countries have become even more dependent over the last few years, as recent experience in East Asia proves (9). This is hardly surprising. "Emerging" countries have never had more than limited autonomy, and the formal sovereignty of those on the weakest fringes has always proved more theoretical than real. While the European Union is an active participant in the worldwide freemarket utopia, at the same time it constitutes a potential counterweight. Since the early 1980s European unification has been directed towards the creation of an entity capable of competing with the US, rather than opposing it. By combining forces in a larger unit, the member states have been attempting to assert their sovereignty jointly in response to globalisation, since none of them is any longer able to do so individually. From 1981 to 1983 France still believed it could go it alone. In the end it was forced to abandon its policy of growth stimulation in favour of an antisocial austerity package chillingly described as competitive deflation. It might seem that the constraints of globalisation and the demands of economic unification were now absolute and left national governments no room for manoeuvre. A closer look at the redeployment of sovereignty and political power in Europe shows this conclusion to be false. Transfers of sovereignty to the EU - with regard to monetary matters or competition law - do not necessarily imply a reduction of national sovereignty. They are not a zero sum game. Under pressure in the new international political economy, the European nation states are pooling their sovereignty to resist submersion. In other words, they are attempting to recover the sovereignty under threat at national level by relying on the strength of a larger regional entity. The EU has no central authority. Decision-making bodies vary from sector to sector. But on matters of strategic importance, the influence of the member states often remains decisive. The Council of Ministers (i.e.

the national executives of the member states), and especially the ministers of finance and economic affairs, have a privileged position among the EU institutions, at the expense of the European parliament and the national parliaments. If we consider sovereignty as relative autonomy within the inter-state system, there is little doubt that the national executives have been able to exercise it through the EU institutions, at least in key areas relating to the world economy. If there is one subject of European consensus, it is free competition, which has been raised to the status of an absolute good. There can be no doubt about the concordance of national and European policy on this matter, since many of the reforms introduced by member states at national level preceded the corresponding EU regulations and sometimes go much further than required by strict compliance with EU constraints. Frances deregulation of its financial markets in 1984, on Anglo-American rather than German lines, is a case in point (10). Popular sovereignty, on the other hand, is breached with increasing frequency by EU practices that prevent parliaments and, even more so, civil society from playing their proper role in areas of crucial concern. In the context of globalisation and European unification, we have a situation - often referred to as the "democratic deficit" - in which the redeployment of state sovereignty is being achieved at the cost of a considerable increase in the autonomy of the political authorities, barely concealed by a barrage of new regulations designed to attenuate the effects of social distress. And when it comes to social measures, the Commission is deliberately holding back on the grounds that the complexity of national systems of social protection, and the specific historical development in each member state, would make social harmonisation highly problematic if not impossible. National governments, which are closer to their citizens, are supposed to be in a better position to defend their interests when it comes to respect for social traditions and national temperament. Nevertheless, all the

national social reforms proposed or implemented are converging towards the same goal: the liberalisation of labour markets. Contrary to the new conventional wisdom, the fact that such reforms are entrusted to the member states, and are implemented incrementally, by no means indicates any resistance by national governments to the forces of globalisation. The nation states are simply playing the role which Karl Polanyi identified in the context of the first "great transformation" (see Globalisation then and now), that of "altering the rate of change, speeding it up or slowing it down as the case may be". Governments are defusing resistance by reforming step by step. But as the combined effect of the measures comes to be felt, they too are experienced as faits accomplis. There is much lamenting over the powerlessness of national governments. Yet these very governments are contributing fully to the elaboration and implementation of the new hegemonic political economy. They have chosen to participate actively, rather than simply adapt (11), and are acting simultaneously at national, regional, local and European levels to redefine the rules in line with current neoliberal dogma and practice. The role of EU institutions has been less to usurp national sovereignty than to enable the member states to pursue their national interests by other means. Because of the way it was conceived from the outset, European unification is a finality without a goal, a forced and blind march forward towards a final objective that is always receding into the distance (12). Since there is no turning back, member states cannot go back on their word. They are trapped in the machinery. In defining general policy options, they bear responsibility for rules subsequently laid down by the Commission that are binding on all their citizens and take priority over national legislation.

So far, responsibility for the consequences of the policy choices of the nation states has been largely attributed to Europe, thus protecting them from blame. But through this blame avoidance strategy, states could well end up losing control of the process. If that happened, there could be no return to the status quo ante. Left to themselves, nation states would lose the room for manoeuvre they had regained by concerted action. The only solution would be to redefine the purpose of European unification. The growth of inequalities not only raises ethical issues. In the end it always holds back economic development and undermines social cohesion. The transnational dynamics of the EU could provide an opportunity for upward social harmonisation in line with the most favourable rules and practices (on working conditions, wages, employment, social protection, etc.) That would require political determination that is currently lacking but, if it could be mustered, would set an excellent example. Failing that, the establishment of a European free-trade empire in the face of US hegemony may perhaps result in multipolarity but will certainly not lead to a fairer world.