Monday, 20 November 2017







Monday, 8 May 2017

The Anatomy of Populists’ Backstops across the EU

In her latest article for Project Syndicate, Professor Brigitte Granville scrutinized the anatomy of the populist movements that have been gaining political ground in many western countries. Published this February and drawing on the insights of various Project Syndicate contributors, the article explained how these different movements have a similar zero sum view of the world and pointed to the then forthcoming elections in the Netherlands and France as bellwethers.

Now that the results of those elections are known, it may be tempting to suppose that the victories of Trump and Brexit were the peaks of the populist wave rather than the harbingers of a general cataclysm. Nonetheless, as Prof Granville outlines in her latest OMFIF article about the French Elections, defeating populist challengers in elections might be the easy part for the mainstream politicians. The more difficult task will be to address the root causes behind the populist wave. This post builds on Prof Granville’s article by considering the evidence as to whether and, if so, how the French and Dutch elections results have stemmed the rise of populism in Western polities.

Rising Populism amidst generalized backlash

Prof Granville notes two contrasting explanations of populism’s increasing electoral appeal. One school of thought is typified by Robert Skidelsky, who argues that the distributive consequences of globalization and neoliberalism are the main fuel of populist parties. The alternative view, set out by the likes of Anatole Kaletsky, stresses the importance of cultural and ethnic attitudes – as opposed to real economic grievance – in driving populist voting intentions. Prof Granville observes that this debate is really about underlying and proximate causes: while some voters might be driven by their cultural grievances, it is economic trends – aggravated by the effects of the 2008 global financial crisis – that created the conditions for their embrace of populism.

This distinction between the ultimate and proximate causes of populism is illuminated by the research of Hobolt and Tilley (2016) on the rise of the challenger parties in the aftermath of the Euro-crisis. They see “populism” as a systematic backlash against mainstream parties. Their hypothesis is that after the financial crisis voters penalized parties that had traditionally alternated in government, while rewarding new challenger parties that had not previously formed governments and so bore no responsibility for present economic difficulties. Voter fleeing from the mainstream were drawn either to left-wing anti-austerity platforms or else to the right-wing agenda of controlling immigration and repatriating powers from the EU. The evidence for this trend of the retreat of the mainstream and rise of challenger parties is captured in Figure 1.

Figure 1: Challengers and Mainstream Parties Across Western Europe (2004-2015)
Source: Hobolt and Tilley (2016)

From Hobolt and Tilley (2016) and from Prof Granville’s summary of the anatomy of populism we can discern three overlapping but distinct phenomena: the backlash against mainstream parties, the rise of challenger parties, and the ascent of populists. There is a generalized backlash against mainstream parties that translates partially into the rise of populist and nativist right-wing options but also into increased backing for left-wing and green parties. While resurgent green parties should arguably not be categorized as populist, the question of how to categorize the newly minted or re-invigorated left challengers – such as Greece’s Syriza or Spain’s Podemos – is open to debate. Nonetheless, across Europe, all left and right “populist challengers” agree in their criticism of the European status quo, which – in different degrees – is viewed as detrimental to democracy (Dennison, 2016). For this reason, the following analysis of the Dutch and French electoral results uses a modified version of the Hobolt and Tilley (2016) categorization of Mainstream and Challenger parties focused on a European dimension.

Anti-EU populist challengers and their opponents in France and the Netherlands

Whereas Hobolt and Tilley (2016) define Mainstream and Challenger as those that, respectively, have and have not been regular participants in national governments, I believe it is important to view the populist challenge in European countries in an EU perspective. I therefore adapt the Hobolt and Tilley distinction as  between parties whose leading figures regularly become European Commissioners – or not. Applying this categorization to Dutch and French results provides relevant insights into the decline of the EU mainstream and the rise of challengers and populists. This framework allows us to gauge the state of the contest between those political forces challenging and defending the European status quo. Figures 2 and 3 apply this categorization to the results of Dutch national elections in 2012 and 2017.  

Figure 2 classifies as mainstream parties those that are members of the following groups in the European Parliament: the Alliance of Liberals and Democrats European (ALDE), the European Popular Party (EPP), the European Conservative Reformists (ECR) and the European Social-Democrats (SD) – and classifies other parties represented in the European Parliament as challengers, and other national parties without European representation as unaffiliated.  The changes from 2012 to 2017 reflect the backlash against mainstream parties described by Hobolt and Tilley (2016): the challengers’ vote share increases and the share of governmental parties decreases. The analysis should not end there, however. We can also observe important changes in the relative vote shares within these broad groupings – and this development should be incorporated into any overall analysis of the French and Dutch elections.

Figure 3 shows these intra-block movements in vote shares – as between the left, right and green components of, respectively, the challenger and the mainstream camps. Starting with the unaffiliated parties, we can observe a slight increase in their share. The principal interest, however, lies in the changes of fortunes on the right – both in its mainstream and challenger versions. On the challenger right, Geert Wilders’ Party for Freedom (PVV) aimed to build on the victory of Donald Trump by becoming the beachhead of right-wing populism in continental Europe. Indeed, opinion surveys pointed towards the possibility that Wilders’ PVV would be the single party with the highest vote share – even if the highly proportional Dutch electoral system and the resulting need to form governing coalitions practically guaranteed his exclusion from the Government. Nonetheless, the increase in the PVV’s vote share was smaller than expected and the party finished in second place. It should be noted that this increase has not had an important effect on the mainstream right parties (those affiliated with the EPP and the ECR) which maintained or increased their vote shares. The mainstream centre – where we find the two parties affiliated with the ALDE – saw only a slight decrease in its overall share. Nonetheless, the intra-block equilibrium has been considerably altered with a steep rise in the share of votes of D66 and a considerable decrease in the share of votes of the VVD.  This categorization also illustrates the difficulties of defining national parties with reference to their European alliances. While both are members of the ALDE, Mark Rutte’s VVD has responded to Wilders’ rise by tacking towards a more critical stance on immigration and the EU while the D66 brooked no compromise with Wilders’s nationalism, which it directly confronted with a platform of liberal and strongly pro-EU policies. Furthermore, while the successful CDA is a socially conservative group that campaigned on traditional Dutch values, it also has an important centre-left current. Overall, voters rewarded the incumbent VVD-led coalition government; but while the smaller coalition members did well, the VVD’s main coalition partner – the Dutch Labour Party (PvdA) was crushed, with its vote share falling from 24.08% to 5.07%. Voters deserting the PvdA for left-wing challengers had a marked preference for Groenlinks, the radical green party whose leader also built his campaign in explicit opposition to the anti-immigrant positions of Wilders.

This evidence from the Dutch election result is now complemented by the fascinating voting data from the first round of the French presidential elections. Figure 4 shows this French result according to the same fine-grained categorization applied to the analysis of the Dutch elections – with this French analysis comparing not just with one but four previous elections.  

In the French case shown here, the classification has some further refinements. It includes mainstream centre parties (those affiliated ALDE), mainstream right wing parties (those affiliated with the EPP), and mainstream left wing parties (those affiliated with the European Social-Democrats). We also find the now familiar categorization of left, right, and green challengers, to which Figure 4 adds two new classifications of left and right challengers not affiliated with European partners. It is interesting to note how the unaffiliated challengers have steadily decreased across the last decade, pointing towards the rising importance of the European dimension in French politics: even the most virulent critics of the EU are increasingly organized at European level.

The most striking feature of this first round result of the French presidential election is the relative victory of the right challengers, comprising Front National and “Debout la France” a right-wing party affiliated with the Euro-sceptic European Parliamentary Group known as the “Alliance for the Direct Democracy in Europe” and whose leader endorsed Marine Le Pen’s FN in the second round. Those two candidates’ combined vote share cautions against complacency on the success of a pro-EU fightback. Despite the avoidance of a Front National victory in the second round run-off, those right-wing Euro-sceptics got more votes than anyone category. Similarly striking is the rise of left-wing anti-EU challengers. Figure 4 shows how this parallel advance of left and right anti-European challengers dates back to 2007 – and is mirrored by the decline of the mainstream centre-right and centre-left. In the case of the Parti Socialiste, discredited by the Hollande Presidency, that decline has become a collapse; but the mainstream right has also been on a constant downward trend since 1997 (with the sole exception of the 2007 election). These trends are consisted with Dutch experience and support the “electoral backlash” framework of Hobolt and Tilley (2016).

The newly elected French president, Emmanuel Macron and his “En Marche!” movement is difficult to classify. In the Hobolt and Tilley (2016) framework, Macron would appear to be mainstream, since he was a senior member of the Hollande Government. But his newly minted platform and public break with Hollande might make him seem more of a challenger. Either way, he has made a point of leading his charge from the centre – “neither left, nor right”– thus an appropriate classification would be “mainstream centre”, especially in the light of the formal alliance between En Marche! and François Bayrou’s Democratic Movement. This positioning is similar to the Dutch D66 party that made significant gains on a platform that emphasized the contrast between their style and policies and the new right populism. Such similarities improve our understanding of the forces capable of mounting effective resistance to populism.

A hypothesis: The realignment of European Identities

In their latest book, “Democracy for Realists: Why Elections Do Not Produce Responsive Government”, the political science professors Christopher Achen and Larry Bartels make a powerful case against understanding electoral contest through the “folk theory of democracy”.  As they describe it, the folk theory of the democracy assumes that voters elect representatives closer to their preferences and punish those that deviate from these preferences or, in the case of incumbents, those that have performed badly in office (“retrospective voting”). These authors challenge this view of highly rational voters. They do not deny that retrospective voting sometimes exists, and Figure 1 above shows the evidence of such retrospective punishment – especially for failing to deliver economic results. But the authors also argue that again and again voters punish elected representatives for events that are clearly beyond those representatives’ control or even completely random, such as dry spells or even shark attacks. In place of strong preferences that shape voters’ choices, Achen and Bartels emphasize the importance of social ties and group identities, describing how through the Great Depression the re-configuration of American politics was result of shifting group allegiances rather than a shift in preferences.

This vision of democratic politics as being based on power relations between groups goes a long way to explain the rise of right populism. In her article on the anatomy of populism, Prof Granville stresses how the populists have capitalized on a widely-shared sense that “the “establishment” has subordinated citizens’ interests to cosmopolitan goals such as globalization, immigration, and cultural diversity”. She refers in this context to the insight of the political thinker Jan-Werner Muller into the populist imagination as pitting innocent and hard-working people against a corrupt elite. We are left with a situation akin to the Great Depression, in the sense that the aftermath of the 2008 Great Recession has produced a realignment of group allegiances along the lines described by Achen and Bartels (2016). A prominent feature of this realignment is the traditional centre-left voters shifting their allegiance towards the rising right populism. In fact, summarizing the research on Trump and Brexit voters we can note similar characteristics: they are older, relatively less educated and tend to live in small towns rather than cities; and in their cultural attitudes, they are suspicious of migrants and minorities and display relatively authoritarian leanings (Martorell Cruz, 2017). Some of these new cleavages, such as the clash between relatively educated and relatively uneducated voters or small town vs big city dwellers are clearly reflected in the recent French and Dutch electoral contests
This notion of politics as the organization of group identities might also explain the rise of the new movements opposed to populism – in France, En Marche!, and in Netherlands, the D66 and the Groenlinks. While we should be cautious about generalizing from recent elections in just two countries, a plausible hypothesis is that these new parties are the mirror image of the populist identity: young, educated, cosmopolitan voters that are shifting from centre-right and centre-left parties to the new centre parties that present themselves as the vanguard of the fightback against populism. These political forces offer a fresh image, breaking with traditional party systems (even if Macron himself is the ultimate product of France’s elite selection mechanisms). This provides them with a whiff of outsider-ness that allows them to escape the generalized backlash against mainstream centre left and right. Furthermore, the fact that they are economically middle-of-the road or focused on environmental issues, allows them to project their opposition to populist agendas. If populists are re-aligning politics by re-activating relatively conservative national identities, the new opponents of populism are re-activating relatively progressive cosmopolitan and (in the case of the EU) pro-European identities.

Last, it is important to consider the role of political institutions. We should note that populists and their newly minted opponents each command no more than a quarter of the vote in both France and the Netherlands. Even in a period of political uncertainty and realignment, the right-left divide retains important explanatory power. The stance of leaders of the left- and right-wing camps will determine the fortunes of the populists. In the US, Trump won the electoral college because the system of party primaries in the presidential election process pushes the parties to rally around the primary winner. Although the new Trump voter might be an old democrat voter from the rust belt, the base Trump voter that ultimately secured his victory is a typical republican voter prepared to support whoever the party had nominated (Martorell Cruz, 2017).  In contrast, the French two-round presidential election incentivizes candidates to take more extreme positions in the first round and rally to the centre in the second round. We can observe this with the defeated François Fillon strongly backing Macron in contrast with the attitudes of mainstream Republicans having to make a single choice between Trump and Clinton. According to IPSOS exit poll, 48% of Fillon’s voters voted for Macron in the second round and only 20% voted for Le Pen. It is not difficult to imagine that this redistribution of the vote, and the race for the presidency after the 1st round, would have been substantially different had Fillon and Les Républicains campaigned against Macron as the Republican Party campaigned against Clinton.

We are now moving into a period in which (depending on the countries concerned) both populists and their new-style opponents are moving from winning elections to governing. As Prof Granville stresses, populist economic governance might have delayed consequences but ultimately might face a reckoning. The champions of the new centrist reaction to populism might be able to rally anti-populist majorities but, as Professor Granville points in her “Anatomy of Populism”, unless they are able to come up with effective solutions, the populist challenge might prove to have been merely staved off rather than defeated.

Continue Reading on the determinants of Populism on:

Granville, Brigitte (2017). “The Anatomy of Populism” Project Syndicate.

Key References:

Wednesday, 3 May 2017

Can non-cognitive interventions improve academic outcomes? The first CGR brown-bag seminar presents experimental evidence on this question

The Centre for Globalisation Research will launch on May 14th its ‘brown-bag’ seminar series, which seeks to discuss the new research of CGR members. The workshop will be inaugurated by Prof Pedro Martins who will present his latest CGR working paper: “(How) Do Non-Cognitive Skills Programs Improve Adolescent School Achievement? Experimental Evidence”.

The question of how to improve the academic achievement of the youth lays at the core of most public initiatives on education. Fortunately, we can go beyond our own personal preferences and received knowledge to assess the success and better implementation of these initiatives. There is an important trove of academic evidence evaluating educational programs and interventions that deliver important lessons, such that early years’ investment goes a long way to reduce the differences in cognitive development or that reduced class sizes might be beneficial. With his latest working paper, Prof Martins adds to this literature, not only assessing the overall impact of non-cognitive interventions but also offering practical insights about how this type of interventions can deliver better results.

Prof Martins evaluates the program “Mediators for school success” shorthanded EPIS – which aims to reduce early school leaving and promote student achievement and is delivered by the organisation of the same name, “Entrepreneurs for Social Inclusion”.  EPIS screens and selects 7th and 8th year grade pupils (around 13-15 years old) that are most at risk of failing or dropping out. Students selected to participate in the program are then monitored by a mediator that assigns a tailored set of individual and small-group intervention to help the students improve their motivation, self-control, problem-solving skills, or study competences, among others. The role of the mediator is an essential part of the program, that seeks to promote a stable relationship between them and the students.  Mediators implement the program’s interventions, meet the students in a relatively frequent basis, and keep in contact with relatives and teachers of the participating students.
The research exploits the EPIS longitudinal records not only to evaluate the program, but to assess who is most benefited by it and how EPIS’ promotes success. In particular, the study draws on data from a randomised controlled trial at the school level that followed 53 schools during the 2014/15 and 2015/16 academic years, observing a total of 2,959 students, 648 of which were assigned to a control group.

The study finds that program assignment lead to an increase of 4.8 percentage points over the two years and that program delivery has an effect of 9.9 percentage points. Given the baseline probability of 45%, the effects above can be translated into relative increases in the probability of progression of 11% and 22%, respectively. Figure 1, below, summarizes the causal impact of EPIS in the fully specified model in the probabilities of progression (i.e., non-retention) across the two years and considering other relevant outcomes too.

As we can observe, and Prof Martins points in his research, participating in the EPIS program not only increases significantly the chances of student academic progression but also has a positive impact on Portuguese, Mathematics, and English grades. However, the fact that EPIS has a positive impact does not mean that all students are impacted equally, as we can observe in Figure 2 EPIS tends to have greater impact on girls and older students.

In this respect, the study finds that the mediator is of great importance to EPIS’ success. As the study is also interested in understanding in greater detail the reasons for the program success, Prof Martins explores the role of the different characteristics of the mediators on the students’ success. While Figure 1 outlined what was the impact of EPIS and Figure 2 to whom this impact benefited most, Figure 3 outlines how this benefit is achieved.

As we can observe from Figure 3, most of the individual traits of the mediator bear an insignificant impact in terms of EPIS’ overall results. Nonetheless, there is one important exception: Same gender mediators increase considerably the chances of their students’ progression. As Prof Martins explains, this finding is consistent with a small, emerging literature that discusses the role of the teacher’s gender in pupil’s academic achievement.

In his latest CGR working paper, Prof Martins shows the potential of careful empirical analysis to evaluate how and why public or private interventions succeed or fail. In this case, the study also furthers our understanding of how non-cognitive skills impact upon students’ academic achievement. As Prof Martins concludes, his study not only supports the importance of initiatives that enhance soft skills but also the importance of proper design, implementation, and monitoring of these programs.

Wednesday, 5 April 2017

Economics or Identity? Professor Brigitte Granville latest article explores the reasons for the rise of the “Front National” in France

The upcoming French elections are the new bellwether of populist politics. In the two-round presidential contest, polls point to Marine Le Pen making it into, but then losing, the second round run-off. Nonetheless, reflecting the growing appeal of the National Front (FN), Ms Le Pen is poised to do considerably better than her father – Jean Marie Le Pen – did in 2002, when he got through to the second round against the then incumbent, Jacques Chirac. In her latest article for the OMFIF bulletin, “Unemployment spurs Le Pen Phenomenon”, Professor Brigitte Granville – CGR Director – argues that to explain the strength of the FN, the poor performance of the French economy matters even more than immigration and other issues touching on identity politics.
The OMFIF, founded in January 2010, is an independent platform for dialogue and research on world finance that serves as a non-lobbying network for promoting public and private sector interaction across law and economics, with the aim of fostering exchange of information and best practices. “The Bulletin” is OMFIF’s monthly publication, featuring in-depth news and expert commentary on the financial industry and capital markets. Prof Brigitte Granville latest contribution can be found in the April 2017 Bulletin.  
In support of her contention that economics is the key to the FN’s popularity, Prof Granville notes the contrast between Ms Le Pen and her political counterpart in the Netherlands, Geert Wilders. With a similar anti-immigration platform but comparatively little emphasis on the economy, Wilders only obtained 15% of the vote in last month’s Dutch Elections, while Le Pen is poised to win around 25% of the vote in the first round of the French presidential election on 23 April. Prof Granville also points to the growing popularity of the hard leftist Jean-Luc Mélenchon – currently out-polling Benoît Hamon, the candidate of the centre-left Socialist Party (PS) – as a reflection of economic problems, since Mélenchon has no truck with identity politics. At the same time, she highlights the linkages between these two drivers of protest votes – i.e. economic problems, above all unemployment, and tensions related to immigration. She highlights how strongly the dysfunctional labour market has contributed to the failed integration of immigrant communities.

A parallel theme of Prof Granvillle’s article is the extent to which voters are repelled by the oligarchic features of France’s elite and policy-making processes that blocks change, entrenches high unemployment, and propagates mistrusts towards free markets. This lack of trust is a root cause of excessive regulation and corruption. The overall outcome is France’s poor economic performance. 

Source: Original article published in the April 2017 edition of “The Bulletin”  OMFIF’s monthly publication  

These points in Prof Granville’s OMFIF article draw on her latest CGR working papers, in particular “EliteThickets and Institutions: French Resistance versus German Adaptation to Economic Change, 1945-2015” outlining how France’s elites are shaped by homogenous education and career paths, forming a tight-knight thicket that monopolises power across the state and business spheres.

Figure 1: Career trajectories across France's Elite Thicket

The above exhibit captures the career trajectories of the 77 directors that sit on at least two of the CAC-40 supervisory boards. Their careers paths are divided between business and state service (a sub-group of the latter being “Enarques”, graduates of the elite civil service school, ENA). Graduates of ENA and other such Grand Écoles start their careers in the upper echelons of the civil service before in many cases moving on to senior management positions in the country’s top companies, many of which have important state shareholdings. Figure 1 shows the extent to which this Elite Thicket is present on the boards of corporate France, with 35 of the 77 directors holding more than one directorship having started their careers in the civil service.  As Professor Granville points in her OMFIF article:

“This group – formed from a web of connections and vested interests among no more than a few thousand individuals– is resistant to external input. Instead, policy initiatives emanate from the rigid world view of this hermetic core

We can find a perfect example of an Elite Enarque in the current presidential election front-runner Emmanuel Macron. Macron is a perfect product of France’s elite selection processes: An ENA graduate who started his professional career as an inspecteur des finances, and then transitioned to the private sector as an investment banker at Banque Rothschild. There he gained the nickname of the “Mozart of Finance” after successfully advising Nestlé on acquiring a unit of Pfizer. Nonetheless his main asset was not deep technical knowledge but a well-maintained rolodex. Their contacts as an ENA graduate where key in getting the job at Rothschilds, with Alain Minc – a fellow former inspecteur des finances (the inner core of the elite, reserved for top ENA graduates) – helping to secure his interview, at the banks and his subsequent successes as an investment banker. The Financial Times notes the sharp contrast between his promises to eliminate the privileges of “insiders” and his professional trajectory.

Thus, if Macron defeats Le Pen, the relevant question is whether he will be successful in reforming France’s economy and institutions. The FT points out that while he has vowed to crack down on insider privileges and break up the bipartisan political system, he does not question how French elites are selected and recruited. Prof Granville stresses the importance of reforming these mechanisms, warning about the risk of complacency, as she concludes:  

“. . . in the event of Ms Le Pen’s defeat in the second round-off on 7 May, the sense of relief felt by the establishment and media will prove hollow. The underlying realities in France will make it impossible that the probable victor Emmanuel Macron, who is in practice the continuity-candidate from François Hollande presidency, could govern any more effectively than his dismal predecessor”

Further Reading

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Thursday, 23 March 2017

Prof Granville on the “Lessons from the Collapse of the Ruble Zone and the Transferable Ruble System”

The consequences of Brexit – especially at pivotal moments in the process like the UK triggering Art.50 at the end of March 2017 – will command attention not only in the UK and the rest of Europe but also among all those around the world looking at Europe with interest and concern. While the implications of Brexit should not be downplayed, the whole subject risks becoming a distraction from the even more important question of the sustainability of the Euro. The deep effects of the chronic crisis of the Eurozone – including, arguably, contributing to Brexit – are generally overlooked, with the economic and political tensions of the Euro only resurfacing periodically when the Greek government needs to access new tranches of the bailout agreement. The fundamental tensions remaining largely unresolved. Since the Eurozone is a source of major potential shocks to the global economy and financial system, the reasons for the failure to resolve those tensions deserve continued close scrutiny.

In her latest article, Professor Brigitte Granville – CGR Director – summarizes how the experience of the short-lived and troubled Ruble Zone (RZ) in the early 1990s illustrates the tensions that result from monetary unions between sovereign states. As Prof Granville explains, the RZ came into life with the signature of the Treaty on Economic Union in October 1991 between eight of the fifteen states that emerged from the collapsing USSR. That agreement was followed on 21 December 1991 by the establishment of Commonwealth of Independent States, which adopted the rube as its common currency. The RZ lasted until early 1994. Prof Granville draws on her previous research to extract four important lessons about the challenges of creating and managing currency unions between sovereign states:

1st lesson. Monetary Union can offer opportunities to extract rent and avoid painful reform.  Prof Granville shows how in the RZ, former soviet republics (FSRs) sought inflationary bailouts from Russia as a way to avoid or postpone necessary domestic reforms. In response, Russia tried to establish a rules-based transfer union, which, however, was compromised by the inadequacy of its own domestic economic reform efforts.

2nd lesson. Economic rationales for monetary union are often spurious: Prof Granville demolishes the main stated economic rationale for establishing the RZ – namely, that FSRs would have no use for each other’s national currencies. She points out that free trade and free prices would have been sufficient conditions to support beneficial trade in the FSU area. As it happened, once national currencies were introduced, inter-republican trade decreased from 57% of the FSU countries’ aggregate external trade in 1992 to 33% in 1997; but resource allocation improved. The main problem was not trade between FSRs but access to western markets. That access was constrained by Western governments’ protectionist restrictions imposed on textiles, steel, aluminium, coal, uranium and tech. Those restrictions penalized the external trade of the FSU to the tune of around US$1 billion.

3rd lesson. Monetary Unions may dissolve when economic realism prevails in the core:  Tensions between FSRs and Russia came to a head with Russia’s unilateral decision to withdraw pre-1993 ruble banknotes from circulation, forcing the FSRs to choose between introducing their own currencies or agreeing to a “New Style Ruble Zone” (NSRZ). The NSRZ agreement, signed in September 1993, envisaged complementary bilateral agreements to harmonize economic policies between Russia and the NSRZ members: Kazakhstan, Uzbekistan, Tajikistan, Belarus, and Armenia. The ultimate – but unrealized – goal was to achieve convergence of legislative and regulatory mechanisms by the end of 1994. The NSRZ was a fraught union, shaped by the clash between NSRZ members, which were pressing to obtain cash in new ruble notes, and the Russian government, which was reluctant to deliver unless economic convergence was achieved first. Finally, Kazakhstan and Uzbekistan introduced their own currencies in November 1993 with the rest of the NSRZ members soon after following suit (the only exception being Tajikistan, which at that time was embroiled in civil war).

4th lesson. The mirror image of lesson three: Prof Granville, identifies the core problem of monetary unions as the reality that political unity is the necessary basis for a single currency. It follows that at some point, countries at the core and at the periphery must face a trade-off between intolerable economic consequences or political integration. In the case of the Ruble Zone countries on the periphery decided to opt out of the monetary union rather than to sacrifice their sovereignty.

This last lesson is applicable to the fundamental tension in the Eurozone, as the periphery is forced to choose between sovereignty and democracy as the price of monetary integration. Prof Granville’s insightful analysis of the development and demise of the Ruble Zone is a reminder that, sooner or later, Eurozone members must face a stark decision between furthering political integration or dismantling the single currency.  

Below you can read Prof Granville full article: 

Further reading:

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