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The Nation-State and International Capital Flows in Historical Perspective1

Published online by Cambridge University Press:  28 March 2014

Helen Thompson
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IN RECENT YEARS IT HAS BECOME A COMMONPLACE OF BOTH academic and financial discourse that we are living in a new economic and political world in which financial globalization is destroying the economic autonomy of individual states and hence the foundations of the nation-state as the focus of political authority and the possibilities of politics. Of course, other threats to the nation-state exist — most crucially, the inability to reconcile its virtual monopoly of political authority, and the constraints it imposes on cooperation between states, with ecological causality — but it is the macro-economic crisis of the state which has captured most attention. Undoubtedly, the contemporary international financial environment makes macro-economic management an extremely difficult practical task for many states. With the daily value of foreign exchange transactions amounting to over $1200 billion, governments run the perpetual risk that their choices, or indeed those of other governments, will precipitate an unsustainable rise or fall in the value of their currency. At the same time they must, if they wish to borrow in international capital markets, pursue policies which will secure, and retain, the confidence of international investors. This, of course, creates a very considerable incentive for governments to choose policies which, in both fiscal and monetary terms, prioritize low inflation over growth and employment.

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Government and Opposition , Volume 32 , Issue 1 , January 1997 , pp. 84 - 113
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Copyright © Government and Opposition Ltd 1997

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References

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45 Milward, European Rescue of the Nation-State, p. 21.

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49 Different states used capital controls to different degrees and for different purposes. In Europe, West Germany, Switzerland and Austria deployed controls more infrequently than other states, and then usually just to control capital inflows. For further discussion see Helleiner, E., States and the Re-Emergence of Global Finance: From Bretton Woods to the 1990s, Ithaca, Cornell University Press, 1994 Google Scholar.

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63 This is not to suggest that long-term credibility does not matter in itself. For example, the foreign exchange markets did not turn against the German Social Democratic governments in the 1970s. But I do want to argue that in states which have since the early 1970s lacked long-term credibility, social democratic governments are significantly more vulnerable to capital flight than centre-right and rightist governments.

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69 There can be very little doubt that during the 1980s the ERM states benefited in monetary terms from fixing their currencies. For most of the decade Britain ended up paying an interest rate premium over most of the ERM states both in nominal and real terms because the Thatcher governments more often than not lacked counterinf lationary credibility in the foreign exchange markets. Despite its relatively poor inflation performance since the 1970s, Italy, for instance, from 1985 enjoyed lower interest rates for a given rate of inflation than did Britain. See Thompson, British Conservative Government and the European Exchange Rate Mechanism.

70 The French government turned to the single currency project after it had been thwarted first in its efforts to reform the ERM to make the burden of adjustment more equitable – the Basle-Nybourg Reforms – and then to use the Franco-German Economic Council, created in 1987, to reduce the power of the Bundesbank. Defeated in finding a bilateral solution, the French turned to the Community. See Dyson, K., Elusive Union: The Process of Economic and Monetary Union in Europe, Harlow, Longman, 1994 Google Scholar; Kennedy, E., The Bundesbank: Germany’s Central Bank in the International Monetary System, London, Pinter, 1994 Google Scholar.

71 For further discussion see Cameron, D., ‘Transnational Relations and the Development of the European Economic and Monetary Union’ in T. Rieper-Koppen (ed.), Bringing Transnational Relations Back In: Non-State Actors, Domestic Structures and International Institutions, Cambridge, Cambridge University Press, 1995, pp. 37–78 CrossRefGoogle Scholar.

72 In the French case some reform of the welfare state was inevitable, given that otherwise the social security system would ultimately go bankrupt. But the absolute urgency with which Chirac and Juppé grasped the nettle must be explained by the Maastricht convergence criteria.

73 Financial Times, 10 May 1996.

74 Financial Times, 12 September 1995; Financial Times, 11 November 1995.

75 The Economist, 9 December 1995, p. 21.

76 Financial Times, 11 September 1996.

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78 How far this is a viable practical option is a matter of some dispute. For a defence of the view from within the international financial circle itself that it is both possible and desirable see Soros, G., The Alchemy of Finance: Reading the Mind of the Market, New York, John Wiley & Sons, 1994 Google Scholar; Soros, G. with Wien, B. and Koenen, K., Soros on Soros: Staying Ahead of the Curve, New York, John Wiley & Sons, 1995 Google Scholar.