The ongoing financial crisis has exposed a paradox underlying the developed world's progress through the 20th and early 21st centuries.
We have more globalisation, to the extent that savings and investment flow across borders much more easily.
We also have less globalisation because, as the 20th century progressed, empires collapsed and were replaced with a proliferation of nation states. Put another way, free markets have given us more globalisation but political re-arrangements have resulted in less. The clash between these two opposing forces is one reason why we've ended up with so much economic instability.
For individual nations, this is an awkward result. Should our leaders respond to market forces or, instead, should they be more carefully attuned to their local political antennae? If markets mostly work well, there is a strong case for arguing that short-term local political concerns should be put to one side.
Markets don't always work well, however. As the economic crisis over the last few years has evolved, it's become increasingly obvious that political leaders have grave doubts over whether markets can provide all the answers. That leaves them with three possible approaches. First, they can try to identify market failures and then attempt to correct them. A second option is to throw sand in the works. If unfettered free markets lead to damaging economic and financial instability, then simply interfere to stop it.
The third alternative is to remove the influence of markets over economic decisions altogether. Too often, emerging nations attempted to live beyond their means, becoming addicted to levels of debt they could never hope to repay. The inevitable crisis eventually hit both domestic debtors and international creditors. Nevertheless, there have been plenty of occasions when the ability to print money has provided a useful safety valve for countries.
If inflation rises and interest rates don't respond immediately, the government debtor benefits at the expense of the domestic creditor. If, instead, the currency falls, the domestic government debtor benefits at the expense of the foreign creditors.
These actions can be described as “stealthy” defaults.
Within the eurozone, however, the option to provide stealthy defaults simply doesn't exist. Nation states may still be sovereign in many respects, but their options in the wake of a major debt crisis are limited to three: austerity, bailout or default.
When the eurozone was first formed, investors appeared to believe that only the first two of these three were possible.
A more radical approach would be to augment the eurozone's monetary integration with a strong dose of fiscal integration, shifting the balance of power away from markets towards policymakers. We take this for granted within countries: savings flow from north to south Italy, co-ordinated through Rome, and across the United States.
In both cases, the distribution of resources rests on political decisions. Could the same happen across countries? Yes, but only if each country recognised the benefits of pooled fiscal sovereignty, and chose to sacrifice its own sovereignty for the “greater good”. That's still a long way off.
Nevertheless, the euro can be seen as “work in progress” in trying to overcome the strains associated with the paradox of globalisation. Markets may have dominated over the last three decades but there can be no doubt that politicians are fighting back.