Richard Eccleston, Rick Krever and Helen Smith explore the future of federalism in the 21st century.
The two seismic political events of 2016, Brexit and the election victory of Donald Trump, have raised significant questions about whether the political settlements that the academy has often taken for granted are as stable as once thought. In The Future of Federalism: Intergovernmental Financial Relations in the Age of Austerity, we examine the political and economic dynamics of a diverse range of federations and federalizing states around the world in the aftermath of the event that triggered populist responses – the financial crisis of 2008 and subsequent austerity policies. The ‘new populism’ that Brexit and Trump’s victory embody suggests that the grievances of significant numbers of citizens in federations are more deeply felt than a simple reaction to budget cuts or higher tax burdens – rather, the consensus seems to be that there is widespread revolt against marginalization and governance by ‘elites’. These events beg the question of what the future of federalism may be in the Trump era of polarization and populism? As our book explains in detail, the purpose of the federal project is to unite culturally, economically, and politically diverse states for the common welfare. Yet, if the current wave of identity politics and growing regional, social and economic polarization endures, is this project feasible, or are federations already straining under the economic and political pressure of the post-financial crisis era likely to collapse?
Several lessons drawn from this volume shed some light on the future of federalism in the 21st century. First, it is clear that in many cases horizontal tensions within federal systems are growing and marginalized communities and regions who feel as though they have been left behind and neglected by national governments are make their dissatisfaction felt at the polling booth. The growing political divide between urban-regional or industrial-knowledge economy voters in countries from the United Kingdom to the United States is increasingly apparent. The experiences of Spain, Australia, and the United Kingdom in particular also illustrate the resentment that can build when poorer regions in a federation are perceived as ‘free-riding’ on the economic strength of wealthier regions. The key conclusion for anxious observers in other federations is that greater efforts must be made to avoid the perception that some groups in society are profiting at the expense of others; for example, our case study of the German federation demonstrates that this problem can be avoided through constitutionally entrenched safeguards. Of course, whilst every society is and always has been characterized by various degrees of inequality, the events of 2016 demonstrate that the traditional ‘firewalls’ that have prevented this inequality manifesting in populist outcomes may no longer stand.
Each federation faces a unique set of challenges born of its particular cultural, economic, and institutional compromises
The second point is that, despite the common trend that severe inequality breeds resentment, each federation faces a unique set of challenges born of its particular cultural, economic, and institutional compromises. As our volume makes clear, federal governance is evolving in the aftermath of the crisis but in many and varied ways, reflecting diverse economic, political and social circumstances. For example, the Italian federation continues to be characterized by the historically longstanding tension between the wealthy North and the poorer South which was not ameliorated by its federation; conversely, Swiss federalism appears relatively stable, despite its financial sector being reasonably strongly affected by the crisis. It appears that comparative equality between the constituent units of federations can act as a buffer to political events that otherwise engender a surge in populism.
Consequently, it would be a mistake for policymakers in federations beyond the US and the increasingly vulnerable union that is the UK to assume that their nations are on an inevitably similar trajectory. In particular, the strength of democratic representation and constitutional guarantees of equality seems to be correlated to a degree with the electorates’ satisfaction with federalism as a form of governance. The US notably lacks any significant equalizing mechanism akin to Australia’s or Germany’s, exacerbating economic inequality between the wealthy coastal states and the poorer rural and industrial center – the latter being the driving force of Trump’s success. Similarly, a perception by rural English voters that their voices were not being heard in Westminster and Brussels is widely attributed as the determinative factor in the unexpected ‘Yes’ vote in July. The detailed case analysis in our book reveals that the stability of federations is linked to how well the design of the federal governance structures represents often significantly diverse economic and social interests. Thus, the extent to which the current wave of populism is likely to impact other federations beyond the UK and the US may be determined by the institutional design that long predated the current political climate that began to emerge with the financial crisis and culminated in the recent political upsets.
Richard Eccleston and Helen Smith are based at the Institute for the Study of Social Change at the University of Tasmania and Rick Krever is based at the Business Law & Taxation Department at Monash University, Australia. This post first appeared in the Elgar blog.