Economy & Markets

2020-06-11 Donato Masciandaro

Bank and Country, the Two Faces of Financial Nationalism

In the post-COVID-19 world, what role should the state have in the banking system? There are two opposing views: liberal nationalism, and sovereign nationalism. It also needs to be recognized that any government, whether liberal or sovereignist, can make a choice while principally seeking consent. In the coming months, the concrete choices made by the Conte government and the Parliament could tell us the position of the Italian political class at this time.

In the months that have just passed, in advanced countries the banks have been the chain of transmission of urgent policy interventions, designed by governments to sustain the aggregate demand for goods and services. Time will tell us what strategy is most effective. Let’s look ahead, though. To do so, like Giano, we will concentrate on what happened in Italy before the pandemic recession began. In at least two cases - that of the European Stability Mechanism (ESM) and that of the Banca Popolare di Bari - the Italian political class has been faced with a question that will certainly arise again in the coming months: what should the state’s role be in the banking system? The question does not regard only Italy, and there are two opposing views on the international scene: liberal nationalism, and sovereign nationalism. Then, there is the common element of governments seeking consent. The concrete choices made by the Conte government and the parliament could tell us the position of the Italian political class at this time.

In almost all of the advanced countries, starting with the onset of the great crisis of 2008, national governments - although with different times and methods - had to intervene to avoid the risk that the bad conditions of specific banks could trigger a systemic macroeconomic crisis of their respective banking systems. Moreover, they had to decide the national attitude towards the design of banking rules, especially - but not only - within the perimeter of the European Union. Two views, in opposition to each other, can be identified while starting from a common assumption: the stability of the national banking system is a public good that politics has the duty to safeguard.

On the one hand there is liberal nationalism, in which the adjective “national” has only a general meaning, over a medium to long-term horizon, and is pursued using the instrument of efficiency. In this view, the political decision-maker is considered a subject that maximizes the public good, having an extended time horizon and using the tool of seeking competitiveness in all markets, including that of banking. The pillar of liberal banking nationalism is that a structurally efficient and stable banking industry ends up providing a positive contribution to the country, since it creates value for all of the subjects involved: savers, shareholders, bankers and bank employees, and taxpayers. Efficiency is measured by the capacity to create value, and is based on the assumption that none of the subjects cited above are subject to discrimination, or have undue privileges. The principle of equal opportunity applies. If the economy is open, and thus multiple countries interact with each other, there are two principal consequences of that perspective.

In designing the rules, with the growth of the number of liberal governments, the definition of rules consistent with the interests of citizens can also be shared at the international level: liberal nationalism tends to be globalist, since the criteria of efficiency, if declined in general and systematic terms, can be shared. Taking as an example the principle of the comparative advantages of specialization, its shared application is good for all of the countries that apply it. A further reflection on the liberal approach is that the regulatory and control authorities - like central banks - must be independent, precisely to guarantee a banking policy oriented towards the long-term and based on the search for efficiency.

Applying the perspective of liberal nationalism to the matter of the ESM, the question then becomes: how to design an efficient insurance mechanism between countries that can be both the insurers and the insured, taking into account the characteristics of both public and private debt, i.e. bank debt? With regard to the role of the state in bank rescues, the consequence is that public intervention must be limited from all standpoints. In particular, even the potential entry of the state as a shareholder must be executed by extraordinary means, involve limited amounts, and have only a temporary horizon. The example to learn from is Sweden, which in the 1990s had to deal with the management of its banking crisis.

The liberal and global vision was thrown into crisis by the great crisis of 2008, which led to the emergence - or better the re-emergence - of sovereign nationalism. An empirical analysis relating to 20 advanced countries in the period between 1870 and 2014 shows that financial crises tend to push voters away from traditional parties in power, favoring consensus for more extreme positions. The crisis of the liberal vision could occur today as well, if we think of the criticisms aimed at the process of globalization.

In sovereign nationalism, the adjective “national” is applied in a selective and discriminatory way - the national subject must be preferred to a non-national entity - and in any situation, also in regard to the specific economic situation. Thus the sovereignist policy tends to have both a redistribution effect and a short-term horizon. As the discriminatory nature is the qualifying element of the sovereign policy, depending on the situation, the banking perimeter can include domestic depositors - or a part of them - as well as shareholders, or also workers and managers, or the business - i.e. the bank - as a whole, or the supervisors themselves. The latter, however, are not to be independent, as their actions must be guided by the government in power, the only subject that from time to time may determine what and where there are national interests to protect. The more a sovereignist government intends to implement a policy that must be redistributionist in the short-term - including banking and monetary policy - the more likely it is that it won’t appreciate an independent bureaucracy, including central banks. Between 2018 and 2019, in the countries in which the governments were considered sovereignist - the United States, Italy, India, and Turkey - there were conflicts between the executive and the central banks. The action taken by the President of El Salvador last February, based on the account given by the Financial Times, can be defined as a sovereignist act in the banking and financial perimeter: in order to have the Parliament approve a loan of 109 million dollars to fund a national security plan, the President entered the Congress with armed troops.

In banking regulation, with the growth of the number of sovereignist governments, it will be hard to identify shared international rules, given that each government will adopt as a priority the immediate interests of one or more categories of consumers and/or domestic producers. Sovereign nationalism tends to coincide with isolationism. For example, the choice of the Hungarian government not to join the European mechanisms of unified banking oversight has been interpreted this way. Architectures such as that of the ESM are always interpreted as zero sum games, in which there are necessarily winners and losers, such that with the growth of sovereignism the probability that those international architectures can be constructed tends to zero. At the same time, in bank rescues state intervention must be maximized, because only the political executive can understand which national interests are to be defended. The entry of the state as a shareholder tends to follow an ordinary procedure, with the maximization of amounts, and a permanent time horizon.

Lastly, both the liberal and the sovereignist approach must be integrated with the political analysis of costs and benefits; because it is not necessarily true that the government in power will maximize collective well-being in a long-term horizon. To the contrary: banking nationalism, whether it is liberal or sovereignist, is defined by the politicians in office at a given time, whose goal may simply be to maximize support.

Introducing the perspective that the primary goal of a politician is to enter - or remain in - government makes the evaluation of what happens undoubtedly richer, although not necessarily simpler. Let us take the example of the debate over financial rules between the United Kingdom and the European Union in the post-Brexit period. The English Prime Minister Boris Johnson presents himself as a champion of liberal nationalism, in a battle with the Brussels bureaucracy. On the other hand, in recent months the European Commissioner Valdis Dombrovskis has pointed out the risk that the United Kingdom wants to move forward with financial deregulation that is contrary to the liberal principles that inspire the actions of the European Union. In short: each accuses the other of not being liberal. The same could be said about the attitude of the Trump administration towards the need to harmonize banking rules with the international Basel criteria. In Italy, in both the government and the Parliament, there are parties that follow liberal nationalism and sovereign nationalism; at the same time, the risk of political instability is always just around the corner. We will see.


To learn more:

S. Classens, “The financial crisis and financial nationalism,” in S.J. Evenett, B.M. Hoekman, O. Cattaneo (editors), Effective Crisis Response and Openness: Implications for the Trading System, London, Centre for Economic Policy Research-CEPR, 2009.

I. Colantone, P. Stanig, “The surge of economic nationalism in western Europe,” Journal of Economic Perspectives, 33(4), 2019, pp. 128-151.

M. Funke, M. Schularick, C. Trebesch, Going to Extremes: Politics after Financial Crisis, 1870-2014, CESifo Working Paper Series, 2015, n.5553.

D. Masciandaro, F. Passarelli, “Populism and central bank (in)dependence,” Open Economy Review, September 10, 2019.

K. Mero, D. Piroska, “Banking union and banking nationalism,” Policy and Society, 35(3), 2016, pp. 215-226.

S. Tarlea, S. Bailer, H. Degner, L.M. Dellmuth, D. Leuffen, M. Lundgren, J. Tallberg, F. Wasserfallen,  “Explaining governmental preferences on EMU reform,” European Union Politics, 201(1), 2019, pp. 24-44.


Donato Masciandaro is a Professor of Political Economy at the Bocconi University, where he holds the Intesa Sanpaolo Chair in Economics of Financial Regulation. Since 1989 he has written for the newspaper il Sole 24 Ore. Since 2005, he has contributed to Economia & Management drawing on and developing his comments and analysis published in that economic-financial daily.


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