A volatile global environment

The current volatility of the global environment can be observed with depressing regularity. The level of downside risks and the potential for rapid escalation towards financial, economic, social or security crisis is ever present, while predictability is limited, not least because of the complex interdependence between political and economic developments, often not only at local or even national level but at the global one.

The complexity of global interdependence, coupled with rapid technological change, makes policy making challenging as never before. The underlying relationship between different variables and, consequently, the impacts of policy decisions are increasingly uncertain. In the current environment, the theory of second best should be widely appreciated, which implies that policy-making takes place within imperfect scenarios and that unintended consequences are ever present.

In addition, it is clearer than ever that the reality is far removed from the simplified thought construct of humans acting rationally, with near perfect information. People are driven by (sometimes irrational and contradictory) expectations and sentiments, often dependent on the framing of a policy issue or the political and social narrative in which it is embedded. Political preferences clash with global, seemingly inescapable, developments, leaving citizens, and governments, feeling helpless to effect change.

Old responses to new challenges

Despite this changed environment, policy-making continues to rely on traditional decision models, particularly in the field of (political) economic policy. The effect is that policy is often ineffective, at worst even counterproductive. Increasingly, this is impacting upon the credibility and wider public perception of the role being played by analysis that feeds into policy making processes, especially economic and financial advice. This impacts on the trust citizens have in policy-making and politics, with policy not improving people’s quality of life and delivery regularly falling short of political promises, resulting in political backlashes that challenge democracy.

Policy-making fails to take full account of path dependency, which implies that there is no way to turn the clock back. In other words, history and past policy decisions, and their consequences, matter, determining and constraining possible future choices. This is linked to the importance of endowments – material, institutional or cultural – which already constrain or enable very different policy choice for different actors.

New thinking

To improve policy-making thus requires a radical re-think. Existential environmental threats and rising inequalities imply a need for normative elements to enter existing policy models, requiring these overarching objectives to be built in as a given. Policy-makers need to think in terms of managing risk and coping with uncertainty. Flexibility, resilience and adaptation, as well as speed of response, need to be built into policy-making from the outset. Policy-making needs to build in the ability to change course and to openly deal with blind alleys and the consequences of risk and uncertainty, which imply that some provisions become redundant over time or simply do not deliver any policy returns, precisely because they were only put in place as a contingency measure. The precautionary principle remains crucial but it also needs to take into account opportunity costs and potential benefits foregone.

In many areas where new policy approaches are required, there is a need to develop the entrepreneurial state1  to benefit from new developments. There is a first mover advantage also for states but this comes with a risk; similar to investment in the private sector, the (political and economic) capital that is invested might not produce the returns envisaged, or might, in the worst-case scenario, be lost. States must thus develop their own broad investment strategies, optimising the balance between focus and concentration on the one hand and diversification and risk-spreading on the other, ensuring there is a coherent approach across all activities of government.

To leverage structural change, often critical mass is required, for example to create the networks and infrastructure required for a substantive technological shift. However, agility and speed and multiple levels of governance require new ways of bringing together multiple actors at different levels to deliver a common purpose. This implies a significant paradigm shift in how we define the role of public servants and the changes / upgrading this implies for skills and competences across actors involved in public services and policy making.

Implications for European integration

These changes have a particular salience for cooperation within the framework of the European Union. In principle, the EU offers the ideal vehicle to achieve common purpose at critical mass, delivered through effective multi-level governance, and having greater heft in international affairs. The EU offers the opportunity and scale to diversify and focus at the same time, absorbing risks and creating the ability to be at the forefront of new developments while delivering on societal objectives. The EU can potentially manage risk far better than the national level, being able to draw on far more diversity.

However, so far, the potential of the EU has not been fulfilled. Rather than managing risk, too often the default response is risk aversion. Rather than joining together for a common purpose, the EU member states are in conflict with each other, failing to strike the right balance between cooperation and competition. The decision-making system is not as flexible and fast as the new realities require but often relies on rigid, legalistic processes, which are hard to adapt, especially over time, as seen in the many crises the EU has been faced with, and continues to encounter.

This should not just be seen as a criticism of the European institutions, although there are many improvements they could make in this regard. But the crucial issue is what constraints member states continue to impose on the joint exercise of sovereignty at the European level. Given the urgent need to develop more innovative and effective governance at European level, combining the best features of different decision-making mechanisms, the EU needs to learn from those examples which have delivered in the current environment. The EU’s approach to the Brexit negotiations might well be a good model to study.   

Chief Executive & Chief Economist, European Policy Centre