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Putting the right kind of fiscal policy has always been the most challenging policy decision to be taken by the democratic governments around the world, there are some famous ‘trilemmas’ related to this aspect. Economics have by now many ‘trilemmas’ developed and articulated by economists from time to time and the process still continues. Let us see some highly popular and newsmaking ones:
(i) The ‘financial stability trilemma’ put forward by Dirk Schoenmaker60 (2008), explains the incompatibility within the Euro zone of :
• a stable financial system,
• an integrated financial system, and
• national financial stability policies.
(ii) By far the most high profile current trilemma of the Eurozone (by Edward Chancellor61) was believed to be the seeming irreconcilability between its three wishes, namely,
• a single currency,
• minimal fiscal contribution to bail outs, and
• the ECB’s commitment to low inflation.
(iii) Martin Wolf62 spoke about the US Republican Party’s fiscal policy trilemma:
• large budget deficits are ruinous;
• a continued eagerness to cut taxes; and
• an utter lack of interest in spending cuts on a large enough scale.
(iv) Then we have the Earth Trilemma (EEE), which posits that for:
• economic development (E),
• we need increased energy expenditure (E),
• but this raises the environmental issue (E).
(v) Above all these more recent trilemmas in economics, the prima donna of all of them is Mundell’s ‘impossible trinity’. This old trilemma asserts that a country cannot maintain, simultaneously, all three policy goals of
—
• free capital flows,
• a fixed exchange rate, and
• an independent monetary policy. The impossible trinity, has seen enough waters flowing down the time since it was articulated almost five decades ago which has a strong theoretical foundation in the Mundell-Fleming Model developed in the 1960s.
Dani Rodrik63 argued that if a country wants more of globalisation, it must either give up some democracy or some national sovereignty. Niall Ferguson64 highlighted the trilemma of a choice between commitment to globalisation, to social order and to a small state (meaning limited state intervention).