One of the fundamental questions in political economy is why governments often fail to adopt reforms that are believed to be needed and welfare-improving. The common explanation was well encapsulated by Jean-Claude Juncker, Prime Minister of Luxembourg and President of the Eurogroup: "We all know what to do, but we don't know how to get re-elected once we have done it".

One of the unexpected side-effects of China’s spectacular emergence is the spread of a new conventional wisdom about the sequencing of political and economic reforms in developing countries: economic reform should come first, and democracy second. The idea is that democratisation in the early stages of a country’s economic development can slow down further development.

Jean-Claude Trichet and his colleagues at the European Central Bank have clearly learned the wisdom of Paul Volcker: without first establishing anti-inflationary credibility, all is lost.