The financial crisis of 2008 has spurred a global debate on how muchgovernment regulation of markets – and what kind – is appropriate. In the United States, it is a key theme in the upcoming presidential election, and it is shapingpolitics in Europe and emerging markets aswell.

For starters, China’simpressive growth performance over the last three decades has given the worldan economically successful example of what many call “statecapitalism.” Brazil’sdevelopment policies have also accorded astrong role to the state.

Questions concerning the state’s size and the sustainable role ofgovernment are central to the debate over the eurozone’s fate as well. Manycritics of Europe, particularly in the US, link the euro crisis to the outsize role of government there, though theScandinavian countries are doing well, despite high public spending. In France, the newcenter-left government faces the challenge of delivering on its promise ofstrengthening social solidarity while substantially reducing the budgetdeficit.

Alongside the mostly economic arguments about the role of government, manycountries are experiencing widespread disillusionmentwith politics and a growing distance between citizens and government(particularly national government). In many countries, participationrates in national elections are falling, and new parties and movements, such asthe Pirate Party in Germanyand the Five Star Movement in Italy,reflect strong discontent with existing governance.

In the US,the approval rating of Congress is at a record-low of 14%. Many there, such asmy colleague Bruce Katz at the Brookings Institution, believe that the only solution is to bring a larger share of governanceand policy initiation to the state and municipal level, in closepartnership with the private sector and civil society.

But that approach, too, might have a downside.Consider Spain,where too much fiscal decentralization toregional governments contributed significantly to weakening otherwise strongpublic finances.

A crucial problem for this global debate is that, despite the realities oftwenty-first-century technology and globalization, it is still conductedlargely as if governance and public policy were almost exclusively the domainof the nation-state. To adapt the debate to the real challenges that we face,we should focus on four levels of governance andidentify the most appropriate allocation of public-policy functions to them.

First, many policies – including support for local infrastructure, land zoning, facilitation of industrial productionand training, traffic ordinances, andenvironmental regulations – can largely be determined at the local or metropolitan level and reflect the wishes of alocal electorate.

Of course, defense and foreign policy will continue to be conductedprimarily at the second level – the nation-state. Most nation-states maintainnational currencies, and must therefore pursue fiscal and economic policiesthat support a monetary union. As the eurozone crisis has starkly reminded us, decentralizationcannot extend too far into the budgetary sphere, lest it threaten thecommon currency’s survival.

The USsystem is manageable, because the American states are largely constrained torunning balanced budgets, while the federal government accounts for most fiscalpolicy. Moreover, banking regulation and deposit insurance are centralized inthe US,as they must be in a monetary union. The eurozone has finally recognized this.

So, governance at the nation-state level remains hugely important and isintimately linked to monetary sovereignty. The key problem in Europetoday is whether eurozone members will advance towards something resembling afederal nation-state. Unless they do, it is difficult to see how the commoncurrency can survive.

There is also a third, regional or continental, level ofgovernance, which is most advanced in theEuropean Union (and is being tested in Latin America, Africa, and Asia) and canbe very useful. Customs unions, free-trade areas, or a single market, as inEurope, allow greater mobility of goods and services, which can lead tobenefits from economies of scale that remaining trade impedimentsat the global level do not permit. Europe’s borderless Schengen Area is another example ofregional supra-national governance. Thereare also aspects of infrastructure that can best be addressed at thecontinental level.

Finally, there is the global level. Thespread of infectious disease, global trade and finance, climate change, nuclearnon-proliferation, counterterrorism, and cyber security are just some ofthe issues that require broad international cooperation and global governance.

In today’s interdependent world, the debate about the role of publicpolicy, the size and functions of government, and the legitimacy of publicdecision-making should be conducted with the four levels of governance muchmore clearly in focus. The levels often will overlap (infrastructure and cleanenergy issues, for example), but democracy could be greatly strengthened if theissues were linked to the levels at which decisions can best be taken.

As Pascal Lamy, the director of the World Trade Organization, has said, itis not only the “local” that has to be brought to the “global”; the inherently“local” political sphere has to internalize the global or regional context.That is a huge challenge for political leadership and communication, but, if itis not met, democracy and globalization will be difficult to reconcile. How toconduct democratic debate with reference to these local, national, continental,and global levels, and to structure a political space that better reflectseconomic and social space, will be the great challenge of the decades ahead.