The current crisis is not the first that has spread beyond the country of origin to threaten global stability: although smaller in size, the East Asian, Brazilian, and Russian crises of the 1990s all shook markets around the world and all spurred global responses. Then the emergency rescue came from the IMF, which avoided contagion, at the price of its much-debated recipes of financial discipline and rigor. Today the situation is different: the crisis originates from a subprime asset bubble localized in the US. Thanks to the dollar being an international reserve currency, the US does not need to resort to the Fund to obtain liquidity, which is instead provided by countries such as China having large trading surpluses. These countries have so far managed to finance the US external deficit.
Another difference is that the crisis does not originate from disequilibrium in the balance of payments disequilibrium, but was caused by gross imprudence in domestic finance, which hadn't properly been overseen by regulators, who appeared more interested in sustaining economic growth, no matter how much on steroids, than in fending off the danger of serial insolvency among financial operators. In today's global world the crisis has spread immediately: the Moscow stock exchange fell off a cliff, and so did Hong Kong real estate. But most importantly, the crisis affected Old Continent regulators, calling for an unprecedented interventionist stance on the part of national governments. The latter had to bail out those European banks that overexposed themselves on toxic assets, also injecting liquidity in the banking system to halt the crisis of trust affecting interbanking lending. The sophisticated arguments against public intervention, because it would induce private moral hazard, were promptly shelved.
The collaboration between national banking supervisors and international monetary authorities is based on flexible forms of entente among policy-makers, and is not disciplined by multilateral agencies like the Fund or the WTO: it is not subjected to formal rules. This does not mean that the coordination achieved by groups such as the Financial Stability Forum, presided by Italian central banker Mario Draghi, or the joint elaboration of universally applicable criteria such as Basle 2 for the financial solidity of commercial banks, were ineffective. The preference for soft-law, flexible tools, because they are more practical, instead of the traditional, mandatory norms of hard law, has been theorized as equally effective in achieving the desired results. This crisis has not discredited the soft-law option, but it has highlighted some its limits, notably on international accounting standards.
Today, the alternative being proposed is a new international architecture based on treaties and fixed norms that would re-establish the roles of the IMF and the World Bank, currently taking the backseat in the handling of the crisis. These two supranational institutions are seeking a more active role in a much-altered financial framework. Sarkozy has proposed to strengthen the role of the Bretton Woods twins at the UN, and this is an objective that Italy has set for its turn at the presidency of the G7.
On paper, it seems a good idea that needs to be further developed. But are we sure that we will be able to arrive at a shared formula, one that draws the right lessons from this unexpected crisis, and formulates the appropriate recipes to prevent the next one from happening? And most especially: who will be in charge of the new system, now that the US is in decline, and Europe is absorbed by its own domestic problems, in spite of its proclaimed velleities? In other worlds, what role is the West ready to give to the emerging economic, financial and commercial powers, countries like China, Russia, Brazil, and the sovereign wealth funds, mostly owned by autocratic states, which we have so far kept out of the door?
by Giorgio Sacerdoti ,
Professor of International Law and WTO Court of Appeals