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Fixing the Global Economy: Why a Better Future Requires International Cooperation

Fixing the Global Economy: Why a Better Future Requires International Cooperation

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Leaders of advanced and emerging economies met for the first time in November 2008 to discuss the global financial crisis. The crisis has clearly demonstrated the potential weaknesses of the existing financial and regulatory architecture. Capital crosses borders instantaneously and virtually seamlessly, but it is national bodies that are tasked with ensuring the financial system's stability. International cooperation is required.
Leaders of advanced and emerging economies met for the first time in November 2008 to discuss the global financial crisis. The crisis has clearly demonstrated the potential weaknesses of the existing financial and regulatory architecture. Capital crosses borders instantaneously and virtually seamlessly, but it is national bodies that are tasked with ensuring the financial system's stability. International cooperation is required.

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Published by: German Marshall Fund of the United States on Sep 23, 2010
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Summary: Amid talk of a new“Bretton Woods,” leaders of advanced and emerging economies
met for the rst time in November2008 to discuss the global nancial
crisis. The crisis has clearly demon-strated the potential weaknesses of 
 the existing nancial and regulatoryarchitecture. Capital crosses borders
instantaneously and virtually seam-
lessly, but it is national bodies thatare tasked with ensuring the nan
cial system’s stability. International
cooperation is required.
The solution lies in better coordina
 tion between national supervisors
and a strengthening of existing international institutions—not a
global regulator. The challenges are
not easy and as the crisis is slowlyresolved, the political pressure towork internationally may lessenover time. However, this is an argu-ment for sustaining momentum—not an argument against trying.The effort of European leaders toinvoke the spirit of Bretton Woods
is not a bad place to start.
Economic Policy Program
Amid talk o a new “Bretton Woods,”leaders o advanced and emerging econo-mies met or the rst time on November15, 2008 to discuss the global nancialcrisis.
One meeting was never going tosolve the huge problems acing the globaleconomy, but they have made a solidstart, providing a oundation upon whichto build when they meet again in April2009. This crisis demands internationalcooperation.The nancial crisis has demonstrated alltoo clearly the potential weaknesses o theexisting nancial and regulatory archi-tecture. This is a world in which capitalcrosses borders instantaneously andvirtually seamlessly. And let’s be clear:there is signicant economic benet tothe global economy rom that integration.It raises growth through more ecientcapital allocation, through lowering thecost o capital, and by acilitating cross-border trade and investment.But the regulators and supervisors taskedwith ensuring the nancial system’sstability are national, rather than global—making it dicult to identiy andguard against systemic risk acrossnational borders. Thus, a ailure toprovide adequate regulation or supervi-sion in one country can easily spill over tomany others, and a crisis that develops inone part o the world can spread withalarming and devastating speed.That is exactly what we now witness.Even businesses and countries with littledirect exposure to the toxic securities atthe heart o the crisis
have been draggeddown by the tightening in credit marketsthat ollowed. Now, as the real economy eels the ull orce o these shocks anddemand alls, the problems are spread-ing wider still. Growth has altered in thedeveloped world, with Europe, the UnitedStates, and Japan tipping into reces-sion; emerging markets, meanwhile, aceshrinking demand in their major exportmarkets, and are particularly vulnerableto the turmoil in global capital marketsthat has seen investors running or cover.The leaders meeting in Washington wereacutely aware o the need or immedi-ate action to boost growth in the ace o these problems; signicant monetary and
Fixing the Global Economy: Why a BetterFuture Requires International Cooperation
by Richard Salt
1744 R Street NWWashington, DC 20009T 1 202 745 3950F 1 202 265 1662E ino@gmus.org
International Regulatory Cooperation
Richard Salt, a transatlantic fellow with the German Marshall Fund of the United States (GMF) since 2006, is an expert on the trans
-atlantic economy and international regulatory cooperation.
The views expressed here are those of the author and do not necessarily
represent the views of GMF.
The “Summit on Financial Markets and the World Economy” has widely been described as a meeting of the G-20 group of nations.Strictly speaking, however, the G-20 is a meeting of nance ministers and central bank governors – not a meeting of Heads of Government. Furthermore, this Summit also included countries not normally present at G-20 meetings: Spain, the Netherlands, theCzech Republic all participated, albeit as representatives of the European Union, which is a G-20 member.
This is, of course, not the same as saying that all problems can be traced to sub-prime lending or weaknesses in regulation of thenancial innovation that appeared, for a time at least, to reduce the risks of such lending. For example, global imbalances, thatresulted in capital ooding into the U.S. and engaging in a search for high-yield investments, doubtless contributed to the scale of  the problem. For an overview of the origins of the sub-prime crisis, see, for example: Goldstein (2008) “The Subprime Credit Crisis:Origins, Policy Responses, and Reforms,” Peterson Institute for International Economics, http://iie.com/publications/papers/20080612goldstein.pdf.
Economic Policy Program
Opinion Brie 
scal loosening is already underway around the world. They also spoke o the need to reject protectionism in the ace o thecrisis—a lesson that the world has, hopeully, learned rom theGreat Depression era—and potentially boost the global economy by reaching an agreement in the Doha Round o multilateraltrade talks.
Prevention is better than cure
There is a second critical element to these talks: nancial marketreorm, or how to make a similar crisis less likely in the u-ture. But a undamental problem—the gap between integratedmarkets and sovereign regulation/oversight—remains. Perhapsunsurprisingly, this is where skepticism about what the summitscan achieve is most readily apparent.Why? Well, i your answer to these problems is to say thatwe need to build a new global regulator, then prepare to bedisappointed. Even i it commanded broad political support (itdoesn’t), it’s ar rom clear that such a step would be desirableon either economic or political grounds. Regulation—both interms o its standards and the way it is implemented—otenrefects distinct national experiences and preerences about theappropriate balance o regulation and the role o government.As a recent article in
The Economist 
notes, national regulatorsmay also be better placed than supra-national bodies to assessand regulate the companies operating within a given, national jurisdiction—and, o course, it is national governments who arelet ooting the bill rom regulatory ailures.
 But we also know that leaving every country to deal with theseissues independently, without sucient coordination, risksa deeply unsatisactory outcome—we’re living it right now.Caught between an unwillingness to cede sovereignty and theknowledge that national regulation risks letting globally systemicrisks ester and grow, are we out o options?Not at all. Posing policy options in this either/or, binary, way isultimately a alse choice. Many o the ideas likely to be discussedover the coming months will have little or nothing to do with asingle global regulator, and much more to do with recognizingour nancial interdependence, and addressing the limitations o existing regulatory arrangements through better internationalcoordination among national bodies.Consider, or example, the recommendation—one o many made by the Financial Stability Forum (FSF)
and endorsed by the G-7 earlier this year—to enhance cooperation among thesupervisors o the largest, and systemically most important,global nancial institutions, through greater use o international“colleges” o supervisors. It is a recommendation grounded in“sot” international cooperation, in liaison and dialogue betweennational supervisors—not coercion or a “hard,” globalcentralization o power. Signicantly, the November 15
com-muniqué and action plan called or immediate action wherein“supervisors should collaborate to establish supervisory collegesor all major cross-border nancial institutions, as part o eortsto strengthen the surveillance o cross-border rms.
Similar points might be used to describe the idea to give theInternational Monetary Fund (IMF) a greater role in identiy-ing emerging, systemic risks to the global economy as part o its surveillance work, including stronger links between the IMFand the nancial market expertise o the FSF—pragmatic stepsthat strengthen existing institutions, and trample on no-onessovereignty. These principles are also the oundation or plansto expand membership o the FSF to include emerging marketeconomies, recognizing their growing importance to globalnancial stability.There will, o course, also be a need to take more specic steps toaddress weaknesses in existing regulatory rameworks. Observ-ers point to many areas or attention: some o which wouldrepresent developments in existing international rameworkagreements such as the Basel II Accords on capital adequacy;some o which would require reviewing and adapting nationalregulations. Whatever the merits o each proposal, a simple truthremains: in such globally integrated markets, regulation shouldnever take place in a vacuum. Policymakers must recognize thatwhat is done at home can critically aect others.
We need to talk 
This is one reason why these summits, and the work programsthey initiate, have potential value—because they may helpembed the notion that this is a undamentally international
The Economist
(2008), “After the Fall,” http://www.economist.com/nance/displaystory.cfm?story_id=12597176.
For the full FSF Report, see http://www.fsforum.org/publications/r_0804.pdf. Housed in Basel,Switzerland at the Bank of International Settlements, the Financial Stability Forum brings togetherrepresentatives of national central banks (plus the European Central Bank), national supervisoryauthorities and nance ministries, along with international representatives from: the internationalnancial institutions; regulatory and supervisory groups; and central bank experts.
Declaration of the Summit on Financial Markets and the World Economy, http://www.whitehouse.gov/news/releases/2008/11/20081115-1.html.

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