October 4, 2008
We can all breathe a sigh of relief that the US Administration and Congress have agreed a financial bail-out for the ravaged financial services industry. Whether or not it will succeed remains to be seen, but no deal would have been disastrous.
This is so far the greatest of the “unknown unknowns” – a nearly one trillion dollar neo-Con US Republican Administration nationalisation. The mind boggles with George W Bush being accused by Republican legislators of being socialist.
Europe, despite its financial and economic future being dependent on what happens in the US, was largely a bystander, addressing its own problems its own way, and mainly at national level. However, so far, only shorter term solutions are being addressed. There has long been consensus on the need to reform global financial and economic governance but not on how. The US, Europe and other leading countries must now sit down and address this, which will require a fundamental compromise between two diametrically opposed viewpoints, with many graded ones in between.
Labelling positions is dangerous although many will continue to refer to “Anglo-Saxon capitalism” versus “Continental regulations”. Central to the debate is the role of government and regulation. However, we should now be able to cease arguing doctrine, and even capitalism and socialism, right and left, after what has happened in Washington.
Two fundamental interests have to be addressed and reconciled: the need for an effective and liquid global financial system and fair protection for ordinary investors.
And underlying this is always the unfortunate law of unintended consequences.
A long term solution is a long way off. In the meantime, a critical aspect is how individual European countries and politicians approach the problems – together or at each other’s expense and focus on domestic political advantage?
Nicolas Sarkozy could well be the catalyst which drives Europe the right or wrong way. A careful examination of his Toulon speech of 25 September is therefore justified. Apart from some rhetoric, designed no doubt to rally his 4 000 listening supporters, it’s hard to fault what he said. What now happens is, of course, what matters. We will shortly know the results of this weekend’s mini summit in Paris on the financial crisis.
Some of the French president’s pertinent remarks:
The present crisis has killed of doctrinaire beliefs that democracy and the market are the solutions to all mankind’s problems.
- He fiercely attacked short term financial capitalism, including excessive management rewards, irrespective of achievement, and the unfair division of economic growth.
- But he rejected the crisis as being one of capitalism itself – he believes that it would be an historic error to return to the collective thinking of the past.
- The crisis is of a system far from the values of capitalism: capitalism must be re-established on the ethic of effort, hard work and fair reward. (A generous portrayal of capitalism!)
- We need a new balance between the state and the market.
- The crisis has highlighted the deficiencies of the European institutional arrangements, questioning whether Europe could respond in such a determined way as the US authorities.
- We cannot continue to manage a 21st century economy with 20th century institutions.
- An overhaul of the Bretton Woods institutions is necessary (as he told the United Nations).
I conclude by raising two of many issues to be addressed: How should we work together effectively at European level? How should we work together globally? The first needs to be answered before the second can be addressed.
Working together requires a substantial degree of trust and an acceptance that common solutions must be sought for common problem. That means ‘win-win’ and no ‘zero sum games’.
However, who is the ‘we’ at European level? The EU27 or the EU15? The former is unworkable, the latter excludes the UK. Should the European Central Bank be given additional powers?
And who adopts and applies the resultant legislation and regulation? Is it a case for “enhanced cooperation”?
Which should be the international forum for finding a solution? The Bretton Woods institutions? The United Nations? The G8? The G8 enlarged? A dedicated forum?
And who will represent the EU? The triumvirate of the Commission, ECB and EuroCouncil?Author : Stanley Crossick