March 20, 2009

OP-ED CONTRIBUTOR; Slide Into Irrelevance


Viewed from afar, the recent deliberations of the Group of 20 finance ministers in London gave the sense that Europe is beginning to live up to foreign fears of a Fortress Europe.

Those fears, which arose at the time of the creation of the single market, had come to seem unfounded as external trade barriers came down and the European Union expanded its boundaries.

Now, the concern is not so much about trade barriers and industrial subsidies, though that may come. It is about an attitude, a blinkered view of the world born of a combination of national rivalries, self-satisfaction and anti-Americanism. To that can be added contrasting paternalism and fear in dealing with the developing world.

The determination to focus the G-20 on financial-sector reform rather than global economic stimulation is a product of all of these ills.

For sure, the world does not need a repeat of opaque derivatives and uncontrolled credit creation. But that is not going to happen any time soon. Greed has given way to fear.

Perhaps the Europeans, particularly the Germans and French, would care to remember two things about the Asian crisis.

First, European banks played a major role in creating that crisis by massive and imprudent short-term lending that was withdrawn in a panic almost overnight. Asia had to be bailed out, painfully, by the International Monetary Fund and local taxpayers. Now the U.S. taxpayer is bailing out Société Générale, Deutsche Bank and Barclays for their foolishness in believing in A.I.G.'s infinitely overstretched balance sheet.

Second, the Europeans should note that crisis-hit Asia mostly responded with a mix of liberalization and enhanced supervision, rather than new regulations. Collective memory is more useful than rules, and has created a caution among lenders and policy makers alike that has lasted for more than a decade since the crisis.

Next, if anyone wants a real improvement in global economic management -- as distinct from micro-level efforts at market regulation -- the IMF must play a larger role. It must be given the necessary resources to help rescue those who fall into difficulties either through over-optimistic borrowing (as in Eastern Europe), market panic , or collapse of export prices (now afflicting much of the developing world).

It has been suggested that the developing world does not want IMF money because of the conditions attached to it. This is a half-truth. The IMF made big tactical mistakes in Asia but on balance played a positive role. Asia is now looking to its own devices with regional swap agreements not to spite the IMF, but because IMF resources are simply inadequate.

They will remain woefully inadequate so long as European countries resist expansion, whether through borrowing from reserve-rich countries such as China, Germany and Japan, or big increases in fund quotas and allocations of special drawing rights. These would provide liquidity to the vast majority of countries whose currencies are not used in cross-border transactions and for reserve purposes.

German conservatism is understandable given its history of inflation, its commitment to a sound currency and its concern at having often had to underwrite the common good as chief contributor to EU budgets. But the national interests of individual European states in maintaining their IMF quotas and votes undercut the ability of the single market to engage with the world.

Of course, China will drag its feet on contributing more to the IMF while its influence is so limited. Of course, the likes of Indonesia will look more to regional powers and the Asian Development Bank than to the IMF or World Bank for the funds they need if the West remains miserly while keeping control of the creation of international reserves.

The U.S. call for coordinated fiscal stimulus may justifiably rankle in parts of Europe where fiscal and monetary rectitude are article of faith. But what the EU members of the G-20 must recognize is that the global issue now is economic, not regulatory. Effective global stimulus must involve a major increase in the resources of global institutions and the role of new big players.

If not, then when the United States and Asia do emerge from this crisis, Europe will find its global influence further reduced, and institutions like the IMF totally irrelevant.