let me first of all thank the Brooking Institution and the Initiative for Policy Dialogue for providing me the opportunity to be here and discuss, with such a distinguished audience, an issue that I consider central for our common future.
For many years, the debate around the question of redesigning the global economic governance has mainly been theoretical. The existing multilateral system was built more than sixty years ago in very different political and economic circumstances. Despite the common awareness that it is increasingly inadequate to respond to the challenges of an ever more globalized world, so far discussions and analyses on the tools, mechanisms and institutions to fill the gaps and adjust the system to the new global context remained mere speculations.
The financial and economic crisis that befell us subverted that perspective. Nowadays, the reconstruction of the global economic governance is no longer a question of choice. It is a question of necessity.
We have finally realized that the idea that self-regulated markets might continue to work without rules, without institutions enforcing those rules and monitoring their correct functioning, was wishful thinking. The wild neoliberalism, that dominated the era of globalization, fed this great illusion for years.
We have been told that we are living at a time of the end of ideologies. But it is neoliberalism, I think, to be the last of the Twentieth century ideologies. And the crisis is not just an accident in the path towards a full and bright realization of globalization, provoked by the calculation mistakes or unscrupulous greed of a few bankers. It was indeed the crisis that exposed the contradictions of this globalization, which has grown too quickly and too unregulated.
This utter lack of regulations and controls reflects a democratic deficit, which is due to the asymmetry between the ascent of a global economy, the weakness of international institutions, and the inadequacy of old nation states.
In the course of the Twentieth century, the development of capitalism was counterbalanced by the principles and limits imposed and implemented by nation states. Thus, capitalism, social cohesion and democracy could live together, at least in Europe, thanks to the role played by governments.
The drive towards deregulation aimed exactly at rejecting the state as an economic actor. The assumption was that social order could be found without state involvement or intervention. This proved to be a dangerous proposition. And its obvious consequence was the weakening of the state as a guarantor of social justice.
Thus, the most extraordinary catastrophe befell the “casino capitalism” that emerged from the era of deregulation. Rather than exercising autonomy, tax-paying individuals – through the workings of the much criticised state – were forced to prop up financial institutions which were now “too big to fail”.
Around the world, states were forced to engage in the most extraordinary expenditure, not to provide public services, but to maintain stability in the supposedly self-regulating financial sector. This state of affairs, as I mentioned, was facilitated by a lack of international coordination and of institutions capable of stabilizing, governing and restraining the impact and effects of global capitalism and global financial markets.
This is now the challenge that we have to face. We must build a new international architecture able to guarantee the unfolding of a fair globalization, while reducing inequalities and ensuring a sustainable development.
We must recognize that such an outcome cannot be achieved through the sole action of single states. We must recognize that the challenge of a global world lies in the ability to govern processes at a supranational level. We must recognize that politics and democratic institutions must orient and regulate economy, because this is the only way in which capitalist development can be reconciled with the principles of democracy and social justice.
Today, 27 European countries are part of a unique project in which economic and political life are not confined to the nation-state. This is supported by an institutional framework which seeks to meet the needs of the people through stability, interdependence and cooperation. Therefore, the European Union represent an impressive positive experience to be considered while designing the new architecture. It shows the utility of a broad, multilateral setting for economic governance.
Of course, current tensions among the EU member states manifest that many instruments are inadequate, need to be attuned or reformed, especially in times of global crisis. However, despite those tensions and the problems that have arisen, very few policy makers today would advocate the reversal of the EU’s experiment. It is no time for the renationalization of our policies. I believe that Progressives and Socialists must oppose strongly that temptation. We need a more united, more integrated Europe, if we want to play a key role in reshaping global governance. The downsizing of the G7 and G8, the centrality of the G20 were big steps towards a more inclusive global governance. However let’s not forget the G20.
The G20 is lacking in representative or democratic legitimacy, because it fails to give adequate representation to the global population based on the present and on future forecasts, while the economic landscape is changing rapidly, forcing us to adapt to this.
I believe we cannot imagine any global governance without the UN system as a fundamental pillar. The document “For a global new deal”, drafted by the Global Progressive Forum together with FEPS, outlined in a very convincing way the strategy for an effective global economic governance. Let me quote: “the political drive should be given by a triangle composed by United Nations bodies, by the international agencies (including IMF, WTO and the World Bank) and by the G20”. As regard the international agencies, particularly IMF and World Bank, I believe we should insist for a single seat for the EU and for the reallocation of voting power in favour of so-called emerging countries.
Major countries, which today are seen as developing economies, will probably be the only available engines of future economic growth (I expect that Professor Ocampo will elaborate further on this). As he has proposed, we must encourage further expansion of countries like Brazil, India and China, otherwise we will miss a huge opportunity to address our own problems. Worse still, inaction will prevent us from helping to bring many millions out of the bonds of poverty and unemployment.
The G20 was instrumental in providing the immediate reaction to the crisis. Now the G20 is entering in a new phase and longer term objectives are becoming the priority. The framework for strong and balanced growth has the ambition to increase growth, while making it more sustainable – also in terms of social equality and fight to poverty – and avoiding the development of large imbalances.
The challenge will be to strike a collective agreement among countries that represent 80 per cent of world GDP and which cover a broad variety of cultures, preferences and approaches to policy and governance.
Let me stress that Europe should play a major role in this process. So far Europe has been hesitant, to say the least, putting a premium on fiscal consolidation with respect to supporting demand. Given the serious crisis that a number of European countries are facing, fiscal consolidation is indispensible. However, Europe should take the opportunity of the crisis to move towards those growth oriented policies – many of which are contemplated in the Europe 2020 Strategy – that are necessary to strengthen the quality of life of European citizens and adjust the European welfare systems to the challenges of the new global environment.
Also a stronger internal governance of the euro, which is necessary on its own right, will contribute to a stronger global governance, including within the G20.
The process of coordination within the G20 is at a critical stage as the risks of “currency wars” are increasing.
The breakdown of macroeconomic policy coordination among this Group of Twenty will have a strong impact on the world economy as a whole, not only on those countries who have a seat at the table. If the G20 cannot achieve its objectives for its own members, how can it be expected to do so for the rest of the world? We must ask hard questions if we seek honest answers!
The great contradiction of economic life at the beginning of the Twenty-first century is that financial markets are inherently globalised, while regulation is still predominantly national and regional. This has allowed actors on the financial markets to take extreme risks.
Even the most extreme free market fundamentalist could admit that the consequences of this anomaly have been truly catastrophic.
If regulation is to work, it must be genuinely international. Regulatory bodies must be operated under institutions of global governance that are accountable to governments and, by proxy, to our citizens. Thus, any effort to improve international financial regulation must be based upon the will to build an ethical and comprehensive institutional framework.
When we discuss the features of this new international framework, it is not enough to simply criticise proponents of economic orthodoxy and financial deregulation. We must look at the systemic problems that the global economy faces and we must offer an alternative based on the values of social justice and the pursuit of global public goods.
I am happy to say that FEPS has drawn on the work of Joseph Stiglitz, Jose Antonio Ocampo, Stephany Griffith Jones and our friends at the Initiative for Policy Dialogue. It is a fruitful collaboration and one which I hope will continue.
When addressing the subjects under discussion, we must also analyse how we tackle issues of governance, economics and international politics. We cannot just talk about the will of “the markets”. We must invoke the concept of genuinely global public goods. Financial stability is certainly a global public good.
But as progressives, we should ask for more than mere stability. It is our challenge to offer an alternative in which the markets serve our people. It is our job to define the global public goods that we seek.
“Fair trade” has become something of a buzz phrase, a logo and a brand. This threatens to rob it of its meaning. Trade must be to the benefit of all, and not only the rich countries of the world. This is the fundamental question of global governance. It is the responsibility of advanced economies to support open markets and resist protectionism, which may again be on the rise in the face of large unemployment.
If we do not address the injustices in our trade system, we show dishonesty in our concern for the poor. Our conception of fair trade ought to focus on domestic demand. Of course, this will require reform in the global financial system to offset the vulnerabilities of the developing world. This is a key reason why we should place global public goods at the centre of our idea of progressive global economic governance.
In our discourse on global governance, we must also argue the case for balanced growth. Many of you are more familiar than I am with the technicalities of the relationship between payment imbalances, exchange rates and pressure for protectionism. The trade relationship between the US and China is inherently imbalanced and this reverberates in overall global imbalances. This has created tensions in both countries, in the face of rising unemployment in America as a consequence of the recession, and pressure on China to appreciate its currency and to increase domestic demand. China has built up huge reserves of dollars which is, of course, problematic, but it has also provided the global economy with the benefits of a powerful fiscal expansion.
Professor Stiglitz has proposed the development of a global reserve currency. Indeed, this was what Keynes had in mind in his original conception of the International Monetary Fund. This may be an idea worth pursuing, although we should acknowledge that it can be a long term solution. In the meantime it is important that new institutions, such as multilateral or regional “financial safety nets”, are set up. Also the global financial crisis has shown the importance of a new approach to regulation that would support long term investment and facilitate the flow of resources towards emerging and developing countries.
Such proposals provide concrete solutions to the complicated problems that we face. Therefore, what we seek is not just an ad hoc response to an ad hoc crisis. We seek to prevent future crises.
Let me now conclude saying that the future international financial architecture shall not simply guarantee sound regulation, supervision and governance of financial markets, preventing speculative phenomena. We must design a monetary and financial system which shall serve a just economy, able to ensure the largest access to the advantages of development, the reduction of inequalities and an economic growth compatible with the protection of the environment.
Right after the outbreak of the crisis, the international debate seemed to be dominated by the will to change. Such approach must not fade away. We must not give in to the temptation of returning to the previous setup. We cannot wait for another crisis to decide to change. It is essential that the current debate lead to concrete results.