Stewart M. Patrick

The Internationalist

Patrick assesses the future of world order, state sovereignty, and multilateral cooperation.

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Five Steps to Bolster the Global Economy

by Stewart M. Patrick
October 31, 2011

A screenshot of the Global Governance Monitor: Finance, available at cfr.org/financemonitor.

The 2007-2009 economic crisis, followed by the sovereign debt traumas in Europe, has triggered a variety of operational and institutional challenges in both global finance and economics.

With the French Riviera town of Cannes busy preparing to host leaders from around the world at Thursday’s Group of Twenty summit (G20), CFR’s International Institutions and Global Governance program is releasing the annual update to the Global Governance Monitor: Finance. This multimedia interactive tracks and analyzes multilateral efforts to manage global finance, spur economic growth, and prevent future meltdowns of the international financial system.

The package includes options for strengthening the regime in its issue brief, which outlines five actions the United States and other major economies should take in the near term. Following are a few highlights from these policy recommendations.

  1. Revitalize G20 action on global economic imbalances
    Back in April, G20 finance ministers and bank governors agreed (PDF) on a two step process to reduce persistently large imbalances between countries with current-account surpluses (notably China) and those with deficits (notably the United States). The plan also charged the International Monetary Fund with identifying factors that drive countries to accumulate massive surpluses or deficits.Leaders will evaluate these assessments at this week’s G20 Summit in Cannes, and determine action to take. Building unanimous consensus will be difficult—the risk is that national politicians will despair of a multilateral solution and will resort to unilateral sanctions, (as suggested by the U.S. Congressional proposal to punish China for currency manipulation). But unilateral measures are likely to spur retaliation and escalation. Instead, the United States and its partners must display leadership by affirmatively supporting—and giving teeth to—the G20’s “Mutual Assessment Process,” designed to identify those sovereign policy decisions that might put global economic recovery or financial stability at risk. Both China and the United States recognize that it is in their own interest to address persistent imbalances, so an international understanding about benchmarks of progress should not be impossible.
  2. Stemming  liquidity crises
    The United States should support France’s proposal to bolster the IMF’s role in helping countries respond to liquidity crises. Stronger IMF responses would decrease the motivation for vulnerable countries to stockpile excessive reserves as a precaution in case of a sudden capital outflow. An increasing number of emerging economies are practicing precautionary reserve accumulation—which contributes to macroeconomic imbalances and mispricing of financial risks. As the U.S. dollar is the currency of stockpiled reserves, widespread reserve accumulation drives up the value of the dollar, widening the U.S. current account deficit. A larger IMF, and one that stood ready to lend rapidly and without excessive conditions, would reduce the incentive to unilateral reserve accumulation: collective insurance would displace individual insurance.
  3. Implement IMF governance reform
    Leaders at the 2010 G20 Seoul summit agreed to increase the voting shares of emerging economies at the International Monetary Fund (IMF) by six percent, and give more seats to developing countries on the IMF Executive Board. The IMF board of governors agreed to these reforms in December 2010, but the timeframe for actual implementation is slated for October 2012. Countries should ratify the changes in their domestic processes, to ensure a smooth and quick adoption of the proposed reforms by the 2012 deadline.An additional challenge will be negotiations within Europe to decide which European nations will give up seats on the executive board to allow for emerging economies. The United States needs to continue to pressure its partners in the G20—especially those European countries hesitant to acquiesce—toward implementing these reforms. The reallocation of quota shares and board seats should reinforce the sense of ownership that emerging countries feel toward the IMF. That, in turn, should encourage them to have faith in the IMF’s ability to provide liquidity in a crisis, and should dampen the temptation to unilateral reserve accumulation.
  4. Resolving the European debt crisis
    Resolving the European debt crisis will be important for curbing fears of contagion across the eurozone and reinvigorating a sustainable global economic recovery. Greater leadership from Germany and France is required to ensure the survival of the union, notably through increased steps toward fiscal and political unity. Since early 2010, when Greece received its first bailout package, the lack of coordination within the eurozone has resulted in a series of policy shifts that have damaged market confidence. Europe’s leaders first said private debt would not be restructured, then said Greece’s creditors should accept a twenty-one percent reduction in the value of their loans, and then settled on a fifty percent reduction for private investors last week. One possible upshot will be that Europe acquires new regional institutions, including centralized financial regulation for the eurozone and some version of an enhanced bailout fund with adequate funding. Last Wednesday’s deal on the European Financial Stability Fund (EFSF) was a first step, but the source of increased resources the EFSF remains undecided and its proposed size is inadequate to bail out any of Europe’s larger economies.
  5. Improve regulatory standards to mitigate financial risks
    Experts and policymakers have placed much of the blame for the financial crisis on weak regulatory standards and inadequate supervision of sophisticated financial activities. Although progress has been made, particularly through the creation of the Financial Stability Oversight Council in the United States and the European Systemic Risk Board in Europe, the complexity and integrated nature of modern finance continues to pose unprecedented challenges. Responding to the crisis, the Financial Stability Board (FSB), formerly the Financial Stability Forum, has provided (PDF) a set of proposals to “restore confidence in the soundness of markets and institutions.” However, FSB recommendations remain advisory, and have no legally binding enforcement mechanism, and the institution itself remains woefully under-resourced. In the absence of a strong global regime governing systemically important financial institutions, the international financial system remains vulnerable to excessive risk-taking and regulatory arbitrage.

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  • Posted by Paulo Augusto LACAZ

    To
    Mr. Dr. Stewart Patrick
    Senior Fellow and Director
    International Institutions and Global Governance (IIGG) program
    Council on Foreign Relations

    Dear Colleague,

    Pay attention with Gift’s Greeks
    Remember the Trojan Horse!

    Indeed, this crisis that the Irresponsible Greek politicians, succeeded to the EU, is a large Gift’s Greeks. But Portugal, Spain, Italy and Ireland, are approximant the same situation.

    Homo-sapiens has been transformed into Homo-economicus, that moral police for not knowing the greatness of Democratic Capitalism, are leading the Animalis-homo.

    The major strategic plans that will emerge from the intellectual IIGG surely have enormous difficulties, to be deployed with results favorable to the maintenance of free markets and adequate levels of employment, if not make some changes of simultaneous actions to meet the unreasonable maneuvers the current opportunistic political leaders, without character and high level selfish, uneducated in Sociology and Moral Sciences Positives, endanger the lives of citizens of their nations.

    Let’s look for new ideas may be feasible to put in place at this time of crisis, certainly appear to prevent other opportunistic – demagogues, to take advantage of this same structure Organization of State and Government Accountability archaic controls that are obsolete and inadequate to cope with current problems, which only change hands, staying with the same diseases of the incredible corruption in the Executive, the Judiciary and the Legislature, and often falling into the hands of military dictators despots.

    Let’s put a stop to this kind of parliamentary system, a system of irresponsibility, not to give possibility to socialist or communist dictators, took power, and conflict with Human Rights and the Humanity Duties.

    We have already seen around the world, the vast majority of professional politicians do not know how to manage economically and financially as a state with a sense of res-public , the STATE activities, for the good of his people.

    It’s getting time to suggest an action on this politicians class, which show total irresponsibility by reducing their actions on the stage of setting the organization of existing political regimes. This does not mean that other participants of the state organization, do not participate politically in daily life of the nation. But they are mostly chosen differently. The proposal is for study and analysis the fowling:

    1) Restructuring of Democratic Capitalist System, to Societocratic Capitalist System.

    2) Modernization of Government Accounting with a single Integrated Accounting Management System Administration – which aims to police accounts of the Government, which may be oriented by the Central Bank of each country and implemented by the leaders of nations who wish to receive World Bank financial support.

    3) A Plan of Human Feelings Education and Scientifically Instruction.

    The Civil Society Organization (CSO) – SCCBESME-HUMANIDADE, non-profit is able to show the basis of these ideas to you, because it is contaminated with heavy thoughts Socialists, Communists and the ruling Democratic academic centers of Universities.

    As the U.S. gave political support to NATO to ensure of dollar stability as the currency of Libyan oil business transaction, to ensure the balance of global capitalism; I think we can suggest the same reasoning to the case in question, which could occur in a similar support, not military invasion but to support for Army, Businessman and Workers of Greeks (Politicians would be waiting for guidance) to the agreement with the IIGG, provide a tactic of changing the existing political regime in Greece, with a suggestion of a Societocratic Constitution (Management and Budget Camera, Congress Camera, Judiciary – NCJ – National Council of Justice – Punitive Laws on Fraud), together with items 2 and 3 above.

    By contrast, the debt Greek would never be reduced. What could be done to reward the acceptance of the new regime is a moratoria grace period of six years, where the Greek state would not pay no dues and no amortization. After this first period, would begin only the payment of financial charges for a period of 3 years and finally after these two grace periods begins payments and the capital amortization plus interest rates, during 20 years, with interest rates that could be agreed between the parties, to enable a peaceful recovery of Greece.

    In my speak I give an suggestion example of Structural Societocratic Regime Organization applied to Brazil.

    http://doutrinadahumanidade.com/Palestra%20AMAN%20IV%20Compatibility%20Mode.pdf
    See the slides 35 to 86.

    Hoping to have collaborated with new ideas to deal with this crisis, because this proposal was granted by a symbiosis of my studies for more than 26 Constitutions of various countries in a period of 20 years of study, which also took into account the good items demonstrated the Current Organizational Structure of the Chinese State, removing and eliminating the method of choice for Communist lawmakers, back in operation. The proposed here only 20% of Congress are made by politicians in a democratic election. The other politicians are elected on a Societocratic.

    I’m sure if we’re Prudent, Audacious and Persevering socially and morally it is possible to save the E. U. , without war, with these my suggestions. Because everything has been going wrong, in the way that occur today.

    Please, analyze! It is necessary to CHANGE!

    Looking forward to news, I wish you

    Health, with respect and fraternity,

    Paulo Augusto LACAZ
    President
    SCCBESME-HUMANITY
    http://www.doctrineofhumanity.com
    .
    PS: Excuse English’s mistakes.

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