Economic news Embassy 12 October 2008
In the dock?
Roland Rudd looks ahead to Bretton Woods II in New York this month and considers the role the EU should play in building a new international financial architecture fit for the 21st century
Professor Theodore Levitt first coined the term 'globalization' in an article for the Harvard Business Review in 1983.
Twenty-five years later, compelling proof of his theory can be seen in the banking crisis of 2008.
World leaders have responded to the banking crisis by displaying an unprecedented level of cooperation, in particular, the EU. Those who thought the EU was one crisis away from collapse have been proved wrong. Despite its flaws, the EU remains a crucial institution in our globalising world.
If its original response to the crisis was undermined by the unilateralism of some member states, its subsequent action in facilitating a unified position has shown the EU's indispensability.
The pan-European package, whereby governments pledged around $3 trillion to the financial system, was well received by the markets. The EU's response to the crisis has vindicated the pro-Europeans in Britain, who call for positive engagement with our European partners, while retaining our critical faculties.
British Prime Minister Gordon Brown has reaffirmed his European mettle by seeking a European agreement on the financial crisis. His leadership has won plaudits from across the board, with European Commission President Jose Manuel Barroso recently stating: "[Brown] has acted as an impetus to the action that we have been taking collectively."
Yet, despite reaching agreement at the October summits, the EU must not rest on its laurels. As the largest market in the world, the EU has a leadership role to play, not least as discussions intensify about a new Bretton Woods framework.
There are things the EU must do, and things it should resist doing. Firstly, it should push for the reform of the international regulatory architecture, to correct anomalies that allow the Benelux countries more votes in the IMF than China, India and Brazil.
The IMF should be equipped to act as an early warning system for market failures, and the proposal of 'colleges' that would supervise regulation of cross-border entities is a step in the right direction.
However, the banking crisis should not be an invitation to impose a raft of heavy-handed regulation. Yes, the system of financial regulation needs review and reform. But the EU, and in particular the UK, have been very successful at striking a balance, ensuring that they attract large amounts of foreign capital. The heavy handed response in the US to Enron in the form of the Sarbanes-Oxley Act serves as a sharp reminder of hasty, disproportionate action.
The EU's established member states should also be mindful of the impact the crisis may have on central eastern European countries. A number of these countries have current account deficits amounting to as much as 10% of GDP.
In times of economic vulnerability, it is crucial they remain on the path of economic growth and reform, particularly as Russia has shown a willingness to exercise its influence in the region.
There are dangers beyond the EU's borders too. While developed countries have suffered due to the banking crisis, developing countries may be affected to an even greater extent.
The head of the World Bank Robert Zoellick has said: "The poorest and most vulnerable groups risk the most serious - and in some cases permanent - damage." There is the very real prospect that much-needed loans and overseas aid to developing countries may dry up, as the likes of the US and European governments feel the pinch.
The EU's commitments on climate change may also be placed in jeopardy. At the EU summit this week, eight central and eastern European countries banded together to challenge the EU's climate change pledges. But, the EU's leadership held firm, and it must continue to do so to address these long-term challenges.
What these past weeks have proved is that the EU is part of the solution in a global crisis, and it is much more effective when it eschews unilateralism and embraces unity.
The coming months are bound to be a testing time for the European and global economy, but if the EU continues to deliver a strong response, it can help the world weather the storm.
Roland Rudd is the founding Chairman of Business for New Europe (www.bnegroup.org)