LETTERS TO THE EDITOR

Spring 2010

by William White

Sir,
There are reasons to accept Anna Diamantopoulou’s thesis that, in an increasingly complex and interdependent world, more power needs to be ceded to higher levels of government. She rightly argues that this should apply both at a global level and at the level of at the level of European institutions and that membership by sovereigns in supranational bodies must be accompanied by “binding standards and material consequences for countries failing to fulfill them”.

Unfortunately, the article makes no reference to a number of important institutional developments which have occurred in response to the crisis. Perhaps the most important has been the increased moral authority given to the G20. This recognises that many emerging market economies are now of significant importance in the global economy and deserve more influence over how it is managed. This is all the more so since many emerging market countries have significant trade surpluses and must have a forum for ongoing discussions with debtor countries on global trade imbalances. Further, a similar extension of both the authority and membership of the Financial Stability Board (FSB) deserves to be noted. Consistent with the thrust of Ms. Diamantopoulou’s suggestions, the FSB is now more strongly focused on ensuring that countries do actually implement the international financial and regulatory standards to which they have committed.

If this is the good news, there is some bad news to go along with it. Of greatest importance has been an increasing reluctance to address the exchange rate issues at the heart of the global imbalances problem. Another practical problem has been the disquieting tendency for many national financial regulators to try to lead by example. Evidently, convergence based on “follow me” is not likely to work over time. We must hope that, with time, the promises offered by the existence of the G20 forum and the FSB will actually materialise.

Anna Diamantopoulou’s call for a more united and forceful Europe on the world stage is also welcome. Internal success in dealing with cross border financial issues would enhance Europe’s already formidable reputation with respect to international cooperation. A willingness on the part of Europeans to merge their seats in international bodies, and to speak with a united voice, would not only make that voice better heard but also make room for emerging market participants. Everyone would gain by such a courageous move.