Sarkozy Overreaching in the Global Economic Summit?

Sarkozy Overreaching in the Global Economic Summit?

Julian has already written a cautionary note about expecting a new Bretton Woods out of the upcoming global economic summit.  I could not agree more, and note that the Washington Post agrees in an editorial yesterday – indeed, the Post takes Sarkozy to the proverbial woodshed for a whuppin’:

With the global economy in crisis, and his own tenure as temporary head of the European Union expiring at year’s end, he wants multilateral action to fix the financial system, and he wants it now — or at least not later than Nov. 15, when leaders of 20 major nations assemble in Washington for an economic summit. “We demand to be heard, and quickly,” Mr. Sarkozy said Friday. “I am not going to be participating in a summit of polite conversation.” The French leader clearly feels empowered not only by the actual urgency of the situation but by a sense — widely shared among his constituents and the voting publics of many other European countries — that, as the crisis was made onWall Street, the solution should be made in Brussels. “The crisis is worldwide, but we know where it started,” Mr. Sarkozy opined.

The idea, as the Post observes, that the crisis originated on Wall Street is, by this point in time, quaint, however useful it is to European politicians.  Things may have started unraveling first in the US – more precisely, in Britain –  but the unraveling elsewhere has revealed that banks around the world followed exactly the same path of increasing leverage, often directly into home mortgage markets.  I lived in Spain for sabbatical in 2004 and wondered exactly what was holding up the Spanish property economywell, now I know.  Europe’s financial institutions leveraged as their US counterparts did – and precisely as one would expect in a world of globalized capital flowing to its highest rate of return.  If there was a problem in examining return as a function of risk, it was a globalized problem in a globalized capital market.  Even the capitals that are apparently awash in cash in the Gulf are not entirely exempt, it turns out – because if you have cash, that too can be leveraged.  As the Post says,

Europe’s comfortable belief in unique American guilt for the economic crisis is not altogether accurate. European banks are in trouble not just because the subprime mortgage contagion spread from Wall Street but also because of their own mistakes and Europe’s homemade structural economic flaws. Or has Mr. Sarkozy never heard of Iceland?

Nothing, in my view, is more pointless than an economic summit that begins from lofty but entirely unreachable premises about global regulation for the global economy.  If one were going to do that, one might have to start with the unpleasant contemplation about what contribution global banking capital standards have made to the current mess.  The idea that the world is going to embrace some kind of holistic financial regulatory arrangement is silly quite beyond belief – but, more dangerously, an immense distraction from what can be achieved, not by seeking global governance of the financial system, but by robust multilateralism that recognizes, to begin with, that national economies have very different requirements.  The Post makes several excellent suggestions on what a sober, realistic summit not merely aimed at speechifying might undertake:

[T]he summit could set up working groups to study practical methods of coordinating liquidity and capital requirements for banks, making derivatives trading more transparent and the like. Now that even China has opted for economic stimulus, the summit might also be a good occasion for participating countries to agree on common principles for fiscal policy, so they do not wind up playing the old game of beggar-thy-neighbor. The International Monetary Fund needs shoring up. So does global free trade, but since Mr. Sarkozy did his bit to scuttle the Doha round of trade liberalization talks, someone else will probably have to demand progress in that area. 

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Interesting but not surprising. My law firm just conducted a survey of the CEOs, General Counsels, Partners and/or Directors of 735 financial institutions and corporations from around the world.  The first question asked was whether a supra-national regulator for oversight of global financial instiutions should be established.  The respondents from Continental Europe were the most in favor (58%), Asia was close (44%) and at the bottom was the UK (39%) and the US (34%).  On the other hand, there was general agreement across the globe that more and better financial regulation was needed across a variety of fronts.