*****#4 Getting the Architecture Right (Or, At Least, Less Wrong)*****
Continuing with The Only Game in Town – Central Banks, Instability, and Avoiding The Next Collapse, finally, there is the issue of the regional and global architecture. The challenges are most urgent in Europe, where, according to Italian prime minster Matteo Renzi, the EU has behaved like a “boring old aunt” – having failed to convert the restoration of market calm into a more durable economic state of affairs. And its inability to be more imaginative and decisive is massively undermined by the incomplete regional architecture.
As currently constructed, the Eurozone’s stool stands on one and a half legs. The full leg is that of regional monetary integration, which is quite solid. The half leg speaks to banking union. Having discovered the hard way the period of banking fragmentation within a monetary and currency union, Europe has made progress in recent years in building a more robust banking system. The initiative got a major boost in 2014 with the fuller empowerment of the ECB. But it is still incomplete, requiring quite a bit of work in both national and regional jurisdictions.
The third needed – but largely missing – leg has to do with fiscal integration, and it is the one that triggers the most heated debates both within and outside the Eurozone. By fiscal integration, Mohamed El-Erian advocate the principle of a common budget that, similar to how the feral system operates in the United States, facilitates transfers, along with joint and several liability (that is, members of the collective are individually liable with respect to the same liability), if the ultimate aim remains a cohesive and coherent economic union that foster ever-closer political, social, and institutional integration. Clearly there are enormous philosophical and operational differences here. Until this gap is sorted out in a mutually acceptable and durable manner, Europe stands little chance of successfully completing its historical regional integration project.
Political integration is the fourth leg. Shaken by the regional crisis and the near collapse of the euro in 2012, members of both the Eurozone and the EUR have paid greater attention to building more robust and responsive regional institutions. Yet the delegation of responsibilities between the national and regional levels remains erratic, hindered by a huge variation in the willingness of national governments to transfer power up to the regional level. And the challenges of an unprecedented refugee crisis have amplified the shortcomings. Many regional institutions lack the operational flexibility needed to respond. And the system of regional transfers has more to do with a series of messy historical political compromises than with the needs of the Eurozone of today and tomorrow. Meanwhile, threats to the EUR are amplified by Britain’s plans for a referendum on its continued membership, as well as the historical challenge of refugees coming in the tens of thousands from middle east and other failed or fragile states.
Then there is the issue of reconciling the two very different tracks that the Eurozone and EU are on. The traditional political parties in the vast majority of the Eurozone members see themselves on a journey to complete integration. The speed and bumpiness of the journey is of course a function of prevailing conditions, including the noise created by Euro-skeptic politicians and the related emergence of non-traditional parties in quite a few of those countries. But the end goal is clear. Not so far the EU. There, a few members, particularly the United Kingdom, are happier to treat the existing situation as a steady state rather than a journey. Their membership is focused much more on the EU as a free-trade area rather than on broader integration objectives. Reconciling these two visions for Europe needs to happen if the region is to deliver more of its promised outcomes.
A lot of this comes down to trust. Without it European countries’ interconnectedness and interdependencies can go at times from being strengths to weaknesses. Without trust, it is hard for any individual country to move forward, and the resulting difficulties are compounded by verification and enforceability issues. The problem comes when you try to play a “cooperative game” in an uncooperative fashion.
B. The INTERNATIONAL SYSTEM
To truly exploit its considerable potential, the world economy needs a better global conductor. Lacking that, insufficient cross-country policy coordination will hold back the beneficial impact of better policies at the national level. Think of it in terms of an orchestra, the global economy lacks both that common sheet of music and that respect conductor.
Who could fix the problem? The obvious answer is the IMF, and institution that enjoys virtually universal membership, has talented staff, and possesses considerable expertise and experience. Yet, as discussed earlier, the IMF’s rile is constrained by its member countries’ unwillingness to agree to reforms, even minor ones. Instead, the organization remains mired in some quite feudal practices that eat away at its effectiveness, legitimacy, and credibility.
And the “G’s” aren’t much better laced, either. – G8, G7, G20, G3, all speaks to the nation that the world is steadily marching toward the G-0. Efforts at international coordination are undermined by the lack of a common assessment of the global environment, supplementing the problems associated with the erosion in common values and aspirations among advanced countries. And with the West no loner trusted to evolve the international architecture in a way that is consistent with the changing global configuration, emerging economies find it easier to try other things even though they are – at best – only partial solutions.
Absent a major correction we may be marching toward a world in which global policy coordination is a mere shadow of its former self. A growing number of countries are becoming either unable or unwilling to reconcile their global role with their domestic situations. As such, global economic and policy outcomes repeatedly and frustratingly fall short of what is needed and indeed feasible.
World summit are driven more by public relations considerations than substance. Despite the sophistication of its hyper-connectivity, the world is subject to periodic coordination failures and vulnerable to possible catastrophic risks should finely tuned networks fail. This increasing isolationism among advanced countries is not limited to the economic and financial spheres. It has also played out in politics.
This was a case where it was sensible to believe that collective international action would take precedence over individual domestic responses. After all, tens of thousands of civilians were losing their lives, and hundreds of thousands more were being displaced. In addition to massive human suffering, such enormous causalities and population movements risked destabilizing neighboring countries and fueling extreme and violent movements. Yet, as visible as this was to all, once again the potential for coordinated responses fell victim to a growing national isolationism. That reflect the extent the national politics and policy making was downgrading the importance of global spillovers, spillbacks, and interdependence.
To overcome these repeated slippages, the world needs to return to the wisdom of strong multilateralism. But rather than create new structures, it should het serious about modernizing existing ones. On the economic and financial sphere, this is particularly important in the case of the IMF, an institution that ,when called upon, has shown an ability to deliver even in the most difficult circumstances.
The comprehensive modernization and empowerment of the IMF is long overdue. If individual l countries wish to improve the prospects for their current and future populations, they must supplement their national policy adaptation with serious efforts to
- Enhance the financial resources of the IMF;
- Restructure the institutions’ voice and representation so that it reflects the world of today;
- Dismantle once and for all remaining nationality entitlements, including a feudal “tradition” under which the head of the institution should be European, and thus fostering meritocracy at every level of the organization;
- Strengthen its ability to name and shame countries, both surplus and deficit ones, that persistently contribute to global imbalances and vulnerabilities.
BACK TO CENTRAL BANK EFFECTIVENESS
No one should doubt that if central banks remain the only game in town,” there is a very real chance that they will go from being part of the solution to being part of the problem. Moreover, the destiny and future standing of central banks are no longer in their own hands. So what can they do? A few small things, though they are limited and unlikely to prove decisive as long as other policy-making entities remain on the sidelines.
Central banks can do a little bit more when it comes to the problems of inadequate demand and debt overhangs. A few small central banks can also try to facilitate economic recovery by making their individual currencies more competitive – though you will never hear them say so. A weaker exchange rate is meant to boost activities of both export-oriented companies and those whose domestic sales compete with foreign-supplied goods and services. But again, effectiveness is far from complete, and there are costs involved, including the risks of triggering a currency war. Finally, when it comes to policy coordination, the regularly scheduled meetings in Switzerland are highly effective when it comes to consultation, sharing ideas, and when needed, applying coordinated action.