New Bretton Woods fails to materialise

6 April 2009

New Bretton Woods fails to materialise

The G20 summit led to a few interesting breakthroughs, but the urgently needed fundamental reform of the financial-economic system failed to materialise.

by Ewout Irrgang, financial spokesman for the SP, and Dennis de Jong, number one on the SP list for the European Parliament elections.

According to British Prime Minister Gordon Brown's statement at the closing of the G20 summit in London, a 'new world order' has been created, and an end put to the 'Washington-consensus’. And it must be said that every major country, including the UK and the US, now endorses the idea that there must be surveillance of the unregulated hedge funds and junk bonds and that this is a breakthrough which a year ago would have been impossible. Tax havens were once the black hole in the financial system, but following the G20 summit are more than ever before under pressure. This is, even if nothing more were achieved, a gain, one which makes it clear that the era of more market and less government is behind us. But is this the new Bretton Woods in favour of which many, including Gordon Brown and Nicolas Sarkozy, have spent the last few months arguing? As far as that goes, the G20 was a real disappointment.

The credit crisis was in essence brought about by financial institutions taking irresponsible risks. They did this after the huge increase in their freedom of manoeuvre which came about through the liberalisation of the financial markets and of international capital movements. Surveillance by states remained, as a result, behind the game, or was even limited by a preference for self-regulation by the financial sector. An entire ‘shadow-banking' system arose, of financial institutions such as hedge funds which were under no supervision.

Some form of surveillance is now urgently needed, but it is alarming that the concrete form taken by this appears to be limited to a requirement for more registration and more information. Bonuses in the financial sector,often based on short-term share values, created the conditions for the shameless lining of pockets. But they also persuaded bankers to take irresponsible risks. Some kind of state supervision of this would be welcome, but concrete agreements are unfortunately not in evidence.

Self-regulation is in itself not expressly ruled out in the G20 declaration. Shareholders have put financial institutions under permanent pressure to improve their profitability each quarter. These shareholders, focused exclusively on the short term, must have their power reduced. Workers and savers should have much more influence and are more interested in the long term. This goes, moreover, not only for financial institutions but for business in general.

The G20 summit had nothing to say on this subject. The distribution of voting power in the IMF and the World Bank reflects the power relations of 1945. That the IMF has now been given far more elbow room so that it can offer assistance to countries such as Hungary and Iceland was necessary. But the fundamental democratisation of these Bretton Woods institutions has failed to materialise. The United States maintains its veto. In addition, the position of the dollar as the international reserve currency, despite careful proposals on the part of China, remains untouched, with all the risks that carries. Europe supported the Americans on the basis of the secret hope that the euro could yet become an alternative. This hope is false. The future is with Asia, where the majority of the world's population resides, not with Europe, whose time has in truth passed. To suggest that Britain's accession to the eurozone would change anything is so Eurocentric. It would be much better were European countries, with and without the euro, able to work together with the rising Asian powers to arrive at a real reform of the financial-economic system. In place of Bretton Woods, a small area of a small town in New Hampshire, such an accord will probably carry the name of a village in the environs of Beijing or New Delhi.

This opinion article first appeared in the daily financial and business newspaper, the Financieel Dagblad, on 6th April.

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