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Financial Architecture

The EU wants to construct a new world order for the global economy.

12:00 AM, Oct 17, 2008 • By IRWIN M. STELZER
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Politics may make strange bedfellows, but economic crises make even stranger ones. Gordon Brown, free trader, now finds that Nicolas Sarkozy, arch-protectionist, has virtues he had not previously noticed. It seems that they are united by three things. First, they believe, or at least are pretending that they believe, that the current ills originated in the United States. You might remember: This is the same United States whose entrepreneurship it was Chancellor Brown's habit to laud to all who would listen, before becoming prime minister and slipping easily into the anti-American mode that began with his first visit to President Bush and now dominates his public and private discourse.

Second, Brown and Sarkozy, along with their EU partners, believe that now is the time to put the former hegemon in its place. America, they believe, is paralyzed by the lame-duck status of its president. It will, they reason, be forced to go along with any European proposals for what is variously called a "new financial architecture" and a "new world order". The joy on the faces of EU leaders as they gather for their several conferences can be seen in news photos. Never mind that the banking systems of their countries are on the verge of collapse, or that they are headed for a recession deeper and longer than the one the United States will suffer. Now is their chance to do things that the Americans might not like, but can't stop.

Third, Brown, Sarkozy & Co. have always done what Ronald Reagan accused his own bureaucracy of doing, "If it moves, tax it. If it keeps moving, regulate it. If it stops moving, subsidize it." Brown, long famous for profligate spending and mindless regulations, now proposes to subsidize home buying by first-time buyers so that they can catch the falling knife that is the UK house-price market. And his new-found friends in the EU, the very same countries whose currency he wisely snubbed, have never hesitated to increase their tax-funded budgets, and draft regulations at such a rate that very often the lobbying firms in Brussels cannot follow all the action.

But that's no business of the United States, at least not directly. Now, however, the EU 27 plan to make it America's business. The enthusiastic response to Gordon Brown's memorandum suggests that his partners have signed on to a regulatory scheme that they plan to put to the United States on a take-it-or-leave it basis. There will be more regulations, more regulators, more international gathering of those regulators, perhaps a new Bretton Woods agreement--more on that in a moment--with a timetable "for agreeing these proposals over the next few weeks and months," says the Prime Minister.

Regulators would study the world's economies for signs of trouble; they would supervise the impact of the financial sector on the real economy; hedge funds would be closely regulated; executive pay and bonuses would be limited; offshore centers will be regulated (important to the French, who find foreign competition with their institutions unpleasant); "Market participants," Brown insists, "should develop a robust clearing facility for OTC credit derivatives
and fulfill other commitments to achieve greater certainty in OTC derivative markets". Whatever that means, it does show that no detail is to be spared the regulator's review. There is, alas, no mention of a commission to stimulate innovation in financial services.

But give Brown his due. He did lead the way in developing a plan to do the most important thing that could be done to bring the crisis off the boil: recapitalize the banks. That, while Hank Paulson and George W. Bush were talking about spending $700 billion to buy duff IOUs from the banks--which would do nothing to add to their capital unless the U.S. Treasury overpaid, which it said it would not do. Dutch Finance Minister Wouter Boss had reason to say, "The crisis showed an absence of US leadership."

Now, there is nothing wrong with greater coordination of economic policy among nations. That's why it was good news that the central bankers of leading countries coordinated their recent reduction in interest rates, and why it is a good thing that there are talking shops such as the International Monetary Fund to provide a forum for an exchange of ideas.

But informal cooperation is not the same thing as erecting a new world order. As the British delegation to the original Bretton Woods, New Hampshire conference in 1944 repeatedly argued, individual nations must be free to adjust to special circumstances by having what we have come to call "opt outs"--the ability to flout the rules when circumstances required.