Global economic governance is the set of supra-national institutions and laws as well as the international relations between countries that have an effect on cross-border economic and financial transactions.
Indeed, no market can survive without an institutional infrastructure, i.e. a set of rules and this is particularly true at the international level, where natural barriers to transactions are already formidable. Global governance's primary aims should be that of reducing transaction costs, and that the process of doing so is evolutionary and characterised by continuous change and learning by doing. One therefore needs to maintain a pragmatic approach with respect to what arrangements may work and not work in facilitating trade and keeping transaction costs low, depending on the circumstances.
Moreover, the more complex and durable the goods and services exchanged, the larger the need for a sound institutional infrastructure. In this respect, finance stands out as a field where global rules may be particular beneficial. More generally, the crisis has weakened the arguments of those who think that de-regulation is always and necessarily conducive to a better functioning of markets.
Of course, there are clear limits to what internationally agreed rules can and should achieve.
* First, the principle of subsidiarity remains valid, implying that no rule should be imposed at a global level that cannot be more or equally effectively set at the local level. Incidentally, this principle is enshrined in the Lisbon Treaty and is therefore part of primary EU law; the Lisbon Treaty, in particular, has explicitly recognised a role for national Parliaments in monitoring subsidiarity in the EU. This principle might also imply that the burden of the proof should rest on those who want to establish global, as opposed to local, rules and institutions.
* Second, there is a risk that common rules are not optimal and in particular they are too lax, since they have to be the common minimum denominator across many different local positions.
* Third, some argue that imposing a common rule also implies limiting the range of national experiences and therefore the potential for learning about the best institutional setting. It would therefore prevent the best rules from emerging from free competition among different systems. Finally, and perhaps most importantly, it is not easy to set common rules in particular in complex and innovative fields like finance.
The global financial crisis has, however, weakened some of these arguments and shattered the previously held conviction that putting one's house in order is the only principle that matters to ensure global welfare, and that international spillovers need not be taken into account.
We have certainly become more aware of the negative externalities that globalization, in particular financial globalization, can create. This is epitomised in the sentence "the crisis is global, the solutions need to be global". In my view, international interdependencies are too large for purely national or regional rules to be optimal and there is a clear need to strengthen global governance, in particular in the financial field.
For example, the crisis has exposed the risk of regulatory arbitrage, shedding a more negative light on the competition among different systems and rules. In addition, the view that local governments are always driven by the welfare of their citizens needs to be qualified, as special interests often matter a great deal. Those special interests are likely to exert less influence if the rules are agreed on at the international level.
International Monetary Fund(IMF) policymakers have failed to head off a forex war. China's top central banker, Zhou Xiaochuan, rejects demands for a quick yuan revaluation, declaring that Beijing would reform gradually, rather than engage in any kind of shock therapy. The yuan would move slowly toward an equilibrium level. Zhou argues that any sudden and sharp revaluation of the yuan would put a lot of Chinese companies in the export sector out of business, triggering massive job losses and social unrest.
Basil Venitis declares the forex war has already erupted! The Fed is flooding the world with cheap dollars. American current monetary policy acts as a competitive devaluation against emerging-market currencies. There is a currency war, but there is nothing we can do about it. The USA should act more responsibly in face of the present economic situation and not simply find a scapegoat in order to please US voters. USA Inc. is bankrupt, that's the short and long of it. It's following the route of a lot of other has-been empires. The global currency system is lopsided and controlled by China. Yuan will eventually stabilize at a higher rate, but it will be China that will decide when and how it revalues Yuan.
The United States fired the first shot in the currency war and the rest of the world must be on guard for its deliberate strategy to devalue the dollar. Sinokleptocrats describe Uncle Sam as the conflict's first maker of tomb figures, a Chinese idiom that means someone who creates a bad precedent. Sinokleptocrats have warned before that loose monetary policies in the United States pose a serious challenge for emerging markets, but rarely in such strident language, a window onto the rising anger in Beijing. Continued intervention in currency markets by developed economies would deal a blow to global economic recovery.
The dollar's depreciation may appear to be market-driven. In reality, it is a depreciation colored by very strong, deliberate actions. Federal Reserve's announcement that it might soon launch another round of quantitative easing by buying bonds and other financial assets had been the key factor pulling down the dollar. The motives are plain enough. Without a weaker dollar, the United States would have no hope of meeting President Barack Obama's goal to double exports in five years. Dollar depreciation will also serve longer-term interests by generating inflation and easing the debt burden that the financial crisis dumped on the U.S. government. If the global financial crisis was about nationalizing private debt, then in the post-crisis period the urgent need of the United States is to internationalize its national debt.
Basil Venitis asserts central bankers and politicians can't repeal the laws of economics. They can use various means to impose fiat money on their subjects, but printing up more money will lead to rising prices. The Fed's pseudobold moves may have temporarily averted a crash in the US financial markets, and the European Central Bank's interventions may have postponed a string of defaults by indebted governments. But more and more investors and central bankers themselves know that these stopgap measures merely pushed back the day of reckoning. As the crisis looms, people are rushing to buy gold from dealers and gold vending machines. The only obstacles are the sales tax and VAT.
The euro has been rescued for the moment, but Eurokleptocrats have thrown the foundations of Fourth Reich's common currency overboard with their unprecedented bailout package. In the longer term, the dangers of the crisis can only increase, and the flood of billions of euros will lead to inflation. Eurokleptocrats have thrown overboard all the noble principles and promises of the formal, tough treaty-based foundations for the introduction of the euro and the independence of the European Central Bank.
Venitis notes Eurokleptocrats sacrificed the independence of the European Central Bank and paved the way for a European Inflation Union. There won't be any state bankruptcies in the eurozone in the future. ECB will just purchase government bonds of the country in trouble. The money can't run out as ECB prints it itself. A flood of money like that can't continue without any consequences. The currency's stability will be undermined and inflation will destroy Fourth Reich.
ECB now purchases government bonds in emergencies. Not only has this been prohibited until now, it also contradicts the central bank's overarching goal, keeping the value of money stable. Now this taboo is broken, and the very foundations of eurozone are eroded. ECB's independence' has now been shown to be nothing more than a sham, a chimera, a will-o'-the-wisp. In the end, ECB and euro will be punished for this decision to stand down from what had previously been considered sacred.
This policy effectively makes ECB a bad bank, a bank that buys up toxic assets as a means of helping out other institutions, all protestations of its president to the contrary. The pile of junk bonds on the ECB's balance sheet continues to grow. The fact that the ECB is keeping prices artificially high is downright encouraging banks to unload their risky assets onto the central bank.
Venitis points out the European Central Bank has been buying up Greek bonds by the bucketload, even though Athens is already getting money from an EU rescue fund. There is a French plot behind the massive buy-up, as it gives French banks the perfect opportunity to get rid of their Greek assets. German banks, on the other hand, are not potential sellers, because they have made a voluntary commitment to Finance Minister Wolfgang Schaeuble to hold their Greek bonds until May 2013.
ECB is creating excess supply by buying at overinflated prices. In other words, many creditors are more inclined to sell their risky assets to the central bank under these terms. It's a free lunch. Anyone who doesn't take advantage of this opportunity to get rid of his securities now only has himself to blame.
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