Convincing George W. Bush to host a global summit on reforming the world's crisis-stricken financial system, set for Nov. 15, was the easy part. But now French President Nicolas Sarkozy and other like-minded leaders have to get Washington's free-market advocates to subscribe to what they consider a vital regimen of new regulations. Despite the scary lessons of the last two months, that is almost certain to prove considerably more difficult.
Sarkozy set high expectations for the summit by calling for the "moralization of financial markets" and a wider push to "re-found the capitalist system." When he and Bush announced the agreement for the summit, the French President envisioned a new regime to prevent "those who have led us to where we are today from being allowed to do so once again." Bush's emphasis was elsewhere: he talked of common rules to "preserve the foundations of democratic capitalism, (and) the commitment to free markets, free enterprise and free trade." So which will it be?
Even Elysée officials say it's impossible to know what a congress of nearly 20 national leaders will yield. "The fact that President Bush agreed to the summit is, in our view, a very significant development in itself," says Sarkozy spokesman Franck Louvrier. "As to exactly what will happen, it's too soon to know." So much for Sarkozy's swagger in insisting on major revision to aspects of the 1944 Bretton Woods treaty."Europe wants it," he said. "Europe demands it. Europe will get it." But observers suggest what emerges may not be exactly what Europe had in mind.
Some argue Bretton Woods and the International Monetary Fund (IMF) and World Bank it created should have undergone revamping even before the crisis broke. Initially tasked with overseeing currency exchange rates and providing funds and advice to nations suffering trade deficits, the IMF has watched its field of action wane as economies developed and globalized. As part of that evolution, financial trading began spanning borders and generating previously unimaginable transactions through highly-leveraged and complex derivatives all within a virtually unregulated atmosphere that national governments couldn't manage to police. Sarkozy and his European partners hope that the Nov. 15 summit can come up with a scheme of common rules governing global finance with the IMF possibly acting as the world regulator. Not everyone is optimistic that will happen.
"Unfortunately, you won't have a single set of rules enforced by a global regulator coming from this, because national interests and the enormous financial sums involved will get in the way," says Willem Buiter, a economics professor at the London School of Economics. "The result instead may be a college of national regulators, who cooperate in harassing reckless financial institutions operating across boarders."
Should that happen, the IMF could be given a new function as a "permanent secretariat" overseeing finance markets for G7 and other major countries, Buiter says. That's rather a far cry from Sarkozy's appeal to reinvent capitalism or even British Prime Minister Gordon Brown's call to reform the international financial system around "the agreed principles of transparency, integrity, responsibility, good housekeeping and co-operation across borders." Yet many observers say that even a partial move away from the reckless lack of oversight that enabled the current crisis would constitute progress.
"If this process results in nothing more than the U.S. resolving the Balkanization of its markets that divides regulation across at least five departments, and Europe coming up with unified rules, that will be something," Buiter comments. "If that happens, you've got much of the G7 covered, and if that can be extended to other major economies, the rest of the world would have to follow along."
Karel Lannoo, chief executive officer of the Center for European Policy Studies in Brussels, thinks the European Union's "collective structures and recent history of harmonization" leave it well-placed to come up with coordinated national rules or eventually even common regulation for financial markets. Yet he says spotty bank balance sheets were just as evident and untreated in Europe as the were in the U.S. until the crisis hit. "Europe, like America, decided it was easier to assume the sun would keep shining and the grass would remain green," Lannoo says.
But even if the summit yields trans-Atlantic agreement on tougher regulations, Lannoo says the new determination to substitute sobriety for greed may be a harder line to sell to emerging nations. "Lots of countries in Africa, Asia, Middle East, and South America are going to say, 'these are reactions to your problems created by your systems why should we listen to anything you say now?'," Lannoo says. "The challenge isn't just finding ways to prevent future excess, but also to convince nations like China and India to agree to turn off the music and quiet down when they've only just arrived at the party."