The sad death of multi-lateralism makes way for a more sinister trend
Like much of what passes as agreed policy in Europe these days, the deal announced only last weekend to address the eurozone's gathering debt storm is fast unravelling. Happy families?
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By Jeremy Warner, Associate editor
8:38PM GMT 15 Dec 2011
Key objections have been raised in national parliaments to the fiscal disciplines that the new, and spectacularly mis-named, "stability union" imposes on members of the eurozone, while the beefed-up financial backstop to halt further market contagion already looks pretty much dead in the water.
Nor is it just within the narrow confines of the eurozone that the financial crisis is testing multilateral solutions close to destruction. Who could in any case regard the vicious programme of austerity measures prescribed by multilateral arrangements as any kind of solution?
Most shareholders in the International Monetary Fund, including Britain and the US, are balking at the idea of coughing up yet more money to bail out Europe's monetary union.
At the World Trade Organisation (WTO), the director-general, Pascal Lamy, has warned of growing protectionist pressures as governments put national priorities before international ones. "We are in a vicious circle where crisis erodes the capacity of governance to co-operate even as the necessity of co-operation increases," he said.
As ever, European leaders appear to have presumed too much in promising an additional €200bn (£168bn) in bilateral loans to the IMF to fight the crisis. In Germany, the Bundesbank has said that the loans would be problematic unless other, non-euro, central banks participate.
In Britain, the Bank of England is baffled by the idea that it should in any way be expected to cough up the money – no one has apparently yet consulted Sir Mervyn King on the matter – while the US, Japan and China have already ruled out any further contributions. Nor does the UK government have any intention of providing the €30bn eurozone leaders have pencilled in for Britain's contribution.
All UK quota contributions to the IMF are bankrolled through the foreign exchange reserves. As detailed in the last Budget, these are being topped up to the tune of £6bn this year to meet potential calls from the IMF. The UK Government couldn't legally go further without a parliamentary vote.
This would be most unlikely to give the go-ahead to any more than a token rise in quota.
And with good reason. It's affecting everyone badly, but the eurozone crisis is in truth an entirely internalised affair which can ultimately only be resolved via burden-sharing within the region of national debts. Most of what was agreed last weekend was entirely irrelevant to this underlying imperative.
Like many others, I have found myself at a loss to explain why it is that European policy-makers refuse to face up to the reality, and either do what is necessary or throw in the towel and reconstitute the single currency accordingly.
A prime example of this state of denial comes in the shape of remarks by Christian Noyer, governor of the Banque de France. Referring to the threat of a downgrade of France's triple A credit rating, he said that it was not justified "when considering economic fundamentals – otherwise they would start by downgrading Britain, which has more deficits, as much debt, more inflation and less growth than us and where credit is slumping".
Mr Noyer is not the sharpest tool in the central banking shed, but even by his own standards, this is an extraordinarily naive remark. The reason France has a problem and Britain doesn't is not just because France will soon have a socialist president likely further to bolster an already unaffordable entitlements system, but because countries which don't have their own sovereign currencies cannot monetise their debt.
For Britain, the default risk is minimal to non-existent, whereas for France it remains quite high. The "economic fundamentals" may or may not look better than Britain's, but the constraints of the single currency make debt sustainability look a whole lot worse.
But Mr Noyer's comments are also symptomatic of a rather more sinister trend – a retreat into petty nationalism and finger-pointing. If the euro eventually comes apart at the seams, there is no doubt who will get the blame. It won't be that as a triumph of political hubris over sound economics, the project was flawed from the start; to the likes of Mr Noyer, it will be because of Anglo-Saxon finance.
Already, the retreat into national solutions is well under way. With every G20 summit, there is the customary commitment to banish the forces of protectionism. Yet though there is as yet nothing to compare with the famous Smoot Hawley tariffs of the inter-war years, creeping protectionism is strongly on the rise.
According to data compiled by the University of St Gallen's Global Trade Alert, the number of protectionist measures rose dramatically with the onset of the crisis three years ago. As St Gallen's Simon Evenett points out in a recent paper, many of these measures are not caught by conventional WTO prohibitions.
In its most recent assessment, the WTO was typically self-congratulatory. "The multi-lateral trading system was instrumental in helping governments resist intense protectionist pressures during the recent global recession," it said. Mr Evenett's analysis finds this judgment to be largely self-delusion.
In difficult economic circumstances, governments create new forms of protectionism that circumvent existing multi-lateral trade rules. The most obvious of these since the onset of the crisis have been in the form of government subsidy and procurement policy, but there are many others. Apparent compliance with existing WTO rules conveniently excludes many areas of fast-growing discrimination.
Most disturbing of all, Mr Evenett finds that WTO rules may be insufficient to prevent the adoption by many governments of more overt tariff increases on the scale of Smoot Hawley. It requires only one to break ranks, and the whole system collapses.
With the possibility of renewed global recession now looming, it seems highly likely we are approaching such a moment. A sharp slackening of growth in China will inevitably result in wide-scale dumping and further mercantilism. The US and others won't take such actions lying down.
Multi-lateralism, it seems, is no more than a fairweather friend. With the storm clouds gathering anew, it is failing to provide solutions. The retreat into national alternatives is already upon us.
All UK quota contributions to the IMF are bankrolled through the foreign exchange reserves. As detailed in the last Budget, these are being topped up to the tune of £6bn this year to meet potential calls from the IMF. The UK Government couldn't legally go further without a parliamentary vote.
This would be most unlikely to give the go-ahead to any more than a token rise in quota.
And with good reason. It's affecting everyone badly, but the eurozone crisis is in truth an entirely internalised affair which can ultimately only be resolved via burden-sharing within the region of national debts. Most of what was agreed last weekend was entirely irrelevant to this underlying imperative.
Like many others, I have found myself at a loss to explain why it is that European policy-makers refuse to face up to the reality, and either do what is necessary or throw in the towel and reconstitute the single currency accordingly.
A prime example of this state of denial comes in the shape of remarks by Christian Noyer, governor of the Banque de France. Referring to the threat of a downgrade of France's triple A credit rating, he said that it was not justified "when considering economic fundamentals – otherwise they would start by downgrading Britain, which has more deficits, as much debt, more inflation and less growth than us and where credit is slumping".
Mr Noyer is not the sharpest tool in the central banking shed, but even by his own standards, this is an extraordinarily naive remark. The reason France has a problem and Britain doesn't is not just because France will soon have a socialist president likely further to bolster an already unaffordable entitlements system, but because countries which don't have their own sovereign currencies cannot monetise their debt.
For Britain, the default risk is minimal to non-existent, whereas for France it remains quite high. The "economic fundamentals" may or may not look better than Britain's, but the constraints of the single currency make debt sustainability look a whole lot worse.
But Mr Noyer's comments are also symptomatic of a rather more sinister trend – a retreat into petty nationalism and finger-pointing. If the euro eventually comes apart at the seams, there is no doubt who will get the blame. It won't be that as a triumph of political hubris over sound economics, the project was flawed from the start; to the likes of Mr Noyer, it will be because of Anglo-Saxon finance.
Already, the retreat into national solutions is well under way. With every G20 summit, there is the customary commitment to banish the forces of protectionism. Yet though there is as yet nothing to compare with the famous Smoot Hawley tariffs of the inter-war years, creeping protectionism is strongly on the rise.
According to data compiled by the University of St Gallen's Global Trade Alert, the number of protectionist measures rose dramatically with the onset of the crisis three years ago. As St Gallen's Simon Evenett points out in a recent paper, many of these measures are not caught by conventional WTO prohibitions.
In its most recent assessment, the WTO was typically self-congratulatory. "The multi-lateral trading system was instrumental in helping governments resist intense protectionist pressures during the recent global recession," it said. Mr Evenett's analysis finds this judgment to be largely self-delusion.
In difficult economic circumstances, governments create new forms of protectionism that circumvent existing multi-lateral trade rules. The most obvious of these since the onset of the crisis have been in the form of government subsidy and procurement policy, but there are many others. Apparent compliance with existing WTO rules conveniently excludes many areas of fast-growing discrimination.
Most disturbing of all, Mr Evenett finds that WTO rules may be insufficient to prevent the adoption by many governments of more overt tariff increases on the scale of Smoot Hawley. It requires only one to break ranks, and the whole system collapses.
With the possibility of renewed global recession now looming, it seems highly likely we are approaching such a moment. A sharp slackening of growth in China will inevitably result in wide-scale dumping and further mercantilism. The US and others won't take such actions lying down.
Multi-lateralism, it seems, is no more than a fairweather friend. With the storm clouds gathering anew, it is failing to provide solutions. The retreat into national alternatives is already upon us.
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