Collapse of global financial policy

October 15, 1998|By William Pfaff

LONDON -- An acute observer, who was in Washington recently for the meeting of international financial institutions, says that experience made him feel as if he were attending a wake for globalism, where the mourners could not bring themselves to admit that death had passed their way. They were unable to think clearly because they were in denial.

Globalism's collapse had provoked in them an intellectual crisis that resembled a religious crisis. The globalist paradigm derived much of its power from its prophetic content. It proposed a universal economic explanation and program for the future. It was all the more powerful as a belief system because it defined the profits made by Western investors and traders, and the costs paid by others, as mutually indispensable elements in an ultimately benign process.

The market has many virtues but globalist economic philosophy's attribution of a divine design to the unregulated play of the market was not a rationally defensible position.

Globalism produced an abdication of Western political responsibilities for the international economy. This made no sense after those same leading capitalist countries' past experience of damage done by unregulated markets within their own financial systems.

The avowed task now is to erect a "new financial architecture" for the world economy, but no one has yet described it, as there seems to be no new Keynes to provide the blueprints. While awaiting a theoretical foundation for serious reform of the international system, the key counsels would seem to be to do no more harm, if that can be avoided, and to make no more mistakes that derive from ideology divorced from intelligence.

A case in point is the controversy now developing about supposed pressures on the independence of the new European Central Bank. The victory of the Social Democrats in Germany has added to the array of European government leaders who are skeptical of the hard-money orthodoxy of the central bank's president, Wim Duisenberg, and of the presumed majority of the bank's council.

The Social Democrats' victory is interpreted as a potential challenge to the European bank's independence and to its "credibility" -- a key issue where the currency markets are concerned.

Oskar Lafontaine, the Social Democratic party leader nominated become finance minister in the German government being formed by Gerhard Schroeder, has said that there should be "a European economic government" to coordinate budget, tax and social policies for the countries that have adopted the European currency.

He has, in the past (without success), demanded from the Bundesbank a policy of lower interest rates. Both he and France's Socialist Prime Minister Lionel Jospin have said that Europe should set an exchange-rate target for the relationship between the dollar and the new euro.

These positions all imply that political considerations should influence central bank decisions -- which monetarist theory says should not occur. The monetarist position is once again the result of a theoretical conception divorced from political realism and historical experience.

The German Bundesbank itself is not independent. It had, and has, an obligation in German basic law to support the economic policy of the German government in power. The U.S. Federal Reserve system and its chairman, Alan Greenspan, are not independent in the manner in which Mr. Duisenberg would seem to conceive that his bank should be. The Federal Reserve is accountable to the Clinton administration, which nominates its members, and to the Congress.

The European Central Bank is accountable to the European governments, whatever its nominal independence, and when Mr. Lafontaine suggests that the 11 countries that have adopted the euro as their currency will eventually need some form of economic government, he is stating the obvious.

The 11 have established the so-called Euro-11 council to meet during European economic and finance minister meetings, which will informally monitor the European Bank's decisions. This is necessary, indeed indispensable.

The idea that a body composed, for the most part, of professional central bankers should independently control the fiscal policy of 11 nations is as unreasonable, and unrealistic, as that a few thousand young traders should have been allowed to rule and ruin world finances.

It has always seemed to me that the qualities that damned globalist orthodoxy were its intellectual narrowness, its lack of political sophistication, and its indifference to the ethical dimension of what it was doing to vulnerable people.

Ethical claims never carry much weight in what has become the accepted opinion of a given time, and political claims are rejected by bankers as prejudicing what those bankers claim are objective decisions. But the neglect of both can be very costly in the end, as we may see by looking about us.

William Pfaff is a syndicated columnist.

Pub Date: 10/15/98

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