In my August entry I noted a trend to decentralizing global finance moving away from the High Command in the form of new forms of financial cooperation amongst countries of the global South, especially spreading in South America and Asia.
But Stephany Griffith Jones´s November entry prior to the meeting of the G20 in Seoul has made me rethink. She notes with concern the worrying trend toward the consolidation of a paradigm of fiscal retrenchment in Europe. She is naturally right (as usual) in drawing attention to pervasive fiscal retrenchment in deficit countries and even surplus countries. While Germany eschews expansionary policies, Greece, Portugal, Spain and Ireland have been pressed by financial markets and the European Commission mainly under German influence into draconian fiscal adjustment.
The Washington Consensus, pronounced dead in 2008 by Gordon Brown and even by the World Bank as Kevin Gallagher noted, has sprouted up much too sturdily in Europe and is in extremely good health. Buried in a nailed coffin in Latin America, in European hands it has staged a spectacular comeback. The situation of hard-hit Hungary, Latvia, and Romania propelled unprecedented cooperation between the IMF and the EU leaving them in effect with control of the economy, spending and austerity measures. Hungary, Latvia, and Romania were offered rescue packages from varying sources, including stand- by loans from the IMF and EU loans under Article 119 of the Treaty establishing the European Community for member states not yet part of the Economic and Monetary Union (EMU) of the EU. Unprecedentedly while the IMF bent on the lenient side of the austerity equation, the EU upheld orthodox measures with unrivalled passion in return for its support. Latvia has shouldered the harshest conditions, even though a significantly overvalued fixed exchange rate was as evident as it had been in Argentina 2001. Argentina 2001 déjà vu all over again?
So for these countries Washington Consensus-like conditionality has landed not from the Washington-based begetters but from Brussels. What we have witnessed since the onset of the global financial crisis is hence a tight-fisted Brussels Consensus, of which Latvia and its fixed exchange rate has been the prime example.
The EU has assumed the role of lender of last resort in insisting that certain conditions be met before rescue packages are to be disbursed. In all cases, the EU actively promoted conditionality that was as tough as, or even tougher than, what the IMF deemed sustainable. What has happened is that while the IMF has sobered somewhat from past mistakes, the EU has only just entered into the business of crisis lending; it handles the basics and is subject to less scrutiny in terms of results and impacts on the “rescued “countries.
The rigid fiscal and monetary rules contained in Europe´s Stability and Growth Pact hardly leave room for the development of pro-growth approaches to steering financial crises. All rescued countries had high levels of outstanding euro-denominated debt that needed servicing for eventual pay-back to European foreign creditors— as much as eighty percent for Latvia.
Let´s merely consider, by way of example, the tough position of Sweden during the Latvian crisis. Swedish banks had been among the first to expand in the Baltic countries. Thanks to the expansion of Swedbank, SEB, and Nordea, Sweden had become the biggest foreign investor in Latvia. Being the most heavily exposed among all foreign banks, its banks went through severe panic attacks when a possible devaluation of the lats was tabled as an alternative solution. Fearing the financial fallout, Sweden soon emerged as the main cheerleader in favor of sticking to the unsustainable fixed exchange rate of the lats.
With such losses at stake, the EU has now emerged as the toughest player on the block. No wonder Portugal is desperately trying to resist a bailout, preferring to go it alone if possible. To pinch unashamedly from Ilene Grabel´s excellent October post, IMF governance reforms have been shipwrecked by the US-EU squabble over shares, voting rights and board representation. The rapidly rising “regional rescuer” interests of the EU loom large in this quarrel. And the hyper-conservative approach prevailing in Europe is bad news for global growth.