From Washington Consensus to Brussels Consensus

Diana Tussie

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.

8 Responses to “From Washington Consensus to Brussels Consensus”

  1. Ilene Grabel says:

    Thanks Diana. It has, indeed, been interesting to observe the IMF’s economists nudging (mostly unsuccessfully) some of the dominant players in the EU to go a little bit softer on the struggling economies in and on the periphery of the Eurozone. The depressing effort by some in Europe to raise from the dead the failed Washington Consensus certainly stems from efforts to play to the national audience (Germany is case in point here), from broader efforts to unravel the welfare state while saving the big banks, and from the commitment to ideas that have long ago been discredited.

    It will be very interesting to see if France’s new leadership of the G-20 and the G-8 ultimately has any measureable influence on the evolving European financial architecture or even on the global financial architecture. In connection with the latter point, French President Sarkozy and French Finance Minister Christine Lagarde have made a number of interesting comments of late regarding the need to overhaul the US dollar-based global financial system and the role that the IMF might play in coordinating capital controls.

  2. Diana Tussie says:

    Thank you Ilene. The issue of capital controls will be gaining momentum and opening up a new stream of controversies in preparation for the next G20 meeting . The IMF now seems to show increasing interest in becoming the overseer of a regime for capital controls and in providing rules of the road for when a country needs or does not need capital controls,

    While the US will push hard agains any proposal that can cast the blame for hot money on them, many other countries, now using capital controls, are wary of granting the IMF any authority on the issue, fearing the loss of policy space.

    The tables might still turn a number of times in the coming months.

  3. Ilene Grabel says:

    You are definitely right, Diana–positions are very fluid right now, making it such an interesting time.

  4. Peter Chowla says:

    Ilene is interested to see if the French G20 presidency will change things. I fear not, now that I have read the G20 agenda as put out by Sarkozy on Monday. It was an interesting sleight of hand (though I have no idea if it was intentional). On the G20 website in English it describes the agenda for the reform of the international monetary system, including the issue of capital controls, as follows:

    “Following on from work already accomplished under the Korean presidency, France would like the G20 to establish a shared diagnosis of both the causes and consequences of the current deficiencies in the IMS. Subsequently, common answers to these deficiencies must be discussed, in order to avoid exacerbating global imbalances. A way must also be found to limit the negative consequences for the global economy of excessive volatility in certain currencies and excessive rigidity in others.”

    But if you read the “Dossier de Presse” given out to journalists and ONLY available in French ( it says this (p. 8): “Favoriser des flux de capitaux stables pour financer la croissance et le développement: La présidence française du G20 proposera de donner au FMI un véritable
    pouvoir de surveillance dans ce domaine, que ne lui donnent pas ses statuts
    actuels. Cela pourra prendre la forme de règles multilatérales favorisant la liberté
    des mouvements de capitaux mais permettant l’intervention des États dans les
    phénomènes d’entrées-sorties massives de capitaux”

    Quick translation: The IMF should have a mandate over capital accounts that includes a presumption of liberalisation and the use of capital controls only in certain cases of massive changes in flows. That is not good news! And funny that that crucial phrase “promoting the liberatisation of capital flows” did not appear in any of the English material!

  5. Diana Tussie says:

    The Brussels consensus rests on strong pillars in Bonn and Paris. Any move to give the IMF a mandate over capital controls will have to contend with that, in my opinion

  6. Ilene Grabel says:

    Thanks Peter for the analysis and comparison of the English and French-language text (especially for us monolingual people).

    What a baffling position elaborated in the French-language document, particularly in connection with the statements coming from Sarkozy and Finance Minister Lagarde two weeks ago regarding the need to have the IMF play a role in global coordination of capital controls. (Even that was a bit scary, at least potentially, in terms of policy space.) But now shifting to more explicit language about limiting the use of capital controls, well, that’s a big problem.

    As Peter rightly notes in some personal correspondence, this apparent new view of the French government is consistent with earlier views articulated in the lead up to the East Asian crisis (when the IMF was poised to expand its mandate to extend to promoting capital account liberalization). Why this idea would rise from the dead now in France, and why it would be articulated in one official statement and not the other, well, that’s a mystery. I’ll look forward to clarification on this matter.

    Also, it will be important to see how the IMF manages dialogue on this issue (more power for the institution, to be sure, so staff might be thrilled, but also at odds with the more accomodating stance it has continued to take on the matter of capital controls). It will also be important to see how governments of countries that have been deploying capital controls of late respond to this idea. Thanks Peter for raising the matter.

  7. Ilene Grabel says:

    One more thought in connection with my last point above re. the possible response of the countries deploying capital controls:

    It is hard to imagine that this large number of countries (especially those that are now in a new position at the IMF, providing resources to it) will acquiesce to any such calls that presume capital flow liberalization to be the norm or that give the IMF increased rights to act on this (false) presumption. I would hope and expect that any such efforts would be challenged by these governments. And I also hope/expect that the IMF’s numerous statements (in policy notes and in more official documents like its Global Financial Stability Report) to the effect that “capital controls are a legitimate part of the policy toolkit” would be used to challenge any effort to contract policy space by giving the IMF new responsibilities/powers to presume capital flow liberalization.

  8. Diana Tussie says:

    You are absolutely right Ilene. I guess the risk now is not the presumption of capital flow liberalization , but that the IMF wants authority tooversee when, how and how long, these are deemed legitimate.