The Crooked Path of Financial Reform

BRUSSELS – Two years ago, governments saved the necks of the world’s financial markets. Yet today, those same markets intimidate governments, or at least some of them.

In Europe, the market for Greek debt has frozen, and interest-rate spreads between Irish and German euro-denominated debt recently reached alarming levels. Spain has succeeded in reducing its own spread vis-à-vis Germany but only after a policy U-turn. Portugal has announced a major austerity package, hoping for the same effect. But, even when they are not in danger of losing access to the bond market, most governments in the developed world nowadays anxiously await the pronouncements of the same rating agencies that they were recently vilifying.

This change of fortune is shocking. To public opinion, it looks as if arrogant financial-market professionals learned nothing from the crisis, feeding the impression that nothing has changed – except for the worse. Governments with a mandate to domesticate financial markets appear to have produced a lot of sound and fury, but little reform. Whether deliberately or not, regulators seem to have missed their chance to implement serious changes to the rules of global finance, and governments are now so weakened that they are at the mercy of those who, not long ago, were begging them for help.

This politically devastating sentiment fuels resentment against markets and financiers. Nevertheless, while no one is proclaiming, “mission accomplished,” it is not true that nothing has been done to reform finance.