The Elusive Search for Global Financial Rules

BRUSSELS – If the financial crisis is global, it is said, then the solution must be global : an international financial system that works better. And, because the Bretton Woods institutions (BWIs) – the World Bank and the International Monetary Fund – form the center of the international financial system, they must be included in the solution.

An enhanced international financial system must pursue two main lines of action. The first is to broaden the scope of international cooperation. At the moment, the Financial Stability Board, whose members include the G-20 countries, mainly pursues initiatives in this field.

A second line of action is to strengthen the international institutions’ soft powers to aim for more consistent economic policies, especially by systemically important economies. This would directly involve the Bretton Woods institutions, notably the IMF. A strengthening of the IMF was agreed after the Asian crisis in the 1990’s, and the G-7 summit in Cologne in 1999 mandated the Fund to play a strong surveillance role to ensure greater transparency and encourage early adjustment by countries with unsustainable balance-of-payments positions.

But, over the last decade, the expectations raised by this mandate have not been met. Some emerging economies did not let their currencies float but, instead, continued to peg them at undervalued exchange rates in order to promote their exports and build up reserves as a form of insurance in case of crisis.