The G20 challenge : no to economic warfare!

’Every man for himself!’ was the reaction of all the major powers of the time to the financial crisis of 1929. Each country shut itself away to protect its agriculture, its industry, its currency and its jobs. The currency war, followed by the trade war and then the industrial war, eventually led to war, pure and simple.

This time, political leaders have demonstrated a remarkable sense of calm. It may have taken the collapse of Lehman Brothers in September to realise the true extent of the crisis that had already been growing for a full year, but three weeks were all that were needed for Europeans and Americans to agree on a number of large-scale, coordinated and complementary rescue plans. Moreover, at the initiative of the European Union, on 15 November, emerging countries will be engaged in the search for lasting global solutions. This is the challenge facing the G20 meeting, which has come about as a result of the personal determination and political leadership of Nicolas Sarkozy in his capacity as President of the European Council. So, are we saved?

Closer inspection reveals that the choice between global solidarity and the ‘every man for himself’ scenario has not yet been made. It all depends on how the rescue plans will be implemented. For the drastic remedies that are required to save the global financial system have side effects which present an equal number of formidable political problems. Let us mention just two.

Firstly, there is a danger of things spiralling out of control. The decisions that have been taken dictate that no country can now afford to allow a bank or insurance company which is considered to be ‘systemic’ to go bankrupt. If such a financial commitment is made to save the banks, how is it possible to imagine that the general public would just stand by and watch as GM, Renault and Volkswagen go under? How can the guarantee of survival be restricted to the banks or to the larger industrial concerns only, whilst leaving the smaller ones to die a natural death? Furthermore, if we guarantee the survival of just the automobile industry, are we suggesting that the aviation, high-tech and pharmaceutical industries are less important for the future of our economy? This is where vertigo sets in …

Secondly, this sense of vertigo may lead to heightened competition between the states that come to the rescue of their financial systems, and to the promotion of ‘national champions’.

In the United States, the billionaire Warren Buffett outbid France’s EDF to take control of the energy company Constellation; a few days later, Wells Fargo Bank, of which Buffet is the largest shareholder, received substantial capital investment from the US Treasury. Similarly, in Europe, the French bank BNP Paribas acquired part of the Belgian and Luxembourg operations of the finance giant Fortis shortly before becoming the first beneficiary of the support plan put in place by the French Ministry of Finance. The unofficial explanation was that even fundamentally sound French banks would require an injection of capital so that their solvency ratio did not compare unfavourably with that of the British banks recently bailed out by the Treasury. Is this solidarity or … rivalry?

The conclusion to be drawn from all this is that, once financial meltdown has been averted, this first crisis in the age of globalisation must continue to be managed collectively, at both international and European level. The chain of irresponsibility created through a system of investing in high-risk securities must not be replaced by a system of competing national self-interests. Otherwise, economic warfare will spread as fast as the subprime virus.

This implies that everyone must dare to face up to his own contradictions and answer a few questions on certain thorny issues. Staying with the Europeans, here are a few such questions.

A question for the euro-zone countries: why delay the integration of financial Europe any longer? One of the most exasperating aspects of European policy is the amount of time wasted in taking into account the clear, expected and appropriate implications of any major decision taken. For instance, the abolition of internal border controls was decided in 1985 and was scheduled for implementation in 1993: it has been known for a quarter of a century that national immigration policies no longer make sense within the European Union. Yet it was not until the European Council last October that, on a French proposal, the main thrust of a common immigration policy was finally adopted. As regards monetary policy, in early 2009, the 16 countries using the euro will still have 16 different financial systems, 16 different supervisors, 16 different interpretations of the same accounting and prudential rules, and 17 different representatives (the 16 plus the EU) to the IMF. In the light of the financial crisis, will the countries in the euro area finally be inclined, 10 years after the introduction of the single currency, to draw the clear conclusions set out in the Treaties and dictated by common sense?

A question for European countries that are not members of the euro zone: how many crises will it take for them to realise that a country which conducts two thirds of its foreign trade with euro-zone countries is obliged, when times are good, to apply the same monetary policy as the euro area and, when times are bad, to watch its credit rating decline at the rate of its currency? The Danish Prime Minister has long understood this. The Icelanders discovered it too late. Central European countries will draw conclusions with regard to their own political agenda. The Swedes, and even the British, would do well to start asking themselves the same question.

A question for Germany: why is there so much reluctance to coordinate national economic policies to support economic activity? When we all go into recession, does this great founding country of the Union which represents 30% of GDP in the euro area and which relies on the euro zone for most of its trade surplus, does it really have nothing to say to its principal partners, suppliers and customers, and nothing to gain from their first-hand experience? This would be a strange first in European history indeed.

A question for France: is the battle over sovereign wealth funds really what we want? Do we want to defend French ownership of companies operating in France or employment and competitiveness in France? In both cases, which type of foreign investor poses the biggest threat: a public or a private shareholder? The truth is that an indebted country is forced to depend, in one way or another, on its creditors. From the standpoint of national independence, therefore, is it more harmful to see our companies acquired by foreign capital, or the French State itself forced to borrow funds from abroad in order to save its businesses? This is an issue that the United States itself can no longer ignore. General de Gaulle had fully understood this: for a state to be independent, it must be able to balance its accounts.

A question for the Franco-German duo: at the peak of the economic crisis, is it a matter of urgency that we impose additional burdens on our European industry in order to encourage it to reduce its CO2 emissions, without knowing what the position of the new US Administration will be, nor that of emerging countries, on the common goals that we are proposing to them in this area? It is true that we will be credible only if we are prepared to be the first to implement the international agreements that we have initiated. However, being the first is one thing, being the only ones is another, entirely different thing. Historical examples of where unilateral military disarmament has proved to be catching are few and far between. As Woody Allen once joked: ‘Yes, we must believe in heaven. The wolf will lie down with the lamb, but the lamb won’t get much sleep …’

Article by Alain Lamassoure published in ‘Les Echos’ on 14 November 2008