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Nation states fight to keep control over money

Policies remain resolutely national - which is why they are failing



The major international efforts after the crisis has focussed on action by each state to increase fiscal and monetary stimulus so as to move as close as it dare to full employment. In bank regulation, also, the emphasis has been on national measures, as in Dodd-Frank and similar measures in Japan and the EU. New powers over the banking and credit markets known as macro-prudential instruments are vested in central banks at national or regional levels. The Fed pursues objectives entirely dedicated to US interests. It is aware that Congress would likely end its independence if it started to take into account the effects of its policies on the outside world in any systematic way.

The IMF, the premier institution of international monetary cooperation, has not been granted any new powers to deal with the next financial crisis – a few new “facilities” and change in governance arrangements do not add up to any significant accretion of power. Academics’ calls for greater coordination of monetary policies to smooth exchange rate variability fall on deaf ears.

By the same token, governments under threat have shown that they are quite willing to try to to censor internet traffic or unwanted social media.

Respectable voices welcome the progressive fragmentation of global money markets and nation’s retreat behind protective walls – mainly on the grounds that then countries will be able to pursue more expansionary policies without fearing capital outflows. Thus two quite distinct and conflicting models of social and economic development confront us – on one hand, the universal, globalised, internet-connected world unified by common monetary links and price signals; on the other, the tried and tested model of the nation state, trading with the outside world but with all the levers of monetary and economic policies and censorship under the control of its government.

Strong forces defend the nation states.  Financial interests, which many people see as gaining from globalisation, have a long-standing alliance with state power. This has never been stronger than in the recent crisis, where the big banks have emerged even larger, with their too-big-to-fail status enhanced and underwritten. The Fed is going slow on implementing even the mild requirements of Dodd-Frank  (e.g. requiring banks to draw up “living wills”), as Simon Johnson shows. In Europe, banks go along with pressure to raise capital ratios (with the implicit quid pro quo that they will receive support if needed), despite evidence it tends to slow recovery.

Everywhere, interbank markets remain dependent on central bank liquidity, and access to funding at zero interest rates provide banks with a guaranteed rate of return on “safe” government bond holdings.They gain from the continued existence of different currencies, and differences in national regulations, from opportunities to arbitrage. The finance sector gains from one-sided globalisation – freedom for them to “loot the world”, with political power remaining with national governments that they can influence. Financial markets and bank capital depend crucially on ownership of “risk-free assets” – identified as the obligations of governments of undoubted credit standing. The entire international monetary system rests on a national currency, the US dollar. Banks are deemed to be made “safe” through their holdings of national government bonds, and regulated at national level under guardianship of national central baks. International cooperation consists in – and is limited to – mutual assistance between sovereign governments.

Equally, the dominant new form in which capitalism takes in East Asia is State Capitalism. The media, dependent on financial advertising and political patronage, is everywhere nationalistic rather than global. So is school and university teaching of history. Events such as the commemoration of  the outbreak of World War I in 1914, provide huge new opportunities for nostalgic nationalistic glorification.

It is unsurprising, therefore that at present, the nation state model is in the ascendant. In many countries there has been a political backlash against the symbols of global integration – especially immigration. The UK threatens to withdraw from the EU; Scotland threatens to withdraw from the UK; throughout the euro area people protest against the austerity (in peripheral countries) or the cost (north Europe) of the crisis in the eurozone. Nations around the world are increasing spending on “defence”. Yet despite the rapid growth in military spending by China and other rising powers, under President Obama the US has broadly maintained its share of global military expenditure at about 40%.

Incidents such as the downing of the Malaysian airlines aircraft over the Ukraine and Russia’s involvement show how easily international tensions can rise.

And as in 1914, rising military, economic and political powers want “their place in the sun”. The existing top dog, the US, has to accommodate their ambitions. Let us hope it shows more wisdom that Britain did in the confusion that led to war 100 years ago.