CNBC's Davos 2011: Downside of Globalization Tests Economic Cooperation
Members of The Basel Committee on Banking Supervision voted to require banks within the country to hold extra capital to protect against potential losses, and other countries with exposure to the “bubble country” would follow suit.
“This is very significant, because it takes the regulatory community into protecting the health of the entire system rather than just individual banks,” said Paul Tucker, deputy governor of the Bank of England.
“They’ve crossed a Rubicon,” says Barbara Matthews, a U.S.-based regulatory consultant. “Up until now the Basel committee has been about making banks safe. They are now implementing a tool kit that blurs the line between regulation and economic policy.”
G-20 Steps Up, Falls Down
In 2009, the so-called G-20, which is made up of countries that represent 85 percent of the world’s economies, agreed in at its meeting in Pittsburgh to become the new permanent council for international economic cooperation, replacing the smaller G8.
“At the outset of the global financial crisis, measures taken appeared ad hoc or temporary,” says Gezici. “But the decision at the Pittsburgh Summit in September 2009 to institutionalize the Group of 20 reflects a marked shift in the locus of leadership.”
The G-20 adopted a proposal from President Obama that outlined a process for economic cooperation to help ensure that worldwide recovery is sustained. It’s the first time such a large number of countries agreed to work together on each others’ economies, regulatory reforms and future growth.
But the group’s subsequent meeting last November in Korea stalled, failing to capitalize on earlier progress as members disagreed on how to best foster global growth.
“Korea showed that the G20 goal of strong, sustainable and balanced growth is nothing but a mantra with few follow-through policies,” says Gezici. “The underlying problem is that it is impossible to force nations to agree when they have irreconcilable differences over their global economics analysis and policy prescriptions.”
Davos founder Schwab said this year, “the G20 will have to demonstrate that it can address not only the necessary financial reforms but also questions of global governance, the reform of the global monetary system and the scarcity and fair distribution of natural resources.”
An individual nation’s economic troubles now ripple across world markets in hours, even minutes yet global solutions remain elusive and nearly impossible to implement.
“We are entering uncharted waters,” says Metzl. “American debt is a big challenge, as is the overheating of the Chinese economy and the growing debt crisis in the European Union. We have lived in a U.S.-led, rules-based economy for some seven decades, and something new is now emerging. In a post-American world, no one knows yet what the rules are or appreciates the dangers.”