Financial crisis and challenges of global governance

Elcano Royal Institute
The global financial crisis that has pushed the EU, and particularly Spain, to economic recession during the second half of 2008 has demonstrated, more than ever, the deep interdependence that exists in Europe and the world. Spanish economists, like most international analysts, do not question any longer the fact that we are facing the greatest international financial crisis since the Great Depression.[1] Since September 2008, the world has seen unprecedented events that are re-shaping the international financial system and challenging liberal economic orthodoxy. Now, governments are launching rescue packages – first for specific financial institutions and then for the banking system as a whole although the Spanish financial sector had remained relatively safe from the turmoil in the markets, thanks to the policies enforced by the Bank of Spain. Central banks, including the ECB, have also opened up new channels for increasing a liquidity that still is lacking. And, what initially appeared to be a liquidity problem is also turning out to be a solvency problem that requires a hefty recapitalisation of the banking system in advanced countries. Fiscal stimulus packages have also been launched and, finally, and above all, decision makers and experts consider now necessary to improve regulation of the financial sector. In this context, the expectations towards the EU in Spain are ambiguous, since the performance of the ECB or the Commission has been perceived as technically correct (despite being less ambitious than the US response) but the real problem of the EU continues to be the difficulty to act with real political will and to generate the leadership that are indeed needed at times like these for restoring confidence to the markets. Although it is difficult to forge and consolidate strong political leadership at a time of crisis – and this is particularly true in Europe, where the Lisbon Treaty is not even into force after nearly a decade of institutional debate – there is no other recourse. In the face of panic, technical solutions are not enough to restore market confidence. For this reason, leadership can only be shared and must be based on cooperation among states. All in all, as of mid-autumn, the leadership emerging from Europe and concerted government action restored some degree of confidence. But capital continued to flee towards safer assets, the inter-bank market still had problems and the structural causes of the crisis had not been resolved.
Notwithstanding all this, the crisis will serve as well as an opportunity for the EU in general and for the Euro in particular as a global reserve currency. First, because it can be expected that the new international financial architecture that emerges after the crisis will have a greater similarity to that of continental Europe than to the Anglo-Saxon model. This will provide an opportunity for the Union to take on greater global leadership, if it is capable of speaking with one voice on the world stage. Secondly, because the crisis gives the Euro a chance to gain ground against the US dollar as an international reserve currency, a change which needs the political-institutional structure of the Eurozone to be sufficiently solid. All in all, the crisis marks an opportunity for the EU if it is capable of using the current, difficult situation to strengthen itself and improve its internal economic governance.[2] In this context, there is an open discussion in Spain as some analysts suggest that the performance of the EU would improve significantly by changing some aspects of the economic institutional governance in the EU[3] and a single European Treasury has even been suggested.[4]
Indeed, the crisis will have major geopolitical consequences, which are difficult to predict. Nevertheless, this might accelerate reforms of institutions of global governance and make clear the need to strengthen the forums for multilateral cooperation beyond Brussels or the G7/G8, being probably the G20 the better arena for co-ordinating the international response. This means significant shift in the international power constellation – since now emerging powers such as China, India, or Brazil are included in the new global decision making. The Spanish government, which is not a member of the Group despite being the 8th-11th world economy[5], re-acted to be invited to the international financial summit organised by George Bush in Washington last November 2008 in which initially only members of the group G20 could participate. Spain did intense lobbying to be invited to this crucial summit and, again, to the following one to be held in London in April 2009. Whereas it may be understandable that Spain is not part of the G8, it is arguable that Spain is not part of the G20 while much less rich countries such as Argentina, Indonesia, South Africa, or Turkey are. Spain finally was invited, thanks to the support of the French President Sarkozy, who left to the Prime Minister Zapatero one of his two chairs – one for France as such and the other for being the rotating EU Presidency – at the summit. However, Spain is not yet a formal member of the G20 but is doing a diplomatic effort which should conclude in the official admission of Spain and the subsequent enlargement of the G20.

[1] See Federico Steinberg, 2008, The Global Financial Crisis: Causes and Political Response (Elcano Royal Institute ARI, 126/2008), available at: (last access: 30 March 2009).

[2] See Federico Steinberg, 2008 (ibidem).

[3] See Carlos Mulas, 2009, Improving Economic Governance in the EU (Elcano Royal Institute ARI, 12/2009), available at: (last access: 30 March 2009).

[4] See Juan I. Crespo, 2009, A Tool for the Economic Crisis: A Single European Treasury (Elcano Royal Institute ARI 31/2009), available at: (last access: 30 March 2009).

[5] It depends on measuring the Gross Domestic Product nominally (and, thus, Spain would be the 8th biggest economy of the world) or measuring the GDP derived from purchasing power parity (PPP) calculations, in which Spain places 11th.