The world's post-war economic and financial institutions intended to provide platforms for global cooperation--including the International Monetary Fund and the World Bank, the Bank for International Settlements, and the regional development banks--seem to be suffering a crisis of credibility. The G-7 and G-20 also appear to be increasingly irrelevant to the workings of global financial markets.
In Europe as a result of the Greek crisis, the EU Commission, the European Central Bank, the EU Council, the EU Parliament, and the Eurogroup of finance ministers all appear to have undergone major reputational collateral damage. As a result of the IMF's participation in the Greek crisis alone, the word "troika" has for many working families sadly become synonymous with crushing austerity.
On the other side of the world, some analysts believe China's new Asian Infrastructure Investment Bank has the potential to become a serious competitor of the World Bank.
Is this claimed loss of credibility exaggerated? If not, is the damage to the industrialized world's economic and financial statecraft reparable? Flow can the statecraft be reinvented?
The IMF's credibility has rightly suffered.
Governor, Czech National Bank
The global financial architecture, the credibility of international institutions, and austerity in some Mediterranean economies--chiefly Greece--are clearly intertwined issues reflecting a fundamental need for reform.
Credibility loss is common in economic crises. As the latest crisis abates and recovery takes hold, this problem is bound to ease. We must also keep in mind that there are international institutions which have come through the crisis with their image unscathed (the Organisation for Economic Co-operation and Development), or even enhanced (the Bank for International Settlements).
Those that have suffered, such as the International Monetary Fund and the European Union (especially the eurozone), have not done so because they prescribed austerity. Austerity is often necessary to address an economy's inability to live within its means. It has worked relatively well in Spain and Portugal, and in the case of Ireland the problem is probably over. The focus is now understandably on Greece, but the Greek economy has been in this state for years. Despite the regrettable hardship for its people, a major contraction is necessary if it is to start living in line with its structural fundamentals. If Greece wants to aim higher, its people must realize that they have to transform the way their country operates.
Still, the IMF's credibility has rightly suffered, as it has betrayed its mission of providing objective advice to Greece. Other stakeholders are correctly pointing out that the IMF was over-optimistic in its support for the first two Greek packages. Its reasons will no doubt long be debated, but its non-European stakeholders are also likely to feel disgusted for many years to come.
The European Union is another major culprit. The euro project was advertised and sold as something that would promote growth in eurozone economies and friendship and trust among its member nations. Both these claims are plainly ludicrous now. However, most of the European Union's failings in the case of Greece stem not from ignorance of the latter's rights, as often claimed by less discerning observers (and Greeks), but from the fact that the European Union and its member states have consistently treated Greece as a sovereign state capable of delivering on its side of the bargain. The eurozone is now restructuring, but the Greek tragedy should not mask the fact that quite a few steps were taken to make the eurozone more sustainable. In addition, the weaker euro will provide a boost to those economies suffering from price competition on world markets. The Greek crisis probably heralds the end of the beginning of the eurozone rather than the beginning of the end.
What should be done with the global financial architecture? First, we must recognize that it is a product of cooperative behavior among sovereigns. We should welcome such behavior, notably the recent establishment of the Asian Infrastructure Investment Bank. However, we should continue with reform of the IMF. I am proud to note that my country, alongside Austria in particular, as well as other Central European and Balkan states and Turkey, has done its fair share of the work in establishing the Turkish constituency. More must be done by other European countries and the United States to realign the IMF's power structure to reflect current world realities. As for Europe, it is simultaneously hitting the boundaries of EU integration and facing a need for integration in the eurozone. Recognition of this might result in an optimistic scenario of a more economically and culturally homogeneous, and possibly smaller, eurozone that is more attractive to potential entrants, combined with a European Union pursuing integration in areas traditionally seen as worthwhile, such as security and infrastructure.
Economy takes command. This is the emerging reality in the world.
Former Deputy Defense Minister, Taiwan, and Professor, National Defense University
Economy takes command. Though not yet obvious, this is the emerging reality in the world. Since the millennium, economic interdependence among nations has reached a magnitude unprecedented in human history. Several implications follow.
First, the military tool has become inhibitingly costly and increasingly counterproductive among major powers. In the new century, when hitting a rival, one feels the pain oneself, and stabbing him, one bleeds. Second, non-bloody tools in international relations become more viable than bloody ones. Among the former, economy has risen in importance. Third, a clash between a rising power and an established power is no longer inevitable. The Thucydides trap loses its validity. Fourth, cooperation will gradually top contention for the long-term self-interest of each nation. Fifth, wars will occur within one nation, between unequal powers, but no longer among major powers.
In short, among major powers, an indirect approach in statecraft wins and a direct and confrontational approach loses.
Failure to heed these new trends has led to recent geostrategic setbacks for Washington as it has so far predicated its global strategy on the primacy of its military force, and on maintenance of its supremacy at all costs. Washington's frustration during the emergence of the Asian Infrastructure Investment Bank devised by Beijing was a case in point. In March 2015, Britain betrayed its most trusted ally, the United States, by joining the ABB--the integrity and intention of which Washington had questioned--taking other American allies along with it like falling dominoes.
In December 2013, British Prime Minister David Cameron led the historically largest overseas trade mission to Beijing and announced, "Britain will act as China's strongest advocate in the West." By then, China had invested more in his country during the previous eighteen months than it had in the previous thirty years. In March 2015, Cameron merely lived up to his words which resulted from Beijing's accelerated economic endeavor targeted at London.
China had applied similar economic tactics to woo other U.S. allies that ended up joining the AIIB--Germany, France, Italy, Australia, and South Korea.
Beijing has observed the adage of Sun Tzu that "winning without fighting" is the best way to achieve victory. China's grand strategy, therefore, is dominating East Asia or even Eurasia without war but with "extra-military instruments" such as economy, culture, diplomacy, and media. If Washington continues to follow the teaching of Clausewitz that "war is an act of violence pushed to its utmost bounds," it may become increasingly reactionary to challenges of unexpected nature.
Washington's long inaction over reform of the inadequate World Bank actually provided Beijing both the moral and the practical justification to establish the AIIB. Yet when Chinese President Xi Jinping first announced the formation of the bank in October 2013, Washington paid scant attention. In contrast, Britain's Chancellor of Exchequer George Osborne rushed to Beijing within two weeks.
In mid-July this year, World Bank President Jim Yong Kim visited Beijing and talked with AIIB Secretary General Jin Liqun to explore options for cooperation. This should be the way to go in the future.
The financial crisis actually paved the way for improved cooperation.
Governor, Oesterreichische Nationalbank
The period after World War II was characterized by an enormous acceleration in economic growth, leading to a vast increase in prosperity and wealth in many countries around the world. This remarkable "growth miracle" was initially triggered by reconstruction efforts and subsequently increasingly fueled by the deepening of cross-border trade and direct investment. Neither reconstruction nor increased trade and investment, however, would have been possible without a tremendous increase in international institutionalized cooperation. Our contemporary institutional structure thus has to be understood as a legacy of this development.
The Bretton Woods institutions, that is, the World Bank and the International Monetary Fund, are exemplary for these developments. While the World Bank has aimed at fighting poverty and assisting less-developed countries in their efforts to improve standards of living, the IMF has supported the balanced expansion of world trade and the stability of exchange rates. Even after the paradigm shift toward floating exchange rates, the Fund has retained a stabilizing and important global role.
After a bumpy road in the 1970s, the world economy eventually entered the so-called Great Moderation, a period of strong economic growth accompanied by stable inflation rates starting in the mid-1980s that even tempted some to the...