Firstly, it is important to fix the problems that the crisis caused. Whilst much of the G20 debate has concerned issues such as global fiscal stimulus, the real challenge remains in choosing a new philosophy for the international financial system and its regulation.
Unless we want to hermetically close the borders and change the economic system, we will need capitals flowing in and out. So far this has been done without much control and the lack of information on what was being traded has created the bubble that exploded a year ago. How to fix it? It is the old story of choosing the right tools to address the problem which is the fact that financial markets are global when the regulators remain national. Understandably, as soon as capitals start flowing between countries it is more and more difficult to keep track of what is being traded. Different accounting rules, lack of transparency, lack of accountability… As soon as information is missing, speculation escalates and a few get filthy rich whilst money disappears from pension funds, saving accounts and people lose their jobs because the company they work for can’t have access to financing. This is institutional failure. The system is failing to protect their citizens from legal theft. This requires a change of system or justifies and upraising from the citizens against the institutions representing them.
Although, if we take into account the increasing integration and interdependence of the world economies, a world financial regulator would be the solution, it still seems to be too far away for many; especially for those countries not used to the exercise of sharing sovereignty -which has delivered so much to the European citizens-. However, within the EU it is unacceptable that we can have a common market, free movement of people, goods, capitals and services –at least on paper-, a common currency and monetary policy and a high level of economic integration without having a functioning European financial system. It took this crisis for the non-interventionist/regulation-phobic European Commission to start working on the regulation of hedge funds, transparency of derivatives markets and improved accounting rules aiming at creating a level playing field between EU countries. It is better late than never, but this will fall short to prevent a new crisis. As long as European financial markets continue without a regulator -which should be democratically managed, transparent and with the power to enforce its decisions we will continue to live under the threat of a new financial meltdown. The decision to allow more or less speculation, to allow using money for the sake of just create money instead of directing to productive investments is not a technical one that can be self-regulated by a market. It is highly political and it requires intervention of European legislators.
Secondly, whilst working on the prevention we need to act to fix the damage done by the crisis. Of course money matters when we want to protect those who are losing their jobs and at the same time invest in economic reconversion but is also a matter of political leadership to pick and implement a coordinated approach to transform the European economy. So far there is no serious European recovery plan as such but a sum of multiple stimulus plans. The European Commission put forward a recovery plan that falls short in scope and objectives when the EU needs bold new vision to move forward. European taxes –without increase tax pressure on EU citizens- or issuing EU bonds to increase the financial capacity of the EU is not a “tabu” issue only supported by some “lunatic federalists” anymore; time has proven that the unbalances of power and competences within the EU may be able to exist as transitional structures but when going through troubled waters the EU needs fiscal federalism and a consistent European budget.
This is why in the new legislature starting next month we need the European Commission to start behaving more like a federal government in order to manage an expanded EU budget of at least 2% of the community GDP, with the capacity to issue Union-Bonds and develop a European fiscal policy matched by an increase in the political responsibility. This reaction is far from radical; it is what any state is doing right now, from China to the US and from Argentina to Germany. In the EU the level of economic integration and the fact that we share a monetary policy justifies why this is the only sensible, yet politically difficult, way forward.
Continuing with the current indecisive situation puts at risk more than just the recovery of the economy but the current structures of the EU because the increasing and unbalanced indebtedness of national budgets will endanger the common market and the euro. We can talk of institutional failure when the institutions fail to deliver the pillars for normal functioning of a society; namely rules (regulatory framework), transparency, fairness and political and budgetary capacity to act in times of crisis. This is needed today and it doesn’t look like is going to be delivered by the EU.
Parts of the solution require treaty changes, some others don’t. A strong leadership is necessary to lead either of them and this leadership should come from the European Commission. If the current Commission is not up for the work the newly elected Parliament should exercise its democratic power and reject any new commission that lacks leadership and a plan for the future of Europe.