Interview conducted by Julie de la Brosse
In Toronto, the leaders of the 20 world powers have decided to . . . not decide much at all. Be it regarding economic austerity or financial regulation, the participating nations have granted themselves the freedom to act as they please, hence the pessimism of Jean-Charles Rochet, a financial regulation specialist who teaches at the Toulouse School of Economics.
The G-20 in Toronto ended Sunday without a single commitment made by any of the heads of state of the 20 world powers. How do you explain this half-hearted summit?
The problems faced by Greece and other European countries led to most nations taking a step back from the reform on financial regulation. They are reluctant to fight the financial system, fearing that it would weigh against economic revival. The United States in particular, which should have taken on the role of leader, did a last minute U-turn on the topic of regulation to focus on the question of growth. This is not very surprising, but it is serious, even more serious than two years ago, when we hoped that the crisis would be an opportunity to put things back in place. This G-20 summit, focused on getting out of the crisis, only reinforced a terrible conclusion: The countries are incapable of making common decisions. In Toronto, they had the choice between two solutions: reforming the financial system or waiting until the economy has stabilized to implement serious reforms. In fact, they chose neither option and decided to leave it up to each country to do what they want, when they want.
Does this mean it would have been better to agree on putting the reforms on hold?
Not exactly — the better option would of course have been for the countries involved to have had the courage to go ahead with the reforms. But to leave it up to them was to nip in the bud any form of international engagement. This “a la carte” G-20 summit is the worst thing that could have happened to international regulation. It is proof that at the slightest problem, in this case the debt crisis, the states are ready to let go of everything, even the most urgent reforms.
May one also consider, as Nicolas Sarkozy, that the initiatives brought about by some, such as taxing the banks, will have a snowball effect?
Taxing the banks is the decision that should have been made at the international level and, therefore, during this G-20, because the leveling always happens from the bottom. If only a few countries puncture their financial sector, it is certain that the banks will relocate to places where they are the least taxed. The end result will be that those countries without taxes will benefit from the virtuous policies of the other countries. They will have no reason to make any effort after that.
Would a surplus of regulation risk having a negative effect while the specter of a slow recession hovers over us once again?
That is the main argument put forward by the banks: Each time we try to regulate the financial sector, they use the argument of growth as a blackmailing tool. This attitude is insufferable. It is in fact absolutely possible to financially motivate the banks to give loans to businesses and to penalize their speculation activities, even if that means cutting a small portion of their profits. This solution would not threaten economic growth, but speculative activities would be monitored as they should be. Nevertheless, the states have a hard time agreeing on these types of measures because they are not sure of what they really want. Politicians are personally sensible to this cause, because they are thinking of their re-election, but the governments remain highly dependent on the pressure coming from the financial industry. Nonetheless, what is certain today is that in case the banks experience new catastrophic losses, the individual states will no longer have the financial means to repair the damage done.
Some countries, such as Australia or Canada, pointed out that they did not need to save their financial sector during the crisis, and therefore shouldn’t have to pay for the others…
I have a lot of sympathy for those countries that did not blindly engage in the subprime trend. But if their banks truly have a limited speculative activity level, then they would not be penalized by a tax well conceived and with the aim of discouraging speculation, wouldn’t you say?
The states have agreed, this past weekend, to make growth a priority while cutting their deficits by half. Isn’t that incompatible?
That was in fact the debate dominating the weekend talks. The Unites States came to Toronto to advocate for growth at any price while Germany and the European Union came to promote austerity. As in the case of financial regulation, a compromise was found to build an action plan “to favorably consolidate financial growth.” It was blurry and not really binding. Nevertheless, to those who say that austerity and growth are not compatible, I would answer that it isn’t impossible to stop the squandering while financing socially beneficial investments through loans. This solution isn’t completely senseless if it is properly applied by all the countries. Unfortunately, the choice was left to the states to do as they wish.
What can one expect of the next G-20 summits?
I am not very optimistic for the future. At each G-20, one realizes more and more the futility of these summits. In London and Pittsburgh, the countries had at least agreed on emblematic measures such as the elimination of fiscal paradises or the supervision of bonuses. But today, we can see that these agreements did not really bear their fruits. There are still fiscal paradises and the implementation of the new regulations varies highly between the countries. In Toronto, no concrete measure was decided. It is that much more discouraging for the future. That’s why I think it would be better to replace these G-20 summits with committees of experts working on long term solutions, which would thereafter be put in place in an orderly manner by the governments. This would avoid wasting time, money and hot air.