The goal of the original Bretton Woods summit, in New Hampshire, was to avoid another Great Depression. There was a strong belief among the victors of the war that the economic calamity of 1929-1933 had created most of the economic dynamic that later led to the war. Today, it's not Washington, but Britain and France that are bent on staging the new version of the summit. "Europe wants it. Europe demands it. Europe will get it," French President Nicolas Sarkozy said with typical Gallic arrogance before going to Camp David, where he met with President Bush, who now looks like the lamest of all ducks in American history. It is no wonder that an increasingly self-confident Sarkozy persuaded President Bush to agree to an international summit dedicated to nothing less than the "re-founding [of] the capitalist system."
The French government, and much of Europe, argues that the crisis has exposed the madness of believing that the market is always right. It's now the best time for "French dirigisme," the economic philosophy behind French political economy, arguably since the days of Colbert in the 18th century.
So what can the new attempt to shape the new world political economy achieve? We all know that the original Bretton Woods created the World Bank to reconstruct Europe after the ravages of war. Today, bombed-out infrastructure is hardly the issue. Bretton Woods also created the International Monetary Fund (IMF) to support a system of fixed exchange rates. But the world has largely abandoned that system. Today the main exchange-rate challenge seems to be in the opposite direction: to persuade China to float its currency.
Europe's point is simple. We are facing a global financial crisis that requires global regulatory solutions. So a new Bretton Woods conference could reform the IMF, which has evolved into a rescue fund for collapsing currencies. During the emerging-market crises of a decade ago, the IMF was central to all the bailouts. Today the Chinese are on the IMF's turf by helping Pakistan, and the Russians are doing the same with Iceland. Similarly, the European Union has helped Hungary. Boosting the IMF as the provider of bailouts and as a lender of last resort would be a worthwhile project mainly because the IMF puts economic conditions on its loans, while governments place political ones.
Yet, the same countries that are pushing for a new Bretton Woods would probably be the first to resist a serious effort to revive the IMF. London and Paris know full well that serious IMF reform needs to begin with the modernization of its board. Rising powers such as China and India deserve a place on the IMF board. This means some Western countries like France and Britain will need to give up influence.
It's worth remembering that after the last global crisis, in 1997-98, there was lots of grand talk about a new international financial architecture. In the end, the only important reforms were national ones. Governments ran budget surpluses and built up foreign reserves to protect themselves from the next shock. One thing is certain: Europeans are enjoying this moment. Having endured endless lectures about the need to get rid of their over-regulated economies and embrace free markets, the French and the Germans believe their attachment to the social market economy has been justified. Peer Steinbrück, Germany's finance minister, even publicly mused that Karl Marx was probably not all that incorrect in predicting that unbridled capitalism would ultimately consume itself.
Such European jubilation is understandable. Overall, the European corporate sector is stronger than in the US, there is scope for further interest rate cuts in Europe (unlike in the US), European savings and investment ratios are high and Europe does not suffer from the big current account and budget deficits that the US does. As a result, European politicians are trying to reassure voters by stressing their own interventionist powers in the background of panic on the financial markets and the severity of the economic downturn. After all, this crisis illustrated that state spending has been vital to recapitalize the banking system, boost confidence and support demand. Now, stricter global regulation with a new Bretton Woods conference may be required to restore faith in the financial system. Europeans will certainly try to take the lead. But they will have to learn to share the podium with Asia.
