UK Prime Minister Gordon Brown has renewed his call, first issued on April 18, 2008 at the John F. Kennedy Library, for a new Bretton Woods conference. The stated objective is to remake the international financial architecture, including the International Monetary Fund (IMF), to strengthen its surveillance and regulatory role over the international financial system and to equip it better to cope with crises. French President Nicolas Sarkozy has joined him, backed by the 27-member European Union. Sarkozy and EU Commission President José Manuel Barroso will meet on Saturday at Camp David to discuss their plans with US President George W. Bush. Good-bye substance! Hello theater! This is a dangerous, grandstand play likely to set back serious consideration of crisis prevention in the future.
No international conference at the level of government leaders since Versailles at the end of World War I has produced significant structural change without substantial preparation. You do not make it up as you go along; the participation of leaders often is necessary, but only to close the deal.
The first Bretton Woods conference took place July 1–21, 1944. Out of its meetings came the IMF and World Bank, later followed by the General Agreement on Tariffs and Trade (GATT). That Bretton Woods parley was preceded by four years of preparation including a preconference in June. Of course, heads of government did not attend; it was chaired by the US Secretary of the Treasury Henry Morgenthau.
The renewed call for a Bretton Woods II has been stimulated by the global financial crisis and an understandable desire not to let such crises happen again. However, unfortunately, there is no consensus yet about what caused the crisis. Without such a consensus, crisis prevention is challenging and potentially dangerous as officials concoct plans to fight the wrong war. As I predicted on October 7 ("The Global Financial Crisis Was Not Made in Washington"), the finance ministers and central bank governors came to Washington last weekend with the dominant view that this crisis was made in Washington. Although some of them may have adjusted their views based upon what they learned, everything I heard indicated that they persisted in blaming the United States. At fault, specifically, were US macroeconomic policies and their contribution to global imbalances, US regulatory laxity, rapacious US financial institutions, or a combination of the three. If the Bretton Woods II is intended to clip the wings of the United States, then it is likely to be as unsuccessful as the Committee of Twenty was in the 1970s in remaking the fixed exchange rate system of the earlier Bretton Woods conference and containing US international financial profligacy.
If the European proponents of a Bretton Woods II are interested in transforming the International Monetary Fund into a super-regulator or super-rating agency, one can reasonably question their seriousness. The Europeans have yet to put in place a robust regulatory system for European financial institutions. It is difficult to see how their national authorities would yield sovereignty to a body located in Washington, Brussels, Basel or Mumbai.
There is also the small matter of legitimacy. As IMF managing director Dominique Strauss-Kahn said in his remarks at the Peterson Institute on October 10, "Legitimacy must be conferred by reliance on broader groups." However, over the past three years the Europeans led by the British and French stymied efforts to legitimize the governance of the IMF by resisting any significant increase in the voting power of the nonindustrial countries. Given this record, Brown and Sarkozy lack credibility.
Of course, Brown and Sarkozy are clever politicians. Perhaps they are hoping that by striking a deal with a weakened, lame duck president, a new president will be obligated to go along. However, they also are sophisticated students of American government. They know that a new Bretton Woods would require legislation by the new US Congress. Therefore, one can only conclude that their motivation is diversionary theater not substantive change.
Lest I be misunderstood, talk is good, including among leaders. It is necessary as part of the consensus building process. Once consensus is reached on the causes of the crisis and on the best way to reduce the probability of repeating it in the future, the IMF should play an enhanced role in implementing the result, but it will not be as a super-regulator or a super-rating agency. All of this will take time, a great deal of thought, and substantial compromise in entrenched positions. To suggest otherwise via calls for a Bretton Woods II is irresponsible.
