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International Economic Law at a Crossroads: Global Governance and Normative Coherence
Published online by Cambridge University Press: 24 July 2014
Abstract
International economic law (IEL) is now at a crossroads regarding the reconfiguration of the international economic order. Many scholars regard the multilateral trading system as a major legal achievement and agree that the World Trade Organization (WTO) has performed as expected with respect to the 2008 crisis. By contrast, the recent financial crisis has demonstrated the inability of the international financial architecture to ensure financial stability. However, this article will review the strength of the multilateral trading system and the challenges that it now faces regarding its main goal (the stability of trade relations). A material reform in the mode of a horizontal expansion in order to protect societal values other than trade liberalization seems to be needed if we want the WTO to be up to the tasks and demands flowing from global governance. Similarly, this article will analyse the current structure of the international financial system as well as the elements that would need to be changed in order to achieve the aim of financial stability. To accomplish that end, an institutional reform in the mode of a vertical expansion of IEL is proposed. Global governance and normative coherence have been used as the theoretical tools to unveil the similarities stemming from the functions performed and the need for transformation that both areas of IEL have in common. The reform proposals submitted for both areas of law would introduce a meaningful step from negative regulation towards a more positive approach to regulation.
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- INTERNATIONAL LAW AND PRACTICE
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- Copyright
- Copyright © Foundation of the Leiden Journal of International Law 2014
References
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104 However, it is true that, pursuant to Article IV of the IMF Agreement, this organization might carry a surveillance activity of financial systems with more teeth than has been the case until now, see Brummer, supra note 98, at 318.
105 See Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System (Stiglitz Report), New York, 21 September 2009, at 96.
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107 Ibid., at 1439 ff.
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111 See Giovanoli, supra note 96, at 6.
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117 See Pan, supra note 91, at 264.
118 See R. H. Weber, ‘Legitimacy of the G-20 as Global Financial Regulator’, (2012) Society of International Economic Law (SIEL), Third Biennial Global Conference, Working Paper No. 2012/13, at 10, <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2088315>.
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122 Although limited to those 25 jurisdictions deemed to host systemically important financial institutions.
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125 See M. Hellwig, ‘Capital Regulation after the Crisis: Business as Usual?’, (2010) Max Planck Institute for Research on Collective Goods Pre-print, No. 2010/31, <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1645224##>, providing a criticism of the new Basel Accord because, as the previous Basel II, it is based on risk-calibrated capital requirements, in particular under the model-based approach which may again lead to the undercapitalization of banks witnessed in the 2008 financial crisis. That is why Basel II has been qualified as a new failure of TRNs, see Cho and Kelly, supra note 119, at 532.
127 The Non-Cooperative Jurisdictions Initiative promoted by the G20 and carried by the FSB in order to oblige those jurisdictions to comply with prudential standards raises some problems of legitimacy, i.e., the legal basis of G20 members to force third countries to abide by standards not legally binding on G20 member States in the first place, see Giovanoli, supra note 93, at 122.
128 See Viterbo, supra note 94, at 128.
129 See Helleiner, E., ‘A Bretton Woods Moment? The 2007–2008 Crisis and the Future of Global Finance’, (2010) 86 International Affairs, 619CrossRefGoogle Scholar, at 632.
130 See Verdier, supra note 106, at 1461–62. According to Verdier, in the post-crisis reform scenario regulators retain considerable control over the process of raising prudential standards; great powers maintain their discretion to address failures on an ad hoc basis; and surveillance is reinforced only in a formal not a substantive way, ibid., at 1463–70.
131 See Helleiner, E. and Pagliari, S., ‘Crisis and the Reform of International Financial Regulation’, in Helleiner, E., Pagliari, S., and Zimmermann, H. (eds.), Global Finance in Crisis (2009), 1Google Scholar, at 4, 6–8.
132 See Giovanoli, supra note 93, at 90–91, 99, and 101.
133 See Cho and Kelly, supra note 119, at 526, highlighting that the G20 initial political impetus appears to be waning. Moreover, at the outbreak of the financial crisis in 2008, there were two meetings of the G20 per year. Nowadays, these meetings have been reduced to one per year, see <http://www.g20.utoronto.ca/summits/index.html>.
134 See Pan, supra note 91, at 245.
135 See J. Eatwell and L. Taylor, Global Finance at Risk: The Case for International Regulation (2000), 208 ff. According to these authors, the WFA could be created from an expanded Bank for International Settlements (BIS) (expanded authority, remit, role and membership); an alternative could be to place the WFA function within the IMF, ibid., at 235–7.
136 See C. Reinhart and K. Rogoff, ‘Regulation should be International’, Financial Times, 18 November 2008, at 13; B. Eichengreen, ‘Not a Bretton Woods, but a New Bretton Woods process’, in B. Eichengreen and R. Baldwin (eds.), What G20 Leaders Must Do to Stabilise Our Economy and Fix the Financial System (2008), at 25, <www.voxeu.org/sites/default/files/file/G20_Summit.pdf>; Garicano, L. and Lastra, R. M., ‘Towards a New Architecture for Financial Stability: Seven Principles’, (2010) 13 Journal of International Economic Law 597CrossRefGoogle Scholar, at 619; Boone, P. and Johnson, S., ‘Will the Politics of Global Moral Hazard Sink Us Again?’, in Turner, A. et al., The Future of Finance (2010), 247Google Scholar, at 269.
137 Independent panels of experts would have the task of determining whether countries are in compliance with their obligations as members of the new organization, see B. Eichengreen, ‘International Financial regulation after the Crisis’, (2010) Daedalus, 107, at 113–14.
138 See B. Eichengreen, ‘Out of the Box Thoughts About the International Financial Architecture’ (2009), IMF Working Paper No. 09/116, at 19, <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1415173>.
139 See Alexander et al., supra note 100, at 163, speaking of a Global Financial Governance Council.
140 See Avgouleas, supra note 109, at 429 ff. The ‘Treaty-established governing council’ would oversee the work of four authorities under it: a global macro-prudential supervisor (a revamped IMF); a global micro-prudential authority (a reconstituted and expanded FSB); a global financial policy, regulation and risk knowledge authority (the OECD together with the research division of BIS); and a brand new global resolution authority. This global prudential (systemic risk) authority would be in a position to face those problems that the recent reform has not properly addressed, namely, the cross-border supervision of very big financial institutions, the management of emerging and unpredictable risks, and the resolution of cross-border financial groups.
141 See Stiglitz Report, supra note 105, at 87, discussing the advantages of establishing a Global Economic Co-ordination Council.
142 See Kingsbury, B., Krisch, N., and Stewart, R. B., ‘The Emergence of Global Administrative Law’, (2005) 68 Law and Contemporary Problems 15Google Scholar.
143 See Lord Adair Turner, The Turner Review: A Regulatory Response to the Global Banking Crisis (2009), Financial Services Authority, at 9, Recommendation 25, <http://www.fsa.gov.uk/pubs/other/turner_review.pdf>.
144 See Pan, supra note 91, at 273–5. See also Aldford, D., ‘Supervisory Colleges: The Global Financial Crisis and Improving International Supervisory Coordination’, (2010) 24 Emory International Law Review 57Google Scholar.
145 See R. M. Lastra, ‘The Role of the IMF as a Global Financial Authority’, (2011) European Yearbook of International Economic Law 121, at 122.
146 See Eatwell and Taylor, supra note 135, at 236.
147 See Lastra, supra note 145, at 122–3.
148 See Arner, D. W. and Taylor, M. W., ‘The Global Financial Crisis and the Financial Stability Board: Hardening the Soft-Law of International Financial Regulation?’, (2009) 32 University of New South Wales Law Journal, at 488Google Scholar. According to these authors, both supervision and crisis management arrangements for cross-border international financial institutions are issues that truly demand hard law regime answers; ibid., at 490, 496.
149 Ibid., at 490. See also D. Schoenmaker and A. Siegmann, ‘Can European Banks Bailouts Work?’, (2013) Journal of Banking and Finance, at 4, <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2134066>, analysing the European context and submitting that, after a supranational approach, a second best solution would be a binding rule among national governments to share the burden of failing banks in order to maintain financial stability.
150 See Baxter, L. G., ‘Exploring the WFO Option for Global Banking’, in Boulle, L. (ed.), Globalisation and Governance (2011), 113Google Scholar, at 116, stating that the WFO idea is misconceived and doomed to failure. See also Brummer, supra note 98, at 312.
151 However, a coherent intellectual framework that promotes a complete overhaul of financial regulation is still very much needed, see F. Allen, A. Babus, and E. Carletti, Financial Crisis: Theory and Evidence, at 29–30, <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1422715>.
152 See Avgouleas, supra note 109, at 431, highlighting the expected opposition of big stakeholders like the US and the EU to a supra-national governance system.
153 See Gadinis, S., ‘The Politics of Competition in International Financial Regulation’, (2008) 49 Harvard International Law Journal 447Google Scholar, at 450, highlighting that domestic interest groups’ preferences have a direct influence on national policies, especially in a dominant state like the U.S., towards international co-ordination in financial regulation.
154 See Eatwell and Taylor, supra note 135, at 219.
155 Ibid., at 220.
156 See Reinhart and Rogoff, supra note 136, at 13.
157 See Kennedy, D., ‘Law and the Political Economy of the World’, (2013) 26 LJIL 7CrossRefGoogle Scholar, at 20.
158 See D. Rodrik, ‘A Plan B for Global Finance’, The Economist, 12 March 2009, at 3, <http://www.economist.com/node/13278147>.
159 See Stiglitz Report, supra note 105, para. 204. See also J. D. Ostry et al., ‘Capital Inflows: The Role of Controls’, (2010) IMF Staff Position Note No. 10/04, conveying a real change in the IMF's stance towards the use of capital controls.
160 See Ferran, E. and Alexander, K., ‘Can Soft Law Bodies be Effective? The Special Case of the European Systemic Risk Board’, (2010) 35 European Law Review 751Google Scholar, at 761, noting the institutional weaknesses of the Lamfalussy framework in place within the EU before the GFC broke.
161 See Moloney, N., ‘EU Financial Market Regulation after the Global Financial Crisis: “More Europe” or More Risks?’, (2010) 47 Common Market Law Review 1317Google Scholar, at 1325.
162 Ibid., at 1319, 1326. In the new institutional structure, the European Systemic Risk Board, which monitors macro-prudential risk, together with the three European Supervisory Authorities (the European Banking Authority, the European Securities and Markets Authority, and the European Insurance and Occupational Pensions Authority) form the European System of Financial Supervisors.
163 But see Hertig, G., Lee, R., and McCahery, J. A., ‘Empowering the ECB to Supervise Banks: A Choice-Based Regulation’, (2010) 7 European Company and Financial Law Review 171CrossRefGoogle Scholar, at 172–3, submitting that the national authorities would still have substantial supervisory discretion and that additional supervisory centralization was needed.
164 See Council Regulation (EU) No. 1024/2013, of 15 October 2013, conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions, DO L 287, 29.10.2013, at 63.
165 See Lastra, R. M., ‘Banking Union and Single Market: Conflict or Companionship?’, (2013) 36 Fordham International Law Journal 1190Google Scholar; See also T. Beck (ed.), Banking Union for Europe: Risks and Challenges (2012).
166 See, e.g., L. Zingales, ‘Is the US Capital Market Losing its Competitive Edge?’, (2007) ECGI - Finance Working Paper No. 192/2007, at <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1028701>.
167 See Moloney, supra note 161, at 1356.
168 See Cottier, T. and Krajewski, M., ‘What Role for Non-Discrimination and Prudential Standards in International Financial Law’, (2010) 13 Journal of International Economic Law 817CrossRefGoogle Scholar, at 823.
169 See Mavroidis, P. C., ‘Free Lunches? WTO as Public Good, and the WTO's View of Public Goods’, (2012) 23 EJIL 731CrossRefGoogle Scholar, underlining the idea that the public good is not free trade but instead the WTO understood as a forum that is necessary to address (negative) external effects stemming from the unilateral definition of trade policies.
170 See Shaffer, G., ‘International Law and Global Public Goods in a Legal Pluralist World’, (2012) 23 EJIL 669CrossRefGoogle Scholar, at 683, who highlights the role of international organizations in the provision of global public goods. See generally Symposium, ‘Global Public Goods and the Plurality of Legal Orders’ in the same issue.
171 See Trachtman, supra note 68, at 277.