1. Why we need global governance

Μερος της ομιλιας του Τρισε 28/4/2010

1. Why we need global governance
There are numerous definitions of global governance. In the economic and financial sphere I
will propose that global governance comprehends not only the constellation of supranational
institutions – including the international financial institutions – but also the informal groupings
that have progressively emerged at the global level. Those informal forums (G7, G10, G20,
etc.) are key in improving global coordination in all the areas where decision making
processes remain national – whether in helping to work out agreed prudential standards and
codes or to facilitate where appropriate, the coordination of economic macro-policies.
No market can survive without a set of rules. This is particularly true at the international level,
where natural barriers to transactions are formidable. One of the global governance’s primary
aims should be that of facilitating the proper functioning of cross-border markets and thereby
of reducing transaction costs.
The process of doing so is evolutionary and demands a pragmatic approach with respect to
what arrangements may and may not work, depending on the circumstances. But the more
complex the goods and services exchanged are, the greater the need for a sound
institutional infrastructure. In this respect, finance stands out as an arena in which global
rules may be particularly beneficial.
More generally, the crisis has weakened the arguments of those who think that deregulation
is always conducive to better functioning markets. We have learned once again that markets
cannot function properly without an effective regulatory and supervisory infrastructure.
Governments, central banks, international institutions and globally agreed prudential
standards and codes are the means by which we collectively seek to avail ourselves of the
global public good of global economic stability.
Of course, there are limits to what internationally agreed rules can and should seek to
achieve.
First, the principle of subsidiarity is essential. This principle, which is a key feature underlying
of European Union legislative framework, says that no rule should be imposed at a global or
supra-national level that cannot be more or equally effectively set at the national or local
level. This principle might also be read as implying that the “burden of proof” should rest on
those who want to establish global, as opposed to local, rules and institutions.
Second, it is not straightforward to set common rules in complex and innovative fields such
as finance. While financial liberalisation, deregulation and innovation all have the potential to
make our economies more productive and more resilient, the financial sector must not forget
that its purpose is to serve the real economy, not the other way around. We have painfully
witnessed the fallout from excessive complexity of financial instruments in the current crisis.
Finally, there is a risk that common rules are not optimal and in particular that they are too
limited, since they have to be the minimum standards across many constituencies. This risk
is very real in the area of finance because of significant differences across countries in
financial structures, financial instruments and preferences for financial regulation.
Overall, the global financial crisis has shattered previously held convictions that “keeping
one’s house in order” is the right principle to ensure global welfare. We have certainly
become more aware of the negative externalities that financial innovation and financial
globalisation can create. Finance in its current form has become a double-edged sword for
the real economy.


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