Financial Crisis and Populism: an explosive Cocktail!


What distinguishes the current financial crisis from the normal garden variety of economic cycles is not only its historic amplitude but rather that it is superimposed on a political crisis that, in turn, severely impairs the moral authority of  Leaders indispensable to draft and implement credible solutions to the former.


Indeed, how can one hope that Ministers (or other elected officials) are able to restore the necessary confidence in a largely discredited financial system if the same “Excellencies” are Members of Governments (or Assemblies) whose exemplarity is nearly daily contested by revelations of unacceptable behaviour, if not from a legal standpoint, at least from a governance and ethical perspective.


This is not a new phenomenon as similar behaviour can be observed throughout history. What is particularly problematic, within the current context, is its simultaneity with the financial crisis. The causes of the crisis are complex: they are described using a highly technical vocabulary, exceeding by far the understanding of the great majority of actors while also often referring to more subjective ideologically based concepts which are cleverly displayed to obfuscate, more or less successfully, underlying private or corporatist interests.


Furthermore, at the legislative level, a deliberate confusion is maintained by manipulating concepts such as “regulation” and “governance” which, far from being interchangeable are thoroughly complementary. Let us make this perfectly clear:


-         “Regulation” can be defined as a corpus of compulsory prescriptions (laws, directives, regulatory codes) promulgated by a competent Authority which organises simultaneously the means of controlling compliance and the enforcement of sanctions against offenders (including lapses by Supervisors). 


-         “Governance”, on the other hand, is a set of prescriptions (completing, as the case may be, statutory obligations imposed by laws and regulations) such as by-laws, internal regulations, professional codes of conduct adhered to, on a voluntary basis, by members of a wide variety of groupings including corporations, political parties, professional – charitable – cultural or sportive associations etc.  Infringements to governance are sanctioned according to “accepted rules” but cannot, in general, go further than the exclusion of the offender from the group in question.


It is most important to distinguish between these two types of prescriptions. Considering the economic importance of the financial sector, it is vital that “financial” Regulation be extended to areas which, in other sectors, could legitimately be largely covered by Governance alone. This is particularly necessary to ensure the enforceability of both civil and penal responsibility of financial sector actors and deter behaviour whose nefarious consequences can spread to society as a whole as was witnessed during the current crisis.


This carefully managed confusion between concepts is particularly apt to foster cheap slogans or amalgams creating an unhealthy climate of irresponsibility and impunity that extends to many areas which appear totally unrelated to the financial crisis: an emblematic example relates to the recent football “world cup” which, through the regrettable actions of the French team, demonstrated the capacity of “sport” to become a “matter of State”, mobilising the French President to deal with the lamentable behaviour of  a bunch of “millionaire” cads (an expression more often used to describe  bank “traders”) which totally ignored the responsibilities of those who have the privilege of defending their national colours. Media coverage focussed – as usual – on the scandalous aspects of the incident, obliterating in the process the highly commendable behaviour of the President of the French Football Federation, Jean-Pierre Escalettes, whose resignation and subsequent press conference were a model of governance, courage, honesty, modesty and selflessness rarely encountered at such a level of responsibility. His attitude deserves to be widely publicised and should serve as an example to all those who have the privilege of governing us.


It is not surprising that, in such a noxious atmosphere, public opinion is seduced by populist oratory whose simplistic denunciations gather all the more attention that the discredit of the political class deepens. One can – quite rightly – repeat that the great majority of elected representatives are both honourable and mindful of the “public good”, it is, nevertheless, the behaviour of a minority, tacitly if not overtly tolerated by a leadership full of its self righteousness, that opens the way to put our democratic system into jeopardy.


The management of the financial crisis by the authorities is impaired by the numerous contradictions that surface and that are ruthlessly exploited to further weaken confidence in a politico-financial system already under severe strain. A first contradiction, that is for all to see, resides in the gap between the unanimous calls for reforming the global financial system and the capacity of reaching an agreement on a coherent set of regulations as systematically “national interests” assert their primacy over the imperatives of security, transparency and governance and common interests that are key ingredients of a performing financial sector.


This state of affairs is particularly visible at European level where the “intergovernmental” and “supra-national” approaches confront each other on a quasi daily basis, weakening the position of the Union in general and of the Economic and Monetary Union in particular. Euro sceptics are making hay from the financial crisis, exploiting without the slightest scruple the weaknesses of the system in order to promote the traditional virtues of national sovereignty, without any consideration for its consequences. They exploit the disenchantment of citizens ascribed – often correctly – to an unhealthy complicity between money and politics; those exercising these levers are being blamed in advance for the unavoidable sacrifices that the population at large will have to bear to surmount the crisis.


These factors contribute to spreading the feeling that the significant increase in social inequalities is closely related to corrupt practices that were obfuscated by decades of prosperity during which the silent majority was kept satisfied with a small - but real -share in the dividends of economic growth. This passive attitude carried on even as it became more and more apparent that the world economy was being kept going by the explosive growth of an increasingly un- or deregulated financial sector with the active or at least supportive complicity of Governments, Legislators, Monetary Authorities as well as Regulators whose lack of resources - and also sometimes incompetence - deprived them of the capacity to carry out their mandates adequately.


In the list of remedies one can note the intensification of simplistic and irresponsible proposals such as reverting to “national currencies” (within EMU) or to protectionism which are added to the more traditional extremist claims concerning immigration and separatism. This line of thinking is claiming a growing attention from citizens fearful for their jobs, their savings, their pensions and their security, and who are increasingly disenchanted by the spectacle of a self-serving political class; thus is ever more openly promoted a return to nationalism that one would have hoped that Europe had definitively done away with after the horrors of two World Wars. Put on the defensive, the traditional democratic parties, whether in government or opposition, succumb to nationalistic overbidding, in particular when it comes to their European commitments, contributing thereby to blocking any significant progress in the integration of the financial regulatory framework or the coordination of economic policies which are prerequisites to ending the crisis and avoiding its recurrence.


It is therefore hardly surprising that financial reform is facing such difficulties as soon as it concerns agreeing on efficient measures – in addition to largely cosmetic and populist measures covering bonuses and tax havens – to end the abuses and manipulations that pervade the financial system. Despite the long list of new measures aimed at controlling Rating Agencies, derivative markets, hedge funds, the solvency of banks (stress tests), risk management, consumer protection (deposit guarantees), taxpayer protection (resolution mechanisms), etc. the true value of these efforts is largely inhibited by the overwhelming priority given to “national sovereignty” in any domain deemed sensitive.


The complexity of the subject induces in and of itself a limitation in the scope of the proposed measures because, by addressing separately though simultaneously a multitude of related problems, it becomes very difficult to ensure their coherence. This is all the more true that in these highly technical matters, there is a strong temptation to turn to the actors most directly concerned, allowing the latter to exercise an unduly preponderant influence over the outcome and ensuring the preservation of their prerogatives to the detriment of the public interest.


While interest in financial reform was waning as the spectre of the recession receded, the “sovereign debt” crisis brought it brutally back into focus reminding all the actors that the end of the crisis was still not in sight. The first consequence was to engineer a broad consensus on the need to restore public finances (a second baking sector bail out being no longer possible) as well as to rekindle efforts to move ahead on the agenda of integrating European economic and fiscal policies. But one should have no illusions, because the implementation of measures to restore public finances can only be achieved through sacrifices that the population will be loath to accept as long as they believe that the burden will be spread unfairly; this  is bound to severely complicate effective  coordination of economic policies within the EU.


This situation is potentially explosive if it is not handled with the required care both on the level of implementation and communication; it could lead either to violent social unrest or to a progressive shift of opinion towards extremist ideologies whose appeal, if still considered today as marginal, could rapidly benefit from the support of a broad based segment of the population, thoroughly shaken by the fear of what the future holds in store.


Prior to implementing any serious financial reform, Authorities must first earn sufficient moral legitimacy to ensure acceptance of the new rules; this implies putting back in the forefront of governance the founding ethical concept of responsibility”. In every area where this principle applies, it must not only be respected but strictly enforced so that, as the saying goes, “justice is not only done but seen to be done”.


The weaknesses of the financial system can be largely attributed to the lack of will to apply existing rules and, when necessary, to sanction transgressions. This leads to a feeling of impunity and feeds suspicions of collusion between financial and political interests. The, so far, rare legal proceedings initiated in the aftermath of the financial debacle (such as the trial of Jérôme Kerviel) only serves to reinforce the dictum expressed by Jean de la Fontaine: “depending on whether you are powerful or destitute, court judgements will find you white or black”, which in turn, confirms the idea that the current system favours privatising gains and socialising losses.


No credible financial reform is conceivable without holding to account all the actors concerned, be they operators, regulators or supervisors. If this is done successfully then it should also be possible to limit the scope of “regulation” insofar as an irreproachable conduct (governance) is demanded from - and enforced on - all participants.


In this profound and necessary social mutation a special responsibility is incumbent on the wealthier segments of society, who have benefitted actively, passively and sometimes unduly from the excesses of the two last decades, to the detriment of the less fortunate. Refusing to put these privileges into question, even partially, can lead to their complete abolition. On the other hand, thanks to Europe’s material and cultural wealth, deeper solidarity between citizens should, over time, ensure greater prosperity for all and the safeguarding of our precious values. 



16:30 Écrit par Paul N. Goldschmidt 13 Ave. Victoria 1000 Bruxelles | Lien permanent | Commentaires (0) |  Facebook |

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