Fixing the World Financial System

Urban C. Lehner

Editor-in-Chief

DTN

Nov 7, 2008

There's a venerable tradition of naming international financial agreements after the places where they were signed -- the 1985 Plaza Accord (to lower the value of the dollar) after New York's Plaza Hotel, the 1987 Louvre Accord (to stabilize the by-then plummeting dollar) after the Paris museum.

Indeed, the post-World War II international financial system (which solidified the dollar's role as reserve currency) is called Bretton Woods after the New Hampshire town where it was set up in July 1944.

On November 15, leaders of 20 nations will journey to Washington to discuss the world economic crisis. Some see this summit as the beginning of a re-examination of the Bretton Woods system.

Don't expect a Washington Accord to be signed anytime soon, though. The obstacles are many, including a lame-duck U.S. president, a big gap in perceptions of what needs to be done between the U.S. and Europe and a simple lack of preparation time.

Most importantly, and most unfortunately for agriculture and for Americans generally, the obstacles include America's declining international influence. That decline, which has been gradually coming for decades but picked up speed of late, was evident in the collapse of the Doha trade talks (named after the city in Qatar where they were launched), which foundered on the refusal of China and India to give in to the U.S. at a key point in the agricultural talks.

It was also visible in the origins of the Washington summit, described memorably by Sebastian Mallaby of the Council on Foreign Relations in a Washington Post column:

"Although the original Bretton Woods took place years after the Depression, Britain and France are bent on staging the new version within weeks. 'Europe wants it, Europe demands it, Europe will get it,' French president Nicholas Sarkozy said before jetting off to Camp David, where President Bush meekly gave in to him.'"

Herding cats doesn't begin to capture the difficulty of guiding sovereign nations to agreement on bedrock economic issues. These deals only get done if somebody exercises strong leadership. For many of the six decades after World War II, that somebody was Uncle Sam. No one's really in a position to take his place.

Europe is on the rise, but its disunity and military weakness limits its ability to stand in. Europe may be strong enough to get George Bush to call a summit, but no U.S. president is likely to go along with what Europe hopes to achieve from the summit -- the straight-jacketing of U.S. financial markets in a web of international regulations overseen by bureaucrats in Europe.

You can argue forever about why the U.S. is losing influence. Part of it is the inevitable consequence of the success of U.S. policies to spread prosperity to the rest of the world. Part of it is the financial collapse itself, which has badly tarnished the U.S. reputation for sound financial management.

Beyond that, some critics blame the current administration's go-it-alone approach to the world generally and the Iraq war more particularly. My candidate is four decades of living beyond our means, running trade and budget deficits. Perennial debtor nations lose international respect.

Whatever the cause, the consequence is clear: stalemate. That's true for Breton Woods II, which is likely to take years of work, if it ever produces anything. It's also true for Doha or any new round of multilateral trade negotiations. The goal of opening world markets wider to U.S. agricultural products remains as elusive as ever.

Uncle Sam has more clout in one-on-one trade negotiations -- everybody wants a piece of the rich American market -- but the enthusiasm in Congress for bilateral deals is not high. Pacts with several nations, including one with South Korea that could by itself add $1.5 billion a year to U.S. ag exports, await Congressional action. With the unions dead set against these deals, they could wait a long time.

Rebuilding American influence will be a major challenge for the next administration and the administrations that follow it. A new Washington Accord that puts the U.S. and the world on a sounder financial footing would be a big step in that direction. The chicken-and-egg-like catch is that it might not be possible to reach a Washington Accord without stronger U.S. leadership.

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