In Europe the rise of modern nation state and the market economy has taken place simultaneously and mutually relied on each other from the very begin-ning. In the circumstances of political rivalry states badly needed fi nancial resources produced by economic actors. That is why governments were
2 EARLE, Edward Mead: Adam Smith, Alexander Hamilton, Friedrich List, in PARET, Peter (editor): Makers of Modern Strategy, Princeton, 1986, Princeton University Press, p. 223.
3 GRIECO, Joseph – IKENBERRY, John: State Power + World Markets. The International Political Economy, New York, 2013, W. W. Norton & Company, pp. 4–9.
interested in the creation of stable economy. At the same time economic actors were also interested in maintaining good relations with the holders of power to get protection on the one hand and have the chance to infl uence decisions on the economy on the other hand. The British East India Company which was set up at the beginning of the 17th century with the exclusive right to conduct trade with the Indian subcontinent and also empowered to execute administrative and military functions had been a good example of close ties between governments and economic enterprises.4
In the early stages of the modern European nation state system disputes over issues of economic cooperation often led to armed confl icts. Kalevi Holsti, a Canadian researcher studied European armed confl icts between 1648 and 1814 and came to the conclusion that out of 58 wars one third broke out due to disputes over trade and navigation.5 With the internationalisation of trade, the fl ow of money and capital the issue of who wins and who loses from the increasing international exchange also became an important ques-tion. The strength and competitiveness of individual economies determined the fact and measure of gains or losses. The ambivalent nature of attitude to the international economic cooperation was underlined by the fact that one could gain or lose from it. The possibility to gain and the necessity to be effective encouraged openness to world markets, possible negative effects on the national economy and society however, required more closure for self-protection. This basic ambivalence has always infl uenced the relationship of states with the world markets. Some experts compared world economy to the scenes of plays by Shakespeare with different types of actors who symbolised the behaviour of states. Free trade idealists, strong supporters of protectionism and wise opportunists have always been present in the world economy, which occasionally was comparable to drama, tragedy or comedy.6 The balance between openness and closure in the relationship of states with world economy was determined by the strategy chosen by individual states in the search of ways and means of how to ensure security and wellbeing for the society.
4 BUZAN, Barry – LITTLE, Richard: International Systems in World History, Oxford, 2000, Oxford University Press, pp. 268–271.
5 HOLSTI, Kalevi J.: International Politics: A New Framework for Analysis, Englewood Cliffs, N.J. 1995, Prentice Hall, pp. 45.
6 GRIECO, Joseph – IKENBERRY, John: State Power + World Markets. The International Political Economy, New York, 2013, W. W. Norton & Company, p. 94.
After the Second World War in the new international political and economic order the proper balance between openness and closure became more important. The new situation was characterized by the emergence of a new hegemonic power, the United States which took over this function from Great Britain. Great Britain was in a hegemonic position in the sec-ond half of the 19th century. According to the theory of hegemonic stabil-ity, the maintenance of an open world economy requires the presence of a politically and economically strong power capable and ready to create and maintain a liberal economic order by initiating rules and institutions and make other states to accept it.7 The United States was capable and ready to assume this role after the Second World War. The American hegemonic stability differed from the British one, since the US initiated a number of international economic institutions and regimes, which the British did not.8 3. Management of international monetary affairs
Lessons learned from the history of national and international economies contributed to the realisation both by economic theory and by economic policies of states that in time of occasional economic troubles active inter-vention of governments is necessary to manage the crisis. John Maynard Keynes, one of the most infl uential economists of the 20th century suggested fi rst that with fi scal and monetary policies governments could stimulate economic growth, ensure full employment and maintain price stability.9 After the Great Depression of 1929 suggestions by Keynes were taken seriously and implemented by governments.
Keynes had a major role in laying down the foundations of the post-war international fi nancial system. At the initiative of the US and Great Britain in July 1944, 44 countries convened in Bretton Woods, a small town in the US and agreed on the basics of the international fi nancial system. The new system had a set of priorities: liquidity, adjustment and confi dence. States facing temporary payment diffi culties could ask for loans from the IMF.
7 GILPIN, Robert: The Political Economy of International Relations, Princeton, 1987, Princ-eton University Press, p. 72.
8 GRIECO, Joseph – IKENBERRY, John: State Power + World Markets. The International Political Economy, New York, 2013, W. W. Norton & Company, pp. 288–289.
9 BRUE, Stanley L.: The Evolution of Economic Thought, Forth Worth, 1991, The Dryden Press, pp. 441–442.
Adaptation to the changing international environment was also facilitated by the new system. Confi dence in the stability of the new system was en-sured by the commitment of the US regarding the maintenance of the value of the dollar. Decisions of the conference were strongly infl uenced by the conclusion that stability of the international fi nancial system must not be left to the markets, regulations adopted by governments were needed to keep stability. According to the consensus reached at the conference the best way to achieve stability was the introduction of a fi xed exchange rate system of national currencies with a maximum deviation of one percent in either direction. The US assumed leadership role in the maintenance of the system by tying the value of dollar to gold. One ounce of gold equalled 35 US dollars.10 Participants of the Bretton Woods conference also agreed to introduce convertibility of national currencies which happened by the end of the 1950s. Responsibility of taking care of the maintenance of the BW system was entrusted with the International Monetary Fund.
In the post-war years both in Europe and Asia the central task was to help economic recovery and reconstruction of war damage. Serious impedi-ment to reconstruction was posed by the lack of money. Economic ties with the US contributed to the solution, since the US offered fi nancial support (Marshall Plan), the American domestic markets opened up to the export of partner nations and the newly established military bases in Europe of-fered job opportunities and income in US currency for European citizens.
Through these channels US dollar accumulated abroad and began to pose diffi culties in the maintenance of the BW system. In the beginning of the 1960s foreign speculators made several attempts to change paper dollar for gold in the American central bank in accordance with the obligation of US government taken at the BW conference. With the help of the central banks of other states and the Bank of International Settlements in Basel the US government was able to manage the situation and prevented the mas-sive outfl ow of gold. However, the solution was only temporary, unfolding events began to pose additional dangers to the fi xed exchange rate system.11
10 SPERO, Joan – HART, Jeffrey: The Politics of International Economic Relations, Bel-mont, USA, 2003, Wadsworth/Thomson, pp. 14–17.
11 SPERO, Joan – HART, Jeffrey: The Politics of International Economic Relations, Bel-mont, USA, 2003, Wadsworth/Thomson, pp. 17–20.
From the beginning of the 1960s American and European banks gradually expanded their operations abroad with the establishment of new affi liates.
As a consequence of internationalisation of production the international fi nancial activities of multinational corporations intensifi ed. Financial speculators realized that huge profi ts can be made by fi nancial transac-tions based on calculatransac-tions regarding changing interest rates and fl oating exchange rates of national currencies. Due to these multiple factors the fi nancial markets dramatically grew in size and became a major infl uence on the fl oating exchange rate system.
Under the pressure of the accumulated paper dollar abroad and the in-creased fi nancial transactions on the fi nancial markets the US government was forced to make a hard choice which led to the collapse of the BW system. In August 1971, President Nixon announced that the US dollar would no longer be convertible into gold. At the moment of this decision the gold reserve of the US was 10 billion dollars and the amount of paper dollar abroad was 80 billion, thus the continuation of free exchange would have led to the collapse of the US fi nancial system. In a subsequent deci-sion the US government imposed 10 percent surcharge on dutiable imports, with the intention of encouraging Japan and West Germany to revalue their currency. Later in the same year the US devalued the dollar by 10 percent.12
After the collapse of the BW system fi nancial markets put increasing pres-sure on economic policies of the states. The collapse of the fi xed exchange rate system and after 1973 the actual introduction of the fl oating rate system, increased uncertainty not only in the international fi nancial system, but also in the international trade system. Theoretical economics assumes that fi nancial markets are capable of rational behaviour. Dani Rodric American economist however suggests that fi nancial speculators can behave rationally only to a certain limit and beyond that limit maniac behaviour and panic take over and markets become irrational. According to lessons learned from the fi nancial crises of the past two hundred years excessive international capital fl ows have always been followed by crash of banks. In 2007 one year before the last fi nancial crisis began, the amount of daily fi nancial transactions were 90 times larger than the transactions in trade of goods and services.13
12 SPERO, Joan – HART, Jeffrey: The Politics of International Economic Relations, Bel-mont, USA, 2003, Wadsworth/Thomson, p. 24.
13 RODRIK, Dani: A globalizáció paradoxona, Budapest, 2014, Corvina, pp. 144–151.
Major fi nancial crises of the 1990s
The fi rst global fi nancial crisis erupted in Mexico in 1994 posing a real threat to the entire international fi nancial system. These crises constituted a warning about the lack of appropriate mechanism to manage such crises.
In the preceding years general optimism dominated the government and the public mood in Mexico due to economic growth. Following the change of government in 1991 a new economic policy was introduced, which was characterized by deregulation, privatization and liberalization of trade. The new government created more favourable conditions for the infl ow of for-eign capital fi rst of all from the rapidly growing security markets. In 1994 domestic political developments took a negative turn, uprising started in the southern part of Mexico, one of the presidential candidates was assas-sinated and the government in offi ce committed serious mistakes in eco-nomic policies, which included an overvalued national currency (the peso) and excess dependence on short-term foreign capital. These developments led to the collapse of confi dence in the Mexican economy and domestic politics, consequently foreign capital fl ed the country quickly. The govern-ment faced severe liquidity problems. The Mexican crisis caused signifi cant pressure on the fi nancial systems of other South American countries and further consequences were experienced beyond the American continent.
The Mexican government was forced to introduce austerity measures as conditions of vital loans from the US and the IMF. A combined package of 40 billion US dollars helped Mexico out of the crisis.
In 1995 G-7, the group of the industrially most developed states held a summit in Halifax, Canada and analysed the causes of the crisis and adopted recommendations of how to avoid and manage future crises. One of the conclusions was that greater transparency is required on the part of those states which intend to take loans. IMF also increased the funds which were available for future crisis management.14
The Asian fi nancial crisis of 1997 – 1998 offered a further example regarding the problems of the global fi nancial markets and the diffi culties of international management. In 1997 the fi nancial crisis started in Thai-land and quickly spilled over to the neighbouring countries, and effected the whole Asian continent in one form or another. The shock waves of the
14 SPERO, Joan – HART, Jeffrey: The Politics of International Economic Relations, Bel-mont, USA, 2003, Wadsworth/Thomson, pp. 53–54.
crisis were felt also in South America. In a paradox way the root causes of the crisis can be found in the Asian economic miracle of the 1980s. High economic growth rate and signifi cant improvement of living standards was based on the high level of education, hard work, the high level of savings and the infl ow of foreign investments. In the subsequent years however, the weakness of the Asian economies, the lack of strong fi nancial control mechanisms, became obvious. The availability of bank loans were not always determined by the competiveness of enterprises, but very often by the special personal relationships between government bureaucrats, representatives of the fi nancial sector and business fi rms. This special network constitutes the Asian version of “crony capitalism”. In the 1990s export markets of smaller Asian countries shrank due to the economic recession in Japan on the one hand and the competition posed by increasing export capabilities of China on the other. Income from export decreased and the most effected countries experienced payment problems. Loss of confi dence of foreign investors and the subsequent outfl ow of capital triggered the crisis in Thailand, which quickly spread to the whole region. National currencies suffered signifi cant loss of value causing considerable hardship to the population. International fi nancial institutions came to the rescue of the countries which suffered from the crisis on the condition of austerity measures. The lesson from the Asian fi nancial crisis underlined that strengthening the national fi nancial control mechanisms is the only way for states to resist the harmful impact of global fi nancial markets. The lack of effi cient fi nancial control mechanisms increases the vulnerability of states.
Since the 1980s as deregulation and liberalisation began to enjoy more prominence in economic policies of governments, self-regulation and rationality of fi nancial markets has got more emphasis. In the name of in-novation a number of new fi nancial products were presented to the public, but the majority of people could not understand them. In 1989 under the name ‘Washington Consensus’ a set of principles were put forward and widely accepted as the most effi cient factors of sustainable development.
In addition to deregulation and liberalisation privatisation was added to the list with a view to the coming political changes in Eastern Europe. The Washington Consensus was the continuation of the economic policies of President Reagan and Prime Minister Thatcher which brought substantial changes in the US and British economies. Both governments decreased intervention into the operation of fi nancial markets. Alan Greenspan, the
former chairman of the Federal Reserve characterized the atmosphere of the 1980s as follows: “Any government intervention regarding investments would reduce the readiness to take risks, which is vital for venture capital.
Risk taking is necessary in the world economy and also for the economy of the US. Why would we impede the benevolent activities of the Wall Street?15 One of the successors of Greenspan didn’t share the views of his predecessor in connection with the deregulation of the fi nancial system.
Ben Bernanke came to the conclusion that in spite of previous expectations the advantages of fi nancial innovations didn’t show up.16
In 1999 the US introduced substantial changes in the American fi nancial system with the passage of the Gramm – Leach – Bliley Act. According to the new legislation fi nancial institutions were allowed to conduct com-mercial, investment and also insurance activities across the United States without any restrictions. Until that time these activities had been separated and restricted only to one state according to the Glass – Steagall Act of 1933. Before the Great Depression of 1929 the lack of transparency caused by universal banking contributed to the crisis as it was widely believed leading to the above act. In the 1990s US fi nancial institutions lobbied for the removal of the restrictions imposed by the Glass – Steagall Act and they succeeded in 1999.17 As a result of changes in legal regulations the operations of US fi nancial institutions became less transparent and less controllable. The new law allowed fi nancial funds (pension, health care, insurance) to carry out fi nancial activities in the area of traditional banking, which increased the problem of lack of transparency. According to Paul Krugman, an American economist the extension of the right of traditional banking to new fi nancial institutions – which he called “shadow banking”
– greatly increased the risks in the fi nancial system. Institutions of “shadow banking” carried out lending operations which contributed to the fi nancial crisis, in the autumn of 2008.18
15 GREENSPAN, Alan: A zűrzavar kora. Kalandozások az új világban, Budapest, 2008, HVG Könyvek, p. 438.
16 RODRIK, Dani: A globalizáció paradoxona, Budapest, 2014, Corvina, p. 170.
17 SPERO, Joan – HART, Jeffrey: The Politics of International Economic Relations, Bel-mont, USA, 2003, Wadsworth/Thomson, p. 44.
18 KRUGMAN, Paul: End this Depression Now, New York, 2012, W. W. Norton & Com-pany, Inc. p. 63.
Dani Rodrik, an American economist came to the conclusion that the fi nancial globalisation resulted in deplorable consequences. Countries which opened up their economies had to face greater risks without achieving higher level of economic growth, as a compensation.19 After the universal acceptance of Washington Consensus, fi nancial crises – Mexico in 1994/95, Asia 1997/98, US 2008 – became global. In the 2008 crisis the quick rise of the price of real estate was followed by quick and unprecedented fall of prices. This crisis is a good example of the irrational behaviour of fi nancial markets.20 According to Paul Krugman in growing economies there is a drive on the side of both lenders and borrowers to intensify their activi-ties in order to gain more profi t. This is especially true in the case of real estate and houses. He warned, that it is crucial to compare the amount of the money lent to the size of the GDP. The comparison of the debt of US households to the incomes showed that the rate in 2006 was higher than in
Dani Rodrik, an American economist came to the conclusion that the fi nancial globalisation resulted in deplorable consequences. Countries which opened up their economies had to face greater risks without achieving higher level of economic growth, as a compensation.19 After the universal acceptance of Washington Consensus, fi nancial crises – Mexico in 1994/95, Asia 1997/98, US 2008 – became global. In the 2008 crisis the quick rise of the price of real estate was followed by quick and unprecedented fall of prices. This crisis is a good example of the irrational behaviour of fi nancial markets.20 According to Paul Krugman in growing economies there is a drive on the side of both lenders and borrowers to intensify their activi-ties in order to gain more profi t. This is especially true in the case of real estate and houses. He warned, that it is crucial to compare the amount of the money lent to the size of the GDP. The comparison of the debt of US households to the incomes showed that the rate in 2006 was higher than in