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The G20 didn't help much during the financial crisis

- January 6, 2015

The Status Quo Crisis (courtesy, Oxford University Press)
Eric Helleiner is faculty of arts chair in International Political Economy and professor in the Department of Political Science of the University of Waterloo. I interviewed him over e-mail about his new book on the financial crisis, “The Status Quo Crisis: Global Financial Governance After the 2008 Meltdown” is available here.
HF – Your analysis says that in political terms the crisis was the dog that didn’t bark – it hasn’t led to any major shake up in global economic politics. Why did the crisis not lead to other states such as China challenging the dominance of the U.S.?
EH – Although some analysts anticipated that China might try to challenge U,S. dominance during the crisis, Chinese policymakers ended up played a relatively “conservative” role at the time in this respect. This response can be interpreted partly as a recognition of the enduring structural power of the U.S., including the centrality of – and Chinese dependence upon – the U.S. dollar and U.S. markets in the global economy. It was also important that Chinese officials were unwilling – for various domestic political reasons – to shift away from their export–oriented development strategy in a significant way. The Chinese leadership also appreciated some key U.S. decisions during the crisis, such as the move to place Fannie and Freddie under a public conservatorship and U.S. support for initiatives to give China’s greater voice in global economic governance (including by widening of the membership of key international financial regulatory bodies). That said, I agree with those analysts who argue that the crisis experience has acted as a catalyst for Chinese policymakers to begin to try to carve out a more prominent and independent role in global monetary and financial affairs over the longer term.
HF – Why is the dollar still dominant (and indeed, becoming stronger again on international markets)?
EH – In contrast to many predictions at the start of the crisis, the crisis provoked neither a collapse of the U.S. dollar’s value nor a diminution of the greenback’s global standing. In my view, the crisis experience highlighted very effectively some key sources of the U.S. currency’s international dominance, particularly the centrality of U.S. financial markets (especially the market for U.S. government debt) within the global monetary system. It also revealed important weaknesses in the governance of the euro, the currency that most analysts thought had the best chance of challenging the dollar’s global role at the time of the outbreak of the crisis. I do not believe that the RMB will be able to become a more serious challenger to the dollar until China embraces more far-reaching financial reforms.
HF -The book suggests that bilateral and unilateral action by the U.S. was far more important than multilateral talking shops such as the G20. What would have happened if the U.S. had not engaged in this way?
EH – You are right that I think the G20’s significance as a manager of the 2008 global financial crisis has often been exaggerated. I argue that the most important aspect of the international financial management of the crisis was the U.S. willingness to act as an international lender-of-last-resort (ILLR) on a large scale. If U.S. authorities had not played this role of providing liquidity, the probability of a collapse of the global economy – echoing the experience of the Great Depression – would have been much higher. It is important to recognize that the U.S. ILLR role emerged not from the G20 process but from unilateral US initiatives and bilateral swaps extended by the Fed to other central banks (all of which were established before the first G20 leaders summit even took place).
HF – You suggest that foreign official support for the dollar emerged as a result of individual decisions by other states, rather than any multilateral initiative. Can we rely on this kind of ‘invisible hand of policy coordination’ to help stabilize currency relations in future crises, or did we just get lucky?
EH – This question is very important but extremely difficult to answer. Foreign official support for the dollar during the crisis reflected a number of distinct political factors that aligned in certain ways at the time. I don’t think we can assume that the alignment will be the same in a future crisis, not least because of various political reactions to the crisis experience, both abroad and within the U.S. itself.
Earlier book interviews on the politics of the financial crisis:
Cornelia Woll: Bailing out banks is not a lucrative business