Has financial globalization changed the context for US international policy?

Alexandra Zeitz (Global Economic Governance Programme, University of Oxford)

That financial globalization presents constraints as well as opportunities has been frequently
demonstrated with regard to smaller states. Consider, for example, Greece’s current predicament. But what about consequences of financial integration for the most powerful state in the international system, the United States? On Thursday, February 12, Caroline Atkinson, Deputy Assistant to President Obama and Deputy National Security Advisor for International Economics, presented the view from United States of the globalized financial system. The lecture was dedicated to the memory of former PEFM Director Max Watson, a long-time colleague of Atkinson’s during their time at the IMF, who sadly passed away in December 2014.

What does financial globalization mean for US foreign policy? It means, in large part, that US policy has itself become global. Or, in former Fed Chairman Alan Greenspan’s words, that the US can no longer be ‘an oasis of prosperity’. Drawing on her lengthy previous experience at the IMF, Atkinson offered many historical examples to illustrate the effect of close international financial links on American policy.

The Latin American debt crisis revealed strikingly that inward looking US monetary policy could directly undermine other countries’ stability, and also that these countries’ instability could reverberate back through the banking system, leaving the US exposed to the consequences. The Asian financial crisis, which provoked Greenspan’s remark on America’s inability to isolate itself, inspired cooperation among central banks, as the US coordinated interest rate policy with the Bank of England to help mitigate the effects of the crisis on the rest of the world.

Reflecting on the series of crises that she has experienced over the years from within the IMF and the White House, Atkinson pointed out that the European ‘bail out’ loan agreements appeared to have failed to learn lessons from history. While the loans provided relief for other creditors, it was evident to many analysts that some of the sovereign borrowers would be unable to repay the loans—that the severe austerity policies required to render their debts sustainable could not credibly be implemented.

Atkinson’s sweeping command of the history of financial integration and crisis was compelling. However, as participants were quick to point out in the discussion that followed, her presentation frequently characterized the US as a passive responder to financial globalization, rather than as an agent of this integration and arguably a leading cause of instability in the system. Atkinson argued, for instance, that while the recent 2008 financial crisis was ‘home-grown’ in the US, it was not ‘home-financed’. In so doing, she implicitly placed some responsibility for the crisis with the credit readily available from a Chinese and German savings ‘glut’ in the lead-up to the crisis. By contrast, other analysts such as Justin Yifu Lin, former World Bank Chief Economist, have stressed the crucial role of US domestic policies in leading to the crisis.

The still-sluggish performance of Europe and other economies around the world remains an American concern in spite of the US’ post-crisis growth surge, Atkinson said. She indicated that the US is advising countries to adopt fiscal measures that encourage (rather than depress) growth, and not to rely solely on monetary policies.

The American position in the global financial system is also being shaped by the rise of emerging powers. Atkinson acknowledged that the founding of the BRICS’ New Development Bank was borne out of frustration over failure to reform the IMF, an Obama administration objective that is being held hostage by domestic politics, although she doubted how far this institution would get given its own rather unbalanced membership. Emerging economies have also critiqued US monetary policy, describing quantitative easing as ‘currency wars,’ and fearing the ‘taper tantrum’ consequences of a post-crisis tightening of US policy. Atkinson argued that many fears can be allayed with better communication, and applauded current Fed Chair Janet Yellen for her rapport with foreign central bankers over ‘taper tantrum’ fears.

For the world’s largest economy and strongest military power, economic and security affairs are closely intertwined. Atkinson pointed to recent sanctions against Russia over the Ukraine crisis to illustrate how financial interconnectedness underpins American authority. While the falling oil price certainly (and fortuitously) reinforced the effect, the sanctions have had a direct and measurable impact. The US’ financial markets, she said, add to the country’s strategic power by providing a powerful tool in the form of sanctions.

For American foreign policy, financial globalization poses incredible opportunities, underpinning the US’ power and creating useful dynamics of interdependence. Yet Atkinson’s lecture also highlighted the constraints that American foreign policy faces due to global interconnectedness: the vulnerability to foreign crises and the importance of coordination. There are important responsibilities that the US must assume in line with closer financial integration. The responsibility of coordination is one it must handle particularly carefully if it is to smoothly manage its relationship with rising economies.