Making a Case for International Monetary Coordination
International Economic Law’s ambivalence with respect to monetary policies is evident against the backdrop of the Global Financial Crisis (“GFC”).
GFC exposed the failings of the global financial and monetary order. On the financial side, lax global and domestic banking regulation, tacit toleration of the burgeoning shadow of the banking system and excessive growth of asset prices, all worked together towards an unwholesome trajectory.[1] The monetary regime on the other hand, created the most optimal setting for unrestrained private activity through actions of individual central banks, and asymmetries and imbalances underlying the international monetary system.[2]
Despite the foregoing, post-crisis reform agenda was limited to strengthening financial regulations alone. There are several reasons for this.
First, legal academia does not afford an independent consideration to purely monetary issues and groups, in a recurring and unrelenting manner, ‘financial and monetary’ under one category.[3] Such a merged consideration has its own merits. Particularly, the fact that ’ monetary and financial orders do not lie in separate domains, but operate rather closely with each other, assisting in their mutual reinforcement. Therefore, a proper functioning of one has a direct effect on the other. Moreover, from a legal perspective, with respect to a variety of functionalities, regulatory aspects of both are undertaken by the same entity, performed through similar instruments and subject to similar levels of scrutiny, mostly deferential, by the legislature and the judiciary.
However, both monetary and financial operate in distinct zones, are driven by different objectives and operate through separate instruments. Legal scholarship’s tendency to infuse money and finance, therefore, eludes a clearer understanding of the distinctiveness of monetary policy measures undertaken within an economy and their impact on the dynamics of coordination in the international realm. Further, the complexity of issues concerning exchange rate mechanisms, capital flows and interest rates which comprise the ‘monetary’, make legal analysis extremely difficult, if not entirely unsuitable. Thus, bridging the gap between monetary economics and monetary law is invariably prone to methodological constraints.
In the absence of clear rules of engagement among nations with respect to the cross-border effects of monetary policy spillovers, international law, instead of mediating over the differing and conflicting objectives, created several points of disequilibrium. Such ambiguity in international law allowed member states to give more importance to their domestic orders, often at the expense of global welfare. Prof. Lupo-Pasini goes a step further and argues that international law consciously makes a choice in favor of domestic stability as against global stability. He writes:
“…In this situation, international law is confronted with a choice between decreased sovereign discretion over the formulation and implementation of domestic economic policies on the one hand, and full sovereignty over domestic stability with lawful global spillovers, on the other hand. International law has chosen the first option: it protects domestic financial stability as a as a national sovereign prerogative at the expense of global stability. As long as a state is implementing a domestic stability policy within its sovereign discretion, and as long as it participates in the international economic system, it can lawfully produce negative cross-border spillovers…”[4]The second reason for restricting reforms to financial regulations is that monetary affairs have traditionally been relegated to the domestic realm. Indeed, several authors have claimed that in an increasingly globalized world, with multilevel and fragmented governance structures, the regulation of money and monetary affairs is the most promising relic of state sovereignty.
There are, clearly, good reasons for the same. A nation’s control over its money permeates every aspect of its relations with other nations: trade, investment and war alike. A sound monetary system and a state’s ability to influence its monetary base seamlessly translates into a more effective and dominant position.
Despite a remarkable explosion of study and research in political science and history on the question and nature of sovereignty, legal analysis and doctrine continue to ascribe fundamental significance to a state’s power over its territory and its people. Few attempts that have sought to explain contemporary exercises of a state’s control over money, have done so keeping international law’s conception of territorial sovereignty as an underlying yardstick.[5] However, as we have seen, global capital markets have come to have a significant influence on the course and exercise of some of the core attributes of monetary sovereignty, especially the control of cross border capital. The globalization of money and finance has substantially taken away the autonomy of national authorities and has put international financial and capital markets at the heart of influence and decision making with respect to national policies. The crucial role of international capital markets, in determining state priorities and tying them to the vicissitude of global capital flows,[6] shows how state authorities, whether central banks or other monetary institutions, have faced increasing pressure in preserving and sustaining particular monetary policies.
Therefore, one can make the case that for a variety of monetary issues, the effective site of exercise of sovereignty has shifted from domestic monetary authorities to global capital market. It makes little sense to argue that monetary problems, which necessarily acquire a global reach, can be effectively dealt with inward-oriented monetary policy mandates. . Simply put, a state cannot exercise control over policies that effectively did not originate from it.
The international community must turn to coordination as the way to limit spillovers since international capital markets operate in accordance with their own rationality and invariably reflect interests that may not be in alignment with the objectives of state domestic policy. At this stage, it is important to clarify the meaning of the term ‘coordination’ and distinguish it from its less demanding variant ‘cooperation’. Literature on monetary coordination concerns central banking interactions with respect to monetary policy and financial regulation. Scholars examining central bank communications use a variety of terms such as ‘cooperation’, ‘coordination’, ‘alignment’ and ‘interaction’ to show different degrees and shades of interactions, from the weak/shallow to the strong/determined.[7] It is in this sense that the term ‘cooperation’ is introduced and should be understood as a loose variation of ‘coordination’ that includes information sharing, exchange of views, standardizing concepts, etc. among central bankers.
‘Coordination’ on the other hand, is understood as cooperation that involves the “mutual adjustment of national economic policies.”[8] This coordination can take place either by ensuring that the national authority internalizes the external effects of its policies or, in the alternative, adequate and transparent communication occurs for the rest of the states to adjust their own mechanisms.
While squaring up sovereignty and international coordination has not always been an effortless endeavor, international law has certain descriptive mechanisms for the same. From the general international law obligation to coordination, distinct branches have emerged- international protection of human rights, coordination with respect to the protection of the environment, cooperation in the field of international financial law and the like. Each subscribes to its own internal logic and normative justifications in explaining the need and mechanisms of coordination and simultaneously redefines the theoretical parameters of state sovereignty.
To conclude, it can be said that the discussion above highlights several aspects of the intersection of law and monetary affairs. First, law and legal scholarship’s ambivalence with respect to money and monetary policy is very real. Second, there is a need for scholars of international law to perceive monetary tensions among nations through the prism of legal institutions and doctrines.
[1] Basel Committee on Banking Supervision, ‘Finalizing post-crisis reforms: an update: A report to G20 Leaders’ (BIS 2015) < https://www.bis.org/bcbs/publ/d344.pdf>
[2] Taylor, John B (2009), “The financial crisis and the policy responses: An empirical analysis of what went wrong”, NBER Working Paper No 14631.
[3]Joseph Gold, Legal and Institutional Aspects of the International Monetary System (1984) Washington,
DC:IMF.
[4] LupoPasini, F. (2017). Financial Stability in International Law. Melbourne Journal of International Law, 18(1), 45-70.
[5] Katharina Pistor, “From Territorial to Monetary Sovereignty” (2017) Theoretical Inquiries in Law Vol. 18, p. 491-517, 495.
[6] Its implications were massive during the Mexican crisis, Asian crisis and most recently the taper tantrum.
[7] Beth A Simmons, ‘The Future of Central Bank Cooperation’ (BIS Working Paper No. 200).
[8] Bergsten, C. Fred and C. Randall Henning (1996), Global Economic Leadership and the Group of Seven, Washington: Peterson Institute for International Economics.