The Incomplete Global Financial Order and Spillovers from Instability in Trade and Currency Market Regimes

Abstract

Turbulence in foreign exchange markets and currency dumping/manipulation cultivate further mistrust in international economic relations. At the same time, both phenomena could potentially prove to be a cause of systemic risk. For example, foreign currency exposures were a key vulnerability behind the series of emerging market crises in 1997-98. The global financial crisis of 2008 also showed that currency mismatches are not just a concern for emerging markets. This chapter argues that currency mistrust exposes as flawed the notion that an international financial order may exist separately from the global monetary and trade and investment orders on a self-standing basis through the technocratic standards promulgated by the Basel Committee and the Financial Stability Board, notwithstanding the importance of such standards. While said separation achieved a great deal in terms of integration of regulation and governance of international finance in the past three decades, at the same time, it has worked to promote financialization and the global shadow banking sector. The paradox of the separation of the three international economic orders, albeit for defensible reasons, has given rise to massive rent-seeking by the global financial services industry. It has also undermined all efforts to create coherent international structures for the governance and regulation of global finance, since these could be defended only if they were seen as integral mechanisms to buttress the global trade and investment order. Finally, the chapter proposes a transparent and objective benchmark for the approximation of currency values which could be the first step towards the reversal of the current trend towards currency and trade wars. Such reversal is the sole path towards rebuilding the trust required to augment the governance structures of global finance.

Keywords: International finance, currency wars, currency manipulation, shadow banking, global financial governance, carry trades, financial instability, financial crises