OSCE, Alm.del - 2008-09 - Bilag 34: Report for the general committee on economic affairs, science, technology and environment: "The OSCE: Adressing New Security Challenges"

The World Financial CrisisAs the OSCE Parliamentary Assembly convenes its Eighteenth Annual Session inVilnius, the world financial and economic crisis that erupted in the second half of 2008 isprobably the most serious challenge affecting the whole of the OSCE area. This crisiswas generated by the financial system itself and caused by an overstretch of financialliberalisation and a lack of regulations as well as lax governmental oversight of financialmarkets. This crisis has placed the world economy in severe recession, and it has seriouspolitical and social consequences.The Organisation for Economic Cooperation and Development (OECD) issued in April2009 a forecast that expects Gross Domestic Product (GDP) among its thirty mainlyprosperous countries to decrease by 4.3% this year.Given the global nature of the current economic crisis, an internationally co-ordinatedresponse is absolutely essential, both to alleviate the strains on societies and to ensurethat similar crises are prevented in the future. It is especially important that the OSCEparticipating States develop a coherent strategy to deal with the situation, because theOSCE includes some of the world’s largest economies, and their economic and fiscalpolicies have far-reaching implications for the planet as a whole.While other international organizations such as the World Bank and the InternationalMonetary Fund (IMF), as well as economic forums such as the Group of Eight (G-8) andthe Group of Twenty (G-20), are addressing the crisis in their own ways, the OSCE andthe OSCE Parliamentary Assembly are in a unique position to facilitate open dialoguebetween the participating States. As the collective voice of the OSCE’s parliamentarydimension, the OSCE Parliamentary Assembly can help guide the debate within thenational parliaments of participating States and serve to help co-ordinate the overallinternational response to the crisis.The OSCE Parliamentary Assembly’s 2009 Dublin Economic Conference, hosted by theIrish Parliament, will address the world financial crisis by focusing the debates on theresponses to the crisis, financial regulations and the social consequences of the crisis.Considering that in theHelsinki Final Act,participating States agreed to “to reduce orprogressively eliminate all kinds of obstacles to the development of trade”,Parliamentarians should undertake to resist economic nationalism in all of its forms. TheParliamentary Assembly should therefore bring to the attention of national parliaments1

The Financial Crisis as a Security Concern and a Threat to Human RightsThe global economic crisis of the 1930s led to widespread insecurity and provided thebasis for the rise of authoritarian regimes and for demagogic leaders to exploit the fearsof their populations. The crisis was used as a justification for provoking aggressivecampaigns and blaming ethnic minorities, with well-known and tragic results.In responding to the current crisis, it is important to keep our recent history in mind. Notonly should those lessons provide a sense of urgency to national governments inimplementing an effective and co-ordinated approach to economic recovery, but it isequally important to carefully monitor the related social and political upheaval, andrespond appropriately. The consequences of failing markets and policies have already ledto political instability in many OSCE countries. This, in turn, could generate insecuritythroughout the OSCE area.According to a recent Eurasia Group report, governments are sure to face an increasinglyinsecure population as unemployment increases and standards of living decrease. Thissituation would be ripe for rising crime, labour strikes, political extremism, andxenophobia.Political and economic nationalism could also take hold, making consumers less friendlytoward foreign products and foreign workers. In the worst case, the social ramificationsof the financial crisis could push populations into regional ethnic conflicts. Due to thefragile situation in certain participating States, it is not difficult to imagine these conflictsspilling over into violent conflict.Migration,as the Hellenic Chairmanship of the OSCE is underlining this year, is anotherconcern. As unemployed workers are forced to leave home in search of employment,destination countries may be overwhelmed with the added economic burden.Furthermore, many migrants are also discovering that there is no employment to be foundabroad, as economic activity has declined throughout the OSCE area. This has led to asharp decline in remittances, which several participating States – particularly in SouthEast Europe and Central Asia – rely on heavily.The economic crisis also has agender-specific impactin which the burden isdisproportionately laid on women. Although both women and men have been affected byjob losses, women are often laid off first, especially in less developed economies. At a 5March 2009 meeting of the United Nations Commission on the Status of Women (CSW),participants noted that jobs are being lost mainly in female-dominated sectors, such as thecare economy. Women in the informal sector – economic activities that are neither taxednor monitored by governments are particularly being affected, as the crisis significantlyreduces the demand for outputs produced in that sector.2

Responding to the Crisis in the OSCE Area: Towards a Common ApproachNational governments within the OSCE area have been implementing various measuresto reverse the economic downturn, but thus far, the transatlantic response has beenlacking a common approach.European governments within the OSCE have generally called for tighter regulations andfiscal restraint, while the United States has introduced a broad spending package intendedto stimulate the economy by creating jobs, increasing infrastructure spending, andencouraging alternative energy development. The U.S. government is also spendingenormous amounts of money to bail out banks, financial institutions, and key industriessuch as car manufacturers. The thinking is that these institutions are “too big to fail”,because if they were to collapse, the effects would be catastrophic.European leaders have for the most part called for less spending and more financialregulation to turn the crisis around. In a joint letter to the Czech presidency of theEuropean Union, the leaders of Germany and France recently said the EU should ensurethat all hedge funds and other private investment firms be registered, regulated andsupervised. “Thetop priority is the putting in place of a new global financialarchitecture,”stated French President Nicolas Sarkozy and German Chancellor AngelaMerkel.Considering this divergence of opinion, it is clear that global co-ordination and decision-making has not always kept up with the pace with economic globalization. Although theglobal economy is more interconnected today than it has ever been, the co-ordination offiscal and economic policy is still implemented on anad hocbasis and often in thenarrow national interests of individual States.Financial Regulations / The Role of GovernmentsFinancial and monetary experts see the origins of this crisis as a regulation failure andfeel that greater supervision of financial institutions is the answer. However, a majorconcern with the role of governments is how far the re-regulation will go.Despite the appearance of a wide divergence of opinion, there is actually common groundand broad agreement that policies of excessive deregulation and lax oversight of financialmarkets are not serving the world well. Indeed, it is now widely accepted that the currenteconomic crisis has its roots in misguided deregulation policies in the United States, andthat any sort of economic recovery must include the reinstatement of regulations thatwere lifted over the past several decades.Specifically, when the 1933 U.S. Glass-Steagall Act, which separated commercialbanking from investment banking, was repealed in 1999, commercial banks began takingon risky activities that directly led to the current situation.There were those at the time who warned that ignoring the lessons of the GreatDepression would lead to a re-play of history. In one particularly prescient statement,3

U.S. Senator Byron Dorgan said in November 1999 that “wewill look back in 10 years’time and say we should not have done this but we did because we forgot the lessons of thepast, and that that which is true in the 1930s is true in 2010… We have now decided inthe name of modernization to forget the lessons of the past, of safety and soundness”.There now seems especially after institutions such as Lehman Brothers Holdings Inc.declared bankruptcy in September 2008 - to be much more appreciation for the “lessonsof the past” and those notions of “safety and soundness.”U.S. Treasury Secretary Timothy Geithner has appealed for tighter regulations oninvestment and private equity firms in the U.S. in order to control their pastunconventional practices. U.S. officials have recognized the failure of certain financialregulatory policies and have pledged to correct these in the weeks ahead. In late March,Secretary Geithner announced that he would work with the U.S. Congress to enact a morestable system that will lead to a more modern financial structure.Many European leaders within the OSCE have called for an increase in financialregulation, with several suggesting that a reorganization of the European financial systemis in order. The European Council passed an economic recovery plan in December 2008intended to stimulate the economies of member countries.In subsequent meetings, leaders in the European Union expressed diverse ideas on how torecover from this crisis, including infrastructure spending, restoring credit flows, andgreater supervision of financial institutions. The European Council also called onMember States to develop individual country stimulus plans in line with the Council’sobjectives.One interesting analysis of Europe’s current financial situation was put forth by Nobelprize-winning economist Paul Krugman. He describes Europe’s dilemma as a lack of co-ordinated fiscal decisions. According to Krugman,“Europe’s economic and monetaryintegration has run too far ahead of its political institutions”.Most of Europe shares acommon currency and a common central bank; however, each country is governed andled by a different political leader. Europe’s economies are as tightly integrated asAmerican states, but they do not have continent-wide institutions to deal with this crisis.

This free spending will be costly to taxpayers, although it might not be enough. Theamount of money spent in such a short time period is intended to inject public money intothe faltering economy. The consequences of this increase in spending are certain to havelasting effects on the value of the dollar as well as the U.S. national debt. Fortunately, theUnited States is seeing some signs of stabilization. In late March, it was reported thathousing construction and orders for machinery and equipment began to rise. In addition,government loans to private sector companies have enabled them to balance their books,save jobs, and keep production moving.U.S. Treasury Secretary Timothy Geithner also recently unveiled a plan to buy up “toxic”debt that many financial institutions have on their books leftover from the collapse of thecredit and mortgage markets. On the monetary side, the Federal Reserve has consistentlybeen cutting interest rates for several months. In addition, they have injected billions ofdollars of capital to unblock the frozen U.S. credit market. According to U.S. FederalReserve Chairman Ben Bernanke, fiscal and monetary actions taken by the U.S.government so far have “avertedthe risk of a new American Depression.”He continuedby adding, “We’vegotten past that… now the problem is to get the thing working properlyagain”.Programs like government health insurance and high unemployment benefits are intendedto stabilize economies during tough times. These programs are intended to be safety netsto steady jobs and companies when payrolls decrease. These previously establishedprograms and stimulus packages may not be enough to avert a deepening crisis,considering their impact on an already subsidized public. The EU has called onindividual governments to buy up portions of failing banks in order to provide somestability and capital. Unlike the U.S. Federal Reserve, the European Central Bank hasbeen less aggressive in its rate cuts and it has been conservative on ways to unfreezeEurope’s credit markets. Analysts believe this is sufficient for now, but they are alsolooking for global leadership to expand on programs and ideas to further strengthenEurope’s economy.One encouraging example illustrates how some countries are adapting to the crisis. Manyfinancial officials have increased their desire for economic diversification. Recently, theRussian Federation announced its intention to diversify its economy from a minerals-based market system to one that enables domestic growth. Igor Shuvalov, Russian FirstDeputy Prime Minister, signaled his country’s intention to move from an energyexporting capital to a more modern economy that will support an increase in domesticcapacity for manufacturing and production. Large overhauls of economic systems willtake time, but they are necessary for countries to have the ability to ride out thesefinancial storms.

Financial Stability Forumto globally co-ordinate regulation and a stronger role for theIMF in lending to distressed countries. G-20 leaders also reached agreement to make$250 billion in trade credit available to importers and exporters to keep global trade flowsfrom diminishing. This internationally coordinated response is essential to move forwardthrough this crisis, and it should be the OSCE PA’s objective to build off these decisionsin the coming months.An innovative proposal –The Stiglitz Initiative --submitted to the G-20 by adistinguished United Nations panel, led by economist Joseph Stiglitz (Nobel Prize in2001) recommended creating a new Global Economic Council which would set theagenda for global financial and economic policy. In addition, the panel proposed a newglobal reserve system to regularly support developing nations which would not be subjectto veto power by any developed nation. Furthermore, the panel called for regional co-operation agreements given their effectiveness at recognizing cross-border externalitiesand sensitivities to the distinctive conditions in neighbouring countries.

The Dangers of Protectionism and Economic NationalismIn reacting to economic difficulty, some States have adopted protectionist and economicnationalist measures. This trend has the potential to be harmful as economies decoupleand turn inward. We are seeing this financial phenomenon happen throughout the worldas countries enact tariffs and restrict trade to avoid losses.In a recent report published by the World Trade Organization (WTO), it specificallyfocused on the rise of protectionism in the last few months. According to WTO Director-General Pascal Lamy, the world has seen “significantslippage”toward the position ofprotectionism. He added, “Thedanger today is of an incremental build-up of restrictionsthat could slowly strangle international trade and undercut the effectiveness of policies toboost aggregate demand and restore sustained growth globally”.Economic nationalismhas created environments where governments are favouring local industry, thus creatingan unequal playing field for foreign competitors.The U.S. Congress, for instance, has established a “Buy America” clause aimed atrestricting investment in anything but American goods and services. In a recent meetingof the European Council, leaders directly addressed this issue by underscoring thedetermination of Member States to adhere to the principles of the EU’s single market.In this context it is important to recall the importance of international trade in providingstability and prosperity. The debates and the conclusions of the OSCE ParliamentaryAssembly’s Fifth Economic Conference held in Andorra in May 2007 devoted tostrengthening stability and co-operation through international trade underlined these factsand warned against the dangers of creating barriers to trade.

What remains to be seen is how these different economic plans will affect individualeconomies. Both sides of the Atlantic have introduced sweeping packages and reformsthat will be needed to stabilize their own economies. Some of these policies willcertainly complement each other, but others may impede progress.Given the large amounts of bailout and stimulus packages to certain companies andsectors of the economy, these companies will likely be more open to doing business sincethey have greater resources. This may free up markets as intended but along with thesestimulus packages and bailouts also comes government intervention. As governmentsbuy up large segments of the private sector, greater government influence in businessdecision making seems likely. When combined with nationalistic and protectionistpolicies this influence could impede growth between countries and negatively affect theexports of less developed countries.Also, there is the potential for environmental priorities to be cast aside in the pursuit ofeconomic recovery. Economic stimulus packages could focus on the imperative ofrescuing industries that are not necessarily environmentally friendly, which could in turnundermine efforts to curb climate change and other global environmental problems. Butthere is also the potential for using the current crisis to rethink economic and industrialpolicies. With high levels of unemployment, governments and international financialinstitutions could use their resources in putting people to work in environmentallyfriendly industries, including the development of energy efficiency and renewableenergies.In this respect, Parliamentarians have an important role to play in highlighting theseeconomic and environmental debates in their own countries. Given the OSCE PA’s role inadvancing the debate on environmentally friendly policies with regard to business andindustry, the Assembly should seek to reinforce these environmental discussions whilegenerating economic solutions. This will ensure that issues such as climate change andenergy efficiency are given equal status to economic recovery in each country’s responseto the economic crisis.Beyond the emphasis on the environment, responses to the current crisis should keep inmind that those who are most affected by the crisis are not necessarily banks andinvestment firms, but rather, average people who have lost their jobs, their homes andtheir livelihood. Therefore, responses to the crisis must involve job creation, providingunemployment benefits where needed, and developing alternative industries that will spurgrowth and diversity in the markets. Infrastructure spending, designed to stimulateeconomies, will also have a positive impact as it addresses critical projects and createsemployment. These actions will release cash into the markets and drive economiestoward a fresh start. Several OSCE participating States have already developed plansaimed at absorbing the toxic debt associated with the failed mortgage giants. These plansintend to allow financial institutions to get these negative investments out of theirportfolios.