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Christine Lagarde sounds like a broken record.

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Message Jean-Luc Basle

Christine Lagarde concludes her June 27 speech at the Osaka G-20 meeting with these words: "...while the global economy is currently at a precarious stage, with the right policies and working together, we can overcome the challenges that we face and set the world on a path of stronger, more sustainable, balanced, and inclusive growth." On August 27, 2011, two months after her nomination as the Executive Director of the IMF, she stated "we must act now, act boldly, and act together". Cooperation is a recurring theme in many of her speeches with little success so far. While she is right, she should have no illusion of her dream ever coming true.

The 2008 London G-20 is the only time nations showed a modicum of cooperation and that is because the world leaders knew they were facing an economic abyss. Contrary to Montesquieu's and Jefferson's beliefs, trade does not bring peace but competition among nations. Norman Angell made a fool of himself with his master piece: "The Great Illusion". It was indeed an illusion to believe as he did, that economic and financial interconnections among European nations would render war impossible. He was proven wrong in the worst possible way five years after his book publication.

The Allies knew it. This is why the United States convened a conference in the summer of 1944 in the mountain resort of Bretton Woods in New Hampshire to agree on a new international monetary system. While 44 nations were represented, the structure that was agreed upon was essentially the one presented by Harry Dexter White, the American Treasury representative. The main result was the creation of the International Monetary System (IMF) whose objective was to stabilize monetary relations and prevent uncompetitive currency devaluations, as was the case in the 1930s. Fully aware that the IMF had to be complemented by a trade organization, the United States convened a new conference under the auspices of the United Nations in Geneva in October 1947. The General Agreement on Tariffs and Trade (GATT) whose overall purpose was to promote international trade by reducing or eliminating trade barriers such as tariffs or quotas, was signed by 23 nations. But the agreement failed to create an international organization to regulate trade similar to the IMF for monetary matters. This lapse was corrected in 1995 with the creation of the World Trade Organization (WTO). Had these institutions worked the way they were supposed to, Christine Lagarde's repeated cries for cooperation may have been redundant. But they did not, essentially due to the United States.

On August 15, 1971, Richard Nixon reneged on the United States' commitment to maintain the dollar the foundation of the Bretton Woods agreement at its agreed value of 35 dollars an ounce of gold. Dissatisfied with WTO's rulings, the United States refused to appoint new members to the Appellate Body of the WTO as old members' terms elapsed, in effect paralyzing the organization. Are the United States' decisions justified? Richard Nixon had a choice: engineer a recession to maintain the dollar value or devalue the dollar. If he chose the first alternative, he wouldn't be reelected the following year. For the consumed and avid politician that he was, this was not an alternative. There only was one solution: devalue the dollar to be re-elected in 1972 as he was with the highest percentage of any president in the history of the United States. With respect to the WTO, the case is more subtle. As a preamble, one must know that the WTO is the only post-WWII institution in which the United States does not enjoy a veto power. This feature does not endear the organization to the hearts of the American politicians whose tenet is to preserve the United States' sovereignty at all cost. This is how one must understand Thomas Jefferson's reference to "entangling alliances", and not as a statement of isolationism as often is the case.

As if this were not enough, the United States came to realize that China was one of the major beneficiaries of the WTO, which it joined in December 2001; the other one, of course, was the multinational corporations many of which were American. So, the WTO was in effect breeding a competitor to the United States' unipolar moment. Something had to be done. Hence, the non-renewal of the Appellate Body membership. Donald Trump took the trade war one step further by imposing tariffs on steel and aluminum products, and later on all Chinese imports. Of course, as everyone knows, China flouted the rules blithely. But this did not bother anybody as long as multinationals made a potful of money. Of course, comes a point when even this doxa does not carry the day anymore.

There cannot be any cooperation among nations as long as we don't have a set of rules agreed by all members of the international community. Unfortunately, as stated by Vladimir Putin in his interview with the Financial Times: "There is no rule anymore." He then adds: "I would like all the G20 members to reaffirm their intention... to work out some general rules that everyone would follow and to show their commitment and dedication to strengthening international financial and trade institutions." Cooperation is a necessary condition but is it sufficient? In Golden Fetter, Barry Eichengreen throw an interesting light on the years that preceded the Great Depression. "In the spring of 1927 the Bank of France initiated efforts to convert its exchange reserves into gold." France was trading in her pound sterling for gold. This might force the Bank of England to raise its interest rate at the time "the British economy was already in a weakened state". The Fed rescued the Bank of England by lowering its interest rates, and thus absorbing "a substantial fraction of the sterling the Bank of France" was liquidating. Eichengreen then observed: "The weakness of the U.S. economy surely contributed to the Federal Reserve System's willingness to undertake a significant change of direction." The Fed was killing two birds with one stone.

Historians and economists blamed the Fed for its "excessively expansionary policy", which in their view created the stock-market boom, and later the stock-market crash when the Fed abruptly reversed its policy. But, again as noted by Eichengreen, the influence of the international factors that "pushed the Fed in a more expansionary direction, was desirable from both domestic and foreign points of view". In other words, the Fed was not only stabilizing the international monetary system on account of the Bank of England, it was also propping up the U.S. economy. International cooperation may lead to unexpected consequences. Had the Fed been concerned with domestic matters only, it may not have adopted as much an expansionary policy as it did in 1927.

For international cooperation to work, countries must be prepared to make decisions that may run counter to their short-term interests--that's a somewhat unrealistic expectation considering human nature, short of a pending cataclysm" as in 2008 or in 1962! That's why Christine Lagarde's calls remain unanswered.

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Former Vice President Citigroup New York (retired) Columbia University -- Business School Princeton University -- Woodrow Wilson School

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