Avoiding Fragmentation of Global Financial Governance
| Author | C. Randall Henning |
| Date | 01 February 2017 |
| DOI | http://doi.org/10.1111/1758-5899.12394 |
| Published date | 01 February 2017 |
Avoiding Fragmentation of Global Financial
Governance
C. Randall Henning
American University
Abstract
Regions of the world have developed an increasing number of financial arrangements to underpin the stability of capital mar-
kets and combat crises. But these arrangements vie for influence over international finance with the International Monetary
Fund (IMF), as has been dramatically illustrated during the euro crisis, and threatens to fragment global financial governance.
This article reviews the regional financial arrangements (RFAs) and their relationships to the IMF, examines the sources of con-
flict between these institutions, draws lessons from the euro crisis for institutional cooperation, and proposes a set of guideli-
nes and principles to avoid fragmentation of financial governance in the future.
Regions of the world have created and developed financial
arrangements over the last two decades in order to provide
stability to capital markets and fight financial crises. This
growing trend raises the prospect that the world could one
day be populated by multiple regional ‘monetary funds’–a
European monetary fund, an Asian one, and so forth –vying
for influence over international finance with the incumbent
multilateral institution, the International Monetary Fund
(IMF). Although that prospect might be distant and uncer-
tain, the euro crisis dramatically underscores the challenges
posed by regional financial arrangements (RFAs) for the IMF
and the potential for fragmentation of the global financial
governance.
The European sovereign debt crisis has been a searing
experience for the institutions that were involved in the res-
cues –the IMF, European Commission, European Central
Bank, European Stability Mechanism, and the Eurogroup and
European Council. Cooperation among these institutions
often operated smoothly. But in no case was it seamless
and in some cases it was sharply conflictual, with the three
successive programs for Greece being especially divisive.
These institutions debated, among other things, program
design, debt restructuring and region-wide policies, and the
stakes were high, both for the institutions and the countries
that underwent programs. The experience highlights the
potential pitfalls for cooperation beyond Europe between
the IMF and RFAs in Asia, Latin America and other regions.
This article reviews the RFAs and their relationships to
global arrangements, principally the IMF, draws lessons from
the euro crisis for flashpoints between regional and global
financial institutions, and proposes a set of guidelines and
principles to underpin cooperation among these institutions
and sustain coherence of financial governance in the future.
Consider recent developments in RFAs in the following sec-
tion, then the experience of the euro crisis, and finally rec-
ommendations in the concluding section.
Regional financial arrangements: what is new?
Regional financial arrangements comprise an important part
of the global financial safety net (GFSN) –the official multi-
lateral, regional, bilateral, and plurilateral arrangements
through which countries access international assistance in
response to financial stress or a crisis (IMF, 2016a; Miyoshi,
2013). The field of international political economy refers to a
set of international institutions that operate within a com-
mon issue area as a ‘regime complex’(Abbott et al., 2016;
Alter and Meunier, 2009; Keohane and Victor, 2011). The
GFSN is thus the international regime complex for crisis pre-
vention and finance.
RFAs are heterogeneous, ranging in size, purpose, and
relationship to the IMF. Their size varies from the small Latin
American Reserve Fund to the Chiang Mai Initiative Multilat-
eralization (CMIM) and the large European financial facilities.
Just as the IMF has expanded the range of its lending facili-
ties –from precautionary to long-term financing –regional
arrangements have expanded their functions as well, with
the European Stability Mechanism (ESM) exhibiting the
greatest range of financial instruments. Some RFAs are moti-
vated by dissatisfaction with the IMF, while others, such as
the ESM, have been created to overcome shortcomings in
the regional architecture. Geographical coverage is incom-
plete: some regions lack financial arrangements and thus
rely exclusively on the IMF and other multilateral institutions
for financial support.
East Asia: Chiang Mai Initiative Multilateralization and
ASEAN+3 Macroeconomic Research Office
East Asia was not the first region to create its own financial
facility, but the Chiang Mai Initiative Multilateralization
(CMIM) is distinguished among RFAs by its origin in a back-
lash against the IMF, in the wake of the Asian financial crisis
Global Policy (2017) 8:1 doi: 10.1111/1758-5899.12394 ©2017 University of Durham and John Wiley & Sons, Ltd.
Global Policy Volume 8 . Issue 1 . February 2017 101
Special Section Article
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