The Americans call it “the crack-up.” Economies are behaving like frightened clams, hiding in their own shells. Economists call it protectionism. In the sand, populism is on the rise at both ends of the political spectrum. The golden age of globalization lasted nearly 15 years, between 1993 and 2007, according to the Asian Hinrich Foundation. The value of trade increased by 6.8% annually, foreign direct investment flows grew by 21.3% during this period, and global wealth grew annually increased by 3.4%. It brought political liberalization, technological advances, multilateralism, and an unprecedented increase in trade, investment, and economic development. Maybe it all ended when Donald Trump said, “I try to learn from the past, but I plan for the future by focusing solely on the present.” That's where the fun lies.” The “present” and the “fun “ of world trade are twofold, but what about financial movements? Are investments and their regulation also hidden?
The omens are uncertain. The increasing fragmentation of the European banking system is a “failure” that increases financial vulnerability and imposes higher costs on everyone. This is the warning from Andrea Enria, former supervisory chief of the European Central Bank (ECB), in the Financial Times. His biggest “personal regret” is seeing how the Eurozone market is becoming “more and more segmented” and how countries are being “led along national borders”. If there is a shock that affects part of the banking union, the sector will not function as it should, that is, absorbing losses in one country with gains in another, he warned. The mechanism – which oversees the bloc's 110 largest and most significant banks – held up when a liquidity crisis at Credit Suisse led to it being taken over by rival UBS. Or when Silicon Valley Bank and Signature Bank failed in the USA. “But there are enormous tensions in financial regulation,” agrees José García Montalvo, professor of economics at Pompeu Fabra University (UPF) in Barcelona, Spain.
For once, all voices seem to have struck the same tone. “The biggest risk in regulating the financial space is its fragmentation, which is clearly evident in areas such as sustainability,” agrees Francisco Uría, global partner for banking and capital markets at KPMG. A more financially united Europe could improve its economic resilience and strengthen the euro as an international currency. However, the realization of this union, explains Sergio Ávila, an IG analyst, requires a deep political commitment and bridging ideological and national differences between member states. And many will ask, for example, what Hungary has in common with France.
In July 2010, the Dodd-Frank Act was passed, representing the most important reform of the American financial system since the Great Depression. It was signed into law by then-President Barack Obama. According to José Manuel Amor, a partner at the Spanish consulting firm AFI, it essentially prevented the emergence of institutions deemed “too big to fail,” empowered consumers (through the creation of the Consumer Financial Protection Bureau) and forced banks into stress Tests, higher capital levels and a system for the orderly liquidation of “insolvent” financial institutions. Donald Trump – predictably – changed the regulations. “He offered small and medium-sized banks regulatory relief and increased the stress test threshold from $50 billion to $250 billion in total assets,” the expert recalls. President Joe Biden, in his “now” moment, has increased investor protection and stability in the system.
Maybe he did that because he was thinking about what was coming. 2024 may be the most important election year in history. People are being encouraged to vote in the United States, India and three of the world's most populous countries (Indonesia, Bangladesh and Pakistan). In addition, 500 million Europeans will vote in the EU parliamentary elections. It will undoubtedly impact this fragmented system. These years of wars, trade crises and inflation have proven something. “The United States has recognized its financial power [in the traditional sense] and also about data,” reflects Federico Steinberg, senior researcher at the think tank Elcano Royal Institute. “This impact was reflected in the ability to impose economic sanctions on Russia, India or China. Because when it comes to imposing punishments, America takes its cue from the Anglo-American institutions.” They are the boss.
A coin toss
With the rise of populism, “after decades of deregulation and globalization, we are entering a period of neo-autarky, and that brings with it more regulation and more uncertainty,” says economist José Carlos Díez. Without mentioning it, it's like he's pointing to Argentina. It's a coin toss. The country owes $43 billion to the International Monetary Fund, it has devalued the peso, eliminated nine of its 18 ministries and committed to cutting subsidies and destroying what its president, Javier Milei, calls “caste.” This comes against the backdrop of an economy that contracted 2.7% last year and rising inflation in December. But populist mistakes must be paid for and the idea of tax cuts must be cornered. Consulting firm Econviews estimates that the Argentine government could lose 0.8% of GDP in tax revenue this year.
Meanwhile, the coin continues to spin in space: heads or tails. “In general, populist leaders tend to ignore international regulations, and that fits well with their desire to raise tariffs, stop immigration and shut down their economies,” Montalvo says. By the way, the banking regulatory framework used in Europe, Basel III, is stricter than that in the United States. “In the United States, the regulation currently being developed would apply to banks with assets of more than $100 billion, excluding medium and small banks,” notes Francisco Uría. If Trump wins the election, he will certainly change that. All leaders should remember the quote from sociologist Karl Polanyi (1886-1964): “There is no economy outside the society that created and sustains it.”
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