"Internationale Finanzmärkte - Gerechtigkeit braucht Regeln" (englische Fassung)

International financial markets -
justice requires rules

Many people nowadays are turning their thoughts to the issue of whether globalisation, in particular, the globalisation of the financial markets, is a blessing or a curse. What basic conditions do international financial markets require and what can be done to ensure that as many people and countries as possible can benefit from the global division of labour and the international financial markets? What kind of rules would prevent the poorest people in the world’s poorest countries from experiencing the greatest suffering in financial market crises? How can rules which utilise the efficiency of free capital flows and promote justness worldwide be enforced?

In its declaration entitled “International financial markets – justness needs rules”, the Central Committee of German Catholics (Zentralkomitee der deutschen Katholiken) takes a stand on fundamental issues relating to international financial integration and puts forward several criteria for acting in the interests of the common good in this important field of modern economic life.

These criteria are guided by standards in Christian social teaching with the four aspects of markets, politics, law and ethics. We view the functioning of markets and the possibilities and necessities of the political and legal framework with the firm conviction that the tense relation of economic efficiency and ethical criteria has to be reshaped time and again.

I. Basic situation

The volume and range of instruments in the increasingly integrated international financial markets have expanded considerably in the last decade. Here, globalisation has advanced further than in any other area.

In view of the continuing income differences between the poor and the rich, this brings with it chances and risks, hopes and fears for many people in both the north and the south. The chance to take advantage of the international division of labour and gain access to import and export markets as well as to foreign capital markets is offset by negative experiences. - International financial markets are perceived as alien and threatening powers capable of uncontrollably plunging sections of the population and economic regions into major problems.

On the one hand, we observe that

- capital crosses borders and continents easily: rapid capital movements, in particular
major capital outflows, are viewed critically as one of the reasons for endangerment
to jobs;

- stock market crises (crashes) affect the people in both rich and poor countries and
can destroy savings as well as companies;

- international debt or currency crises, eg in Mexico, Asia, Russia or Argentina, result in high economic and social costs in the countries affected and for the people affected – it is depressing to realise that speculation can overnight destroy any development progress so arduously made;

- a lot of people in developing countries still have to live under catastrophic conditions without any prospect of substantial improvements;

- certain groups benefit unilaterally from the advantages of the international financial system;

- major indebtedness considerably restricts governments’ and parliaments’ political ability to act.

On the other hand, it should be borne in mind that

- functioning financial markets make a crucial contribution to economic and social development. Properly regulated markets are, in most cases, the most efficient and just (most neutral) means of coordination for economies based on a division of labour and in the world economy;

- markets (including financial markets) as entities upholding the freedom of exchange and trade, play a role in safeguarding fundamental liberties, the value of which people have learned to appreciate in the course of history; after all, market participants have technically the same chances of participation – social status and power do not matter for services and prices;

- savings and the demand for capital are matched in the financial markets: capital is steered towards the best, ie the most productive, use;

- cross-border capital flows broaden the investment opportunities for savers and the financing opportunities for companies;

- the expansion of cross-border direct investment and world trade, which has furthered development in most countries, would not have been possible without the international financial markets;

- emerging market economies have connected with the international financial markets and, thus, escaped from the vicious circle of poverty.

II. The development of the financial markets

In recent years, concerns and hopes regarding the effects of international financial flows have grown at equal rates, triggered not least by the dynamic development of the international financial markets.

- Nowadays, an average of US$1,200 billion is traded daily on the foreign exchange markets alone. On particularly hectic days, this figure may increase to up to US$3,000 billion (compared with US$150 billion in the mid-1980s).

- The turnover on the derivatives markets has surged spectacularly (it amounted to US$80 trillion at the end of 2000); most of this turnover is used to hedge risk positions. Derivatives are contracts, the value of which is derived from the price of an underlying instrument such as shares, bonds or exchange traded commodities.

- Nowadays, investors hold – even long-term – securities for only a few days. - The foreign lendings reported to the Bank for International Settlements by credit institutions at the end of 2001 amounted to around US$13 trillion. This figure is ten times greater than that reported in 1980 and twice as much as in 1990.

More and more countries have liberalised their financial markets and therefore participate in global financial transactions. In Europe, the launch of monetary union has had a stabilising effect.

The development and trade in ever more complex, innovative financial products has, without a doubt, been a driving force behind the unprecedented growth of the international markets in recent years. In principle, they make it possible to trade the risks underlying financial transactions in the market and, thus, share the burden more widely.

From a historical perspective, the high level of integration of the global financial markets is nothing new. Measured in terms of capital mobility, ie comparing cross-border financial transactions and national product, the level reached in 2000 merely matched that achieved in 1914, when there were already brisk capital movements.

What is new today, however, is the number of countries involved in international financial flows, the wide range of products consisting of loans, shares, bonds, foreign exchange assets and derivatives, and the speed at which capital transactions are conducted. The combination of greatly increased volume and the possibility of global shifts in capital in seconds have created a particular potential danger for the global financial system, which is still insufficiently regulated in many areas.

The 1997-98 Asia crisis was an example of the international financial markets’ vulnerability to crisis. This crisis escalated into a global crisis and involved high restructuring costs for the countries affected. During this crisis, the contributory and exacerbating role played by national economic policy as well as the serious institutional deficiencies in economic policy and in the financial systems (lack of supervision, safety nets, risk management) became clearly discernible.

III. More equal participation worldwide

The developments described demand evaluation. Are the developments being observed good and correct, improvable, detestable or controllable? Since Oswald von Nell-Breuning published his “Grundzüge der Börsenmoral” (“Basic Features of Stock Market Morality”) in 1928, Christian social teaching has repeatedly endeavoured to critically evaluate the phenomena of the world economy and finances, and has developed standards which can offer guidelines for both personal and political action. In line with this tradition, the Central Committee of German Catholics resolutely promotes more equal participation for as many people as possible worldwide. In doing so, we are confronting economic determinism or reductionism which, by making stringent economic rationality the measure of all things, considers market efficiency the sole epitome of reason, including even ethical reason. Use of the term “equal participation” highlights the fact that we consider it to be reasonable to expect the (self)restriction of efforts to gain private advantage on the part of powerful economic agents. This underlines the significance of a suitable regulatory framework. The task of this framework is to regulate which aspects of fair and just life in a well-ordered society of free citizens with equal rights are to take (legally enshrined) precedence over the striving for private advantage and success. With regard to the international financial arkets, this means that there is no alternative to strengthening the supranational pillars of a political framework regulating global competition which guarantees equal participation.

The social and ethical criterion of equal participation emphasises the link between subsidiarity and solidarity, and underlines the corresponding connection between regulatory ethics and individual ethics. The responsibility of all members of society to play an active role in the community can be enforced only if the relevant structural conditions exist to make such participation possible. This applies in particular to those marginalised in or excluded from economic interaction. The economic and fiscal policy framework must be structured in such a way as to give as many people as possible the opportunity to accumulate capital and gain access to product and financial markets irrespective of the economic level already reached. Therefore, the joint and several responsibility of the wealthy includes the creation of a participation-promoting framework: structures, which make self-initiative possible and take into account the issue of enabling the poor to participate also in an economic sense. Moreover, supporting measures in the area of development cooperation remain imperative for promoting equal participation, especially for the poorest people. If resources have to be reallocated repeatedly through intervention on a large scale for the sake of social harmony, this suggests that structural obstacles persist and that equal participation has not been achieved.

For the international financial markets this means gradually and persistently building up an international social market economy framework. The most important aspects are institutions such as legal security, secured ownership, contractual liberty, accessible open markets as well as training and education requirements.

However, the concept of equal participation also covers much broader international justice which demands that industrial countries put aside their own short-term interests, for instance, ring-fencing highly-subsidised economic sectors such as agriculture. Economic globalisation will support peace and freedom worldwide only if the “rules of the game” are in accordance with the common interests of humanity and the rich countries do not (re)define or simply disregard them for their own short-term interests.

IV. Eight proposals for improving the regulatory framework of the international financial markets

As a reaction to deficiencies and erroneous developments, national and multinational institutions have begun a process through which the conditions for the global financial system are to be improved with two main objectives:

- to create efficient incentive structures for national and international financial markets, which reduce the risk of unstable developments and secure the market participants’ integrity;

- to develop structures for development financing in poor countries, which will help to eliminate poverty and allow access to the capital market.

Against the background of erroneous developments, our aim is to develop proposals for regulatory elements for the international financial markets so that as many people as possible can benefit from the markets’ advantages and so that negative effects, especially those for the lowest social strata in the developing countries, can be avoided.

Many of the demands in this paper concur with other ecclesiastical and non-ecclesiastical views such as that of the "World Economy and Social Ethics" expert group of the German Bishops’ Conference or the “Globalisation of the World Economy – Challenges and Responses” study commission of the German Bundestag (appointed in the 14th electoral period, German Bundestag printed paper 14/2350).

It is necessary to strike the right balance between politics, markets, law and ethics. Whereas in a long process regulatory structures were set up for the national financial systems in most European and North American countries and for some Asian ones, only initial attempts at such a regulatory framework have been made at an international level. In many developing countries, there are not even any national regulations.

1. Strengthening the international financial architecture

In order to create a robust international financial architecture, there is no alternative to the International Monetary Fund (IMF) having a new, stronger role in crisis prevention, if only because of its universal membership. The paradigm shift, which the IMF itself has executed in its policy, offers reference points for a preventative international regulatory policy, even if the IMF still has to overcome some resistance in implementation. Initiatives which have the aim to strengthen the weight of the developing countries in IMF and World Bank must be carried on. As part of multilateral and bilateral surveillance, the IMF must identify serious deficiencies in economic policies and on the markets at an earlier stage. In the emerging economies, it must, above all, keep an eye on monetary and fiscal policy, including the suitability of exchange rate policy. In addition, the institutional structures must be examined with regard to their degree of suitability for capital inflows and channelling these inflows into efficient uses.
The IMF originally had the task of providing temporary liquidity to overcome short-term balance of payments problems. This principle was violated so often in the past that private creditors assumed that they would not have to bear any loss exposure in the event of a crisis.

Certain clauses should be incorporated into international bond contracts to prevent individual bond creditors from being able to block debt restructuring. Therefore, in future, a majority decision passed by the bond creditors would suffice, according to which all of the creditors would have to accept a certain loss on their claims.

Furthermore, we welcome the international insolvency law initiative for states which will enable overindebted states to restructure and reduce their burden of debt in an orderly manner. In doing so, the interests of both the creditors and the debtors must be taken into account to the same extent. The debtor countries have a fundamental interest in maintaining or restoring their creditworthiness. It is, therefore, in the debtor countries’ own interests to ensure that the lenders can basically depend on their loans being serviced and that restructuring will be necessary only in exceptional situations. We explicitly support the international insolvency law initiative, which unfortunately was postponed at the annual meeting in April 2003, as a concept for a new Sovereign Debt Reduction Mechanism as an answer to the demands in the year-long debt relief campaign. However, we expect the detailed procedure to not fall short of imperative minimum expectations. This includes the right of all of the parties affected by payment or non-payment to be heard before the arbitrator’s decision. The arbitration proceedings and the arbitrator must be accepted by both sides, ie must be independent.
The poorest countries must not collapse under their burden of debt. In taking up the call “Human development needs debt relief” of the general assembly of the Central Committee of German Catholics on 24 April 1999, we hereby reaffirm the expectation that the debt initiative, which links debt relief to economic reforms and effectively combatting poverty, will be extended to include additional countries. The requirements also have to include a minimum level of legal security, observation of human rights and combatting of corruption.

2. Gradual financial market integration

The degree of a country’s involvement in the world economy and the financial markets must correspond to that country’s level of development and institutional requirements. In the past, a lot of emerging economies were introduced into the international financial markets too quickly without having the necessary internal structures. Graduated access strategies are required.

It is the responsibility of state institutions to create the necessary conditions for the creditworthiness of banks and companies in these countries and, with that, the preconditions for direct investment and capital investment. Above all it is important to make efforts to mobilize the potential for savings which actually exists in developing and emerging countries, and to build up an efficient financial system. This includes not only a sound monetary and fiscal policy but also, in particular, the institutional preconditions for the domestic accumulation of capital, above all a functionally viable financial system with an independent central bank as well as effective supervisory structures.

If sufficient incentives for a domestic accumulation of capital exist, there are fewer reasons for capital flight, which is one of the most pressing problems in many countries.

3. Transparency and disclosure

In 1999, the central banks which work together in international bodies set up a new “Financial Stability Forum” at the Bank for International Settlements in Basel. The task of the Financial Stability Forum is to examine the flaws in the international financial system and develop suggestions for improvement. Up to now, agreement has been reached on about 60 important financial market standards, which are to promote national and international financial stability and, in particular, improve the information on and transparency of international financial flows.

In order to be able to assess risks correctly and efficiently, international financial markets need accurate, up-to-date and reliable data. In this respect, special disclosure requirements are directed at the emerging economies (including their structures of indebtedness and foreign currency reserves), although the industrial countries also have a need for improvement with regard to their disclosure practices.

4. Financial supervision

Differentiated risk buffers must be built into credit operations so that the capital markets are better protected against conceivable disruptions. Negligent acceptance of excessive risks must be countered at all levels. Promoting understanding of the necessity for self-restraint with regard to risks is an ongoing activity. Against this background, we welcome the efforts to draw up new standardised capital requirements for credit institutions worldwide (Basel II). This will give the banking sector greater stability in the medium term and will, thus, strengthen the world economy and its development.

Moreover, we consider it to be urgently necessary to put pressure on tax havens until they comply with a minimum number of internationally agreed regulations. Tax havens often provoke flight from taxation and tax evasion, which must not only be condemned but have to be combated by effective international cooperation. It is particularly important to reduce regulatory deficiencies and to work together with the supervisory authorities of other countries. This would be a decisive step in combatting money laundering and cutting off the financing sources of international terrorism. In addition, attention should be given to hedge funds. These are capital pools in offshore financial centres, which pose a systemic risk through short selling (selling borrowed shares) and other highly speculative investment strategies.

An animated discussion is taking place about whether the introduction of an international turnover tax on foreign exchange transactions could moderate excessive, destabilising, short-term reactions in the international financial markets and protect the international financial system from abrupt fluctuations. The proponents of this “Tobin tax” (named after James Tobin who developed the basic concept) hope than it could make a part of currency speculation unattractive whilst at the same time creating a source of revenue for international development efforts. In assessing this proposal, account should be taken of the fact that the balancing function of the foreign exchange markets should not be restricted. It is scarcely possible for the allocation and revenue functions of the Tobin tax to be fulfilled simultaneously. The lower the tax rate, the less likely the tax is to restrain speculation, but the higher the tax rate, the greater the restrictions on the global financial system. The discussion is to be continued with new proposals and the political possibilities to introduce the Tobin tax have to be checked.

Negative effects from currency speculation should certainly be counteracted through even greater cooperation between the international central banks.

5. Improvement of capital market integrity in developed countries

Initiatives, which considerably increase the demands placed on market participants with regard to exercising care and avoiding conflicts of interests must be seen as positive. These initiatives are the only means of regaining investors’ confidence. The regulations which recently came into force in the USA are a necessary response to the scandals which have occurred eg at Enron, Worldcom, as well as to the questionable conduct and inaccurate assessments of analysts and rating agencies. In response to the conflicts of interests which have come to light, equity research and investment banking at financial institutions are to be separated in organisational terms and there is to be a division between auditing and management consultancy.

In the European Union, work is currently under way on an ambitious project to create a single financial market, which sets high standards for transparency and investor protection. A financial market similar to that of the USA is to be created in Europe by 2005 by way of the Financial Services Action Plan, which contains a total of 43 individual initiatives.

6. Strengthening European cooperation

It is no coincidence that this project is being pushed ahead by the European Union and not by the individual European nation states. European legislation has emphasised that the rules for international financial flows are no longer compatible and enforceable at a national level. The creation of supranational regulatory bodies is, therefore, indispensable for the prevention  of irregularities in international financial markets.

The enlarged European Union, representing a Europe with a common economy and shared values, reinforced by a constitution, assumes very great significance in this respect The EU institutions must fulfil their responsibilities in order to create the necessary rules for improving the stability of the financial markets. There is need for action with regard to financial market supervision, in particular, the supervision of credit institutions, insurance enterprises and securities trading firms.

The euro demonstrates just how significant a functioning regional consolidation can be for the stability of financial systems.

Just as the European financial markets have weathered the most recent financial crises without the previously common currency turbulences not least because of the introduction of the euro, similar forms of cooperation in Asia, Africa and South America could prevent disruptions in future. This requires suitable institutions to be set up. In this respect, it would be desirable for Europe to speak and act more as a single entity in international organisations and thus enhance its role in advising emerging economies and developing countries about financial market issues.

7. Financial development cooperation - democratic rules

It will not be possible to integrate most of the poorer developing countries in the international financial markets in the foreseeable future owing to a lack of institutional conditions. However, to ensure that this is a prospect in the long term, financial development cooperation must be given new emphasis.

Development financing will achieve its objectives only if there is an improvement in the basic economic framework in the developing countries. It, therefore, appears prudent to tie development financing to conditions which will help to achieve the goals of ecologically benign growth and balanced distribution. In the past, mistakes have been made in this respect in the cooperation between the IMF and national decision makers as the needs of the population were not taken into sufficient consideration in structuring the programmes.

Internal obstacles to development caused by irresponsible actions at national government level not least the scandalous flaunting of wealth in the world’s poorest countries as criticised by Pope John Paul II - can best be overcome by promoting democratisation processes. Development financing, especially debt relief programmes, should help to guarantee minimum standards for just state structures, to develop a framework of social order and to promote equal rights for men and women and the creation of a viable civil society. By means of the Poverty Reduction Strategy Papers IMF and World Bank meanwhile responded to the demand that they should concentrate their structural change policy on the stronger participation of the poor in the economic growth. However, this should not be done pro forma only. It is necessary that civil society is constantly involved and its propositions are actually taken into account. For the development strategies of multilateral institutions strategies which nowadays are orientated towards combatting poverty and promoting growth to be successful, it is essential for them to be factored into the political programmes of national decision makers and governments through effective cooperation. Corruption and nepotism, a too small participation of the poor in the development programmes and measures biased only towards promoting growth remain decisive obstacles to lastingly promoting development.

8. Allowing the poor access to loans

International financial markets are markets for global players. An improvement in the basic conditions for international financial markets will only indirectly help to satisfy local players’ demand for capital, that is the conditions for small and micro loans. If the objective of achieving equal participation is to be resolutely pursued, the range of microfinance options must thus also be improved parallel to strengthening the international financial architecture. The significance of the simplest financial services in developing countries was underestimated for a long time. The involvement of the poor in a reliable monetary system is a key to participation, nearly all poverty-relevant areas being influenced by money. The establishment of simple, functionally viable banking systems, which give broad strata of the population access to savings and loans, must be given increasing priority in development financing. There is savings potential even in the poorest developing countries and this could be mobilised for investment purposes. In view of similar efforts made in Germany in the 19th century and the positive history of our cooperative banks and savings banks, we support the creation of microfinance banks like the ones already operating successfully in several countries (eg Grameen Bank in Bangladesh). Therefore it is necessary to bring into being legal basic conditions, which will support the creation of microfinance banks. Furthermore the number of finance programmes has to be increased substantially. Microfinance banks have become an important ray of hope for the fight against poverty and for social changes. Small and micro loans, especially to women, are evidently an effective instrument of lasting povertyorientated aid to the developing countries. According to the World Bank women are the most reliable borrowers and thus they are not the problem but the key to development.

V. What can we do?

The principal players in the international financial markets are the big banks and professional investors. The request to adhere strictly and reliably to rules of conduct, which prevent economic crises from being caused by the criminal practices or negligence of individuals, is aimed at them. All participants must realise that institutions and individuals who are new to the international markets – be they emerging economies or countries of a former state capitalist nature – do not automatically take over the rules of conduct upon introducing free market and democratic structures. This makes it all the more important to introduce and implement a code of conduct, including penalties for non-compliance, at the level of both companies and supranational authorities. We expect internationally operating (financial) enterprises to establish sound standards of self-obligation and self-commitment. They can and must assume their sectoral and regulatory co-responsibility in this way – a coresponsibility, which is becoming ever more indispensable as, in the wake of global competition for investment, regulatory policy (which is still largely national) is increasingly losing its power to police the global players. In view of the effective power of such international players, it will scarcely be possible to draw up a supranational regulatory policy without their involvement. Nevertheless the responsibility of the national governments of course has priority.

However, each individual can act, be it as a financial market player or as a participant in the public debate. As a financial market player, each individual in deciding on the nature, location and terms of a financial investment or loan has room for manoeuvre, in particular, with regard to the risk which he wants to accept. The financial investments of many private individuals are bundled by large institutional investors, eg insurance companies and investment funds.

Goal-oriented forms of financial investment are now available, such as the growing ethical and ecological investment sector, and there are forms of investment which are particularly committed to pursuing development goals as micro loans are granted using the deposits.

It has long been known that investments can be used as a lever. According to opinion polls, 80% of Germans think that it is important to take ethical and ecological criteria into consideration in financial investments. Ethical and ecological investments create the financial framework for social and ecological innovations in our society as well as in countries in Africa, Asia, Oceania and Latin America, and thus contribute towards the “globalisation of solidarity”.

Furthermore the welfare organizations of the Churches continue to make an indispensable contribution to the globalisation of solidarity. Supplying donations in addition to a responsible strategy of investing capital are necessary means to achieve a lasting development.

Each and every one of us is called upon to make the questions of efficiency and justice raised with regard to the international financial markets a subject of public debate. Only if Christians specifically draw attention to retrograde tendencies in economic “progress” will it be possible to distinguish fatuous claims of a supposed globalisation “logic” from well-founded indications of economic integration and necessity. Anyone who supports equal participation must have the courage to question the humaneness and existential rationale of the rules and mechanisms of international markets. If we fail to do this, then we must expect an antimodernistic or even fundamentalist backlash, above all in countries which have not yet undergone deep-rooted cultural modernisation.

Our aim must be to advance the principle of solidarity in the cosmopolitan community of mankind, to gain general recognition of the cross-cultural, universal community of all people and all peoples, from which no one may be excluded.