Credit crisis driving global cooperation

World markets responded positively Monday to new initiatives emerging from meetings in Washington and Paris.

from the October 14, 2008 edition

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Alexandra Marks talks with reporter Peter Grier about the unprecedented cooperation between countries to solve the world financial crisis.

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The financial crisis "needed this international coordination," he adds. "But we will needstill broader international coordination to bring in China, India, and Russia because the key to recapitalization isn't national government – it's going to be sovereign wealth funds and getting trade moving again."

By working together, European nations will limit the impact of the money market mess on the real economy, adds Philippe Waechter, director of economic research at Natixis Asset Management in Paris.

"This cooperation is an important answer to negative fear and worry in individual states," says Mr. Waechter.

Almost overnight, the global financial crisis has swept away years of national economic philosophy. The bailout-rescue plans in the US and Britain, for instance, represent a dramatic shift away from decades of laissez-faire economics towards more regulated markets.

In Europe, the crisis has become a genuine test for the idea of European unity. In the United States, it has sharply affected the tone and tenor of the presidential race – something that polls show may be leading to a surge in support for Democratic candidate Barack Obama.

Either Senator Obama or rival Sen. John McCain will take office at a time of unprecedented global economic challenges – challenges that will require both leadership on the part of the US chief executive and extensive cooperation with international institutions, according to a new report by the Brookings Institution.

Restoring financial stability may be the next president's top such problem. Others include: setting a green agenda that can win support both from the US public and developing nations, which are large per capita emitters of greenhouse gases; reimagining global trade, to widen the world's circle of economic winners; navigating around China's economic rise; deciphering Russia's attitude to world economics; engaging an emerging India; revitalizing ties to Latin America; and supporting Africa's growth turnaround.

"Given America's enormous stakes in a strong and resilient global economy, it will be critical for America to lead on the main challenges we face today," writes Lael Brainard, Brookings director of global economy and development.

Meanwhile, Germany moved down a path similar to the one Britain has taken.

On Monday, Chancellor Angela Merkel's Cabinet approved a banking rescue package worth up to 500 billion euros ($679.3 billion), seeking to restore confidence and order to Germany's battered financial sector.

The package comprised up to 400 billion euros in bank guarantees and as much as 100 billion euros in state funds – sums that together almost equal Germany's annual tax take.

"Today we have established a first building block for new financial market conditions," Mrs. Merkel told reporters. "We have one goal – (the plan) should help to create new confidence, between banks, in the economy and among citizens."

Earlier the euro rose against the dollar on news the cabinet had approved the plan, which Merkel said should come into effect on Friday after parliament has passed it.

Germany initially pledged help for banks on a case-by-case basis, but changed course and decided to adopt a sector-wide plan after the financial crisis grew worse last week.

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