Abstract
The expression Washington Consensus, coined in 1989 by the English economist John Williamson, is usually indicated by a set of ten economic policy prescriptions that constitute the “standard” reform package promoted by the International Monetary Fund (IMF), World Bank, and the US Treasury Department, all based in Washington D.C., for solving the economic crisis of developing countries. The paper, after describing the main characteristics of the Washignton Consensus economic model in the perspective of the international economic law, intends to underline the deep influence of this economic ‘recipe’ on the Maastricht Treaty and on the construction of the European Monetary Union (EMU) and its basic rules. In spite of the failure of this model, as showed by the current economic and financial crisis started in 2008, the European Institutions and the EU Member states still do not seem ready to change the primary provisions of the EU treaties devoted to the economic and monetary policy, with the real risk of increasing the disaffection of European citizens towards the European Union.
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Notes
- 1.
British economist (born June 7, 1937, Hereford) Senior Fellow at the Peterson Institute from 1981 to 2012. He was project director for the UN High-Level Panel on Financing for Development in 2001 and advisor to the International Monetary Fund (1972–1974) and economic consultant to the UK Treasury (1968–1970).
- 2.
The Conference in question took place in Barcelona (Spain), in 1989 and Willamson entitled it ‘from the Washington consensus to Global governance’.
- 3.
See Williamson (1990), pp. 1–3.
- 4.
See Williamson (2009), pp. 7–26.
- 5.
The reference to ‘consensus’ wants in fact to mean that the ten points, mentioned in the text, were shared by power circles in Washington, including the US Congress and Administration, on the one hand, and international institutions such based in Washington International Monetary Fund and the World Bank, on the other, supported by a range of think tanks and influential economists.
- 6.
In particular, Friedman argued that poor monetary policy by the Federal Reserve (FED) represented the main cause of the Great Depression in the 1930s. In his view, markets naturally move towards a stable center, an incorrectly set money supply can cause market’s failure; in this way, the FED’s failure to offset forces that were putting downward pressure on the money supply and for reducing the stock of money. These were the opposite of what should have been done. His position was criticized by ‘Keynesians’ for which the demand for goods and services is the key to economic output. Because the economy is subject to periodic instability and deep swings, it is dangerous to make the FED obliged to a preordained money target, they argued the FED should have some margin or ‘discretion’ in carry out monetary policy.
- 7.
An ideology and policy model that exalts the value of the free market competition and the minimal state presence in economic and social affairs. Since the 1970s, owing to the economic stagnation and increasing public debt some economists proposed a return to classical liberalism, which in its revived form became neoliberalism. In particular way, Von Hayek argued that government measures aimed at the redistribution of wealth lead inevitably to totalitarims. His point of view was enthusiastically embraced by the conservative political parties in Britain and the United States, which achieved power with the administrations of British Prime Minister Margaret Thatcher (1979–1990) and U.S. President Ronald Reagan (1981–1989).
- 8.
In these terms, see Hall (1993), pp. 275–296.
- 9.
It was also applied for more than two decades in other diverse contexts as Africa, and Asia, as well as in countries emerging from real socialism in Eastern Europe and Central Asia.
- 10.
A group of States (in particular, Hong Kong, Singapore, South Korea and Taiwan) characterized by high levels of economic growth, stimulated by exports and rapid industrialization, which enabled these economies to join the ranks of the world's richest nations. See Stiglitz (1996), pp. 151–177.
- 11.
See https://www.imf.org/external/np/sec/memdir/members.aspx for IMF Member’s Quotas and Voting Power, and IMF Board of Governors.
- 12.
Conditionality makes reference to the commitments contained within loan or grant contract that developing countries must adhere to if they are to receive all or part of the financial aid. In the case of IMF, it usually imposes two different types of macroeconomic conditions to countries that need its support: quantitative conditions and structural conditions. The first consist of imposing a set of economic targets influencing the level of fiscal deficit or public debt a government is allowed to go into. Structural conditions normally consist of adopting institutional and legislative reforms within countries and include trade reform, privatization and price liberalization.
- 13.
- 14.
The nineties have seen a number of financial crisis among which include: September 1992 European Monetary System (strong devaluation of Italian Lira, British Pound and Spanish Peseta); December 1994 Mexico; June-November 1997 East Asia; July-August 1998 Russia; November 1998-Febraury 1999 Brasil; December 2001 Argentina.
- 15.
For IMF stabilizing currencies and for WB and regional development banks to lend money to finance recovery projects.
- 16.
In these terms, see Babb (2013), p. 280.
- 17.
Cf. Stiglitz (2003).
- 18.
Cf. Naim (2010).
- 19.
Cf. Sahn et al. (1997).
- 20.
The current international economic and financial situation has been compared to another well-known event that shocked the World in the early decades of the twentieth century, the Crisis of 1929. Both phenomena would result from a lack of liquidity, suffered mainly by the US credit system, by an excessive liberalism, from a monetary policy too lax by the US Federal Reserve, by a heavy fall in the value of commodities and industrial production levels. However, the current crisis, unlike that of 1929 concentrated mainly in the US and Europe, has affected, though in different ways, all of the economic areas of the Globe. Moreover, it should be noted such as right on the basis of the mistakes made during the Crisis of 1929, in order to ensure liquidity to the market, it has seen in recent years a strong intervention by Central Banks (Federal Reserve, European Central Bank and Bank of England) to support the banking and credit system to boost the real economy, to allow greater circulation of money and facilitate access to credit by companies and individuals in general. For a comparison between the two crises, see Almunia et al. (2009), Krugman (2009), Sapelli (2008).
- 21.
The subprime mortgage crisis, at the origins of the current worldwide financial crisis, started with the explosion of the american housing ‘bubble’ started in 2001 that reached its peak in 2007. A ‘bubble’ is usually characterized, how occurred in USA house market, by rapid increase in the valuations of real property until unsustainable levels are reached in relation to incomes and other indicators of affordability.
- 22.
Cf. Sumner (2010).
- 23.
It was signed on 7 February 1992 and entered in force on 1 November 1993. Its main purpose was to prepare for EMU and to introduce elements of political union like the European citizenship, common foreign and internal policy. Other significant changes were introduced, in particular, we have to remember the following: the establishment of the European Union and introduction of the co-decision procedure, giving Parliament more power in decision-making; new forms of cooperation between EU governments—for example on defence and justice and home affairs.
- 24.
It is in the judgment of the former Permanent Court of International Justice (PCJI) that for the first time we get the official recognition of monetary sovereignty in modern international law. As stated by the PCJI in 1929 in the Serbian loan case “it is indeed a generally accepted principle that a state is entitled to regulate its own currency”. It is on this basis that the State’s sovereignty over its own currency and by implication over both the internal and external aspects of its monetary and financial systems has traditionally been recognized by public international law. See the Case Concerning the Payment of Various Serbians Loans Issued in France (France vs. Serbia). Judgment of 12 July 1929, PCJ Rep. Series A N. 20-21, p. 44.
- 25.
The ‘Snake in the tunnel’ was a mechanism, created by Member States in March 1972, for fluctuations of their currencies (the snake) inside narrow limits against the dollar (the tunnel). Owing to oil crises, policy monetary divergence between its members and dollar weakness (mainly due to Nixon’s unilateral cancellation in 1971 of the direct convertibility of the United States dollar to gold) within two years the snake had lost many of its component parts. Its quick ‘death’ did not diminish the objective to realize in the European community an area of currency stability. A new proposal, took the form of the European Monetary System (EMS) in March 1979, with the participation of all Member States’ currencies except the British pound, which joined later in 1990 but only stayed for 2 years. The EMS was built on the idea of stable but adjustable exchange rates determined in relation to the newly created European Currency Unit (ECU)—a currency basket based on a weighted average of EMS currencies. Within the EMS, currency fluctuations were kept within ±2.25% of the central rates, with the exception of the Italian lira, the Spanish peseta, the Portuguese escudo and the pound sterling, which were allowed to fluctuate by ±6%. See Victor (1990), Van Ypersele and Koeune (1985), Giavazzi et al. (1992).
- 26.
The Maastricht Treaty contains the institutional arrangements for the conduct of monetary policy in Economic and Monetary Union (EMU) in Europe. The Treaty, which entered into force in November 1993, provides the legal basis for the formation of the European System of Central Banks (ESCB), which includes the ECB and the National Central Banks (NCBs) of the 25 Member States of the European Union (EU). The term Eurosystem stands for a subset of the ESCB that comprises the ECB and the NCBs of those EU Member States that have adopted the Euro. The governing bodies of the Eurosystem are the Governing Council and the Executive Board.
- 27.
The importance of ‘price stability’ is also expressed in other provisions of the treaties especially in articles: 3 par. 2, TEU 119 parr. 2, 3 TFEU, 140, par. 1 TFEU, 141 par. 1 TFEU, 219 parr. 1,2,3 TFEU, 282 par. 2 TFEU.
- 28.
The target of 2% was established by ECB’s Council in the January 1999 (see ECB Bullettin, January 1999, p. 39 ss.). See also article 12.1 of the Statute of ESBC for which “The Governing Council shall adopt the guidelines and take the decisions necessary to ensure the performance of the tasks entrusted to the ESCB under this Treaty and this Statute. The Governing Council shall formulate the monetary policy of the Community including, as appropriate, decisions relating to intermediate monetary objectives, key interest rates and the supply of reserves in the ESCB, and shall establish the necessary guidelines for their implementation. The Executive Board shall implement monetary policy in accordance with the guidelines and decisions laid down by the Governing Council. In doing so the Executive Board shall give the necessary instructions to national central banks. In addition the Executive Board may have certain powers delegated to it where the Governing Council so decides. To the extent deemed possible and appropriate and without prejudice to the provisions of this Article, the ECB shall have recourse to the national central banks to carry out operations which form part of the tasks of the ESCB.”.
- 29.
Federal Reserve Act, Section 2A, 1913 and subsequent amendements.
- 30.
- 31.
According to the mentioned rule: ‘Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments’.
- 32.
It consisted of a set of monetary interventions to restore a correct and normal monetary policy transmission mechanism, and thus the effective conduct of monetary policy oriented towards price stability in the medium term.
- 33.
The market place for the bonds that are already issued in the primary market and where the re-selling of government bonds is possible.
- 34.
For which ‘The Union shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project.’
- 35.
See the ECB (2012), p. 7. Thanks to the OMT for the ECB is possible to purchase the sovereign bonds of specific euro area countries, always, on secondary markets with no set ex ante quantitative limits. The ECB Governing Council’s aim in implementing this programme is to safeguard an appropriate monetary transmission process and the singleness of monetary policy. For the purchasing of the state bonds, the OMT programme establishes that the state in question complies with conditions specified in European Stability Mechanism, that establishes a permanent emergency fund which entered in force in September 2012.
- 36.
The balance of payments is functional to summary, for a specific time period, the economic transactions of an economy with the rest of the World. With reference to the conceptual framework of the balance of payments accounts and the international investment position and national accounts see IMF (2012), pp. 6–20.
- 37.
The ceilings of 3% of Gross Domestic Production (GDP) on budget deficits and of 60% of GDP on government debt: probably the best known elements of the EMU framework.
- 38.
The EU’s role as external constraint for Italian economy and policy is common among commentators and the public. There is the idea that Italy is unable to take care of itself without the help of the EU institutions. In particular way, many authors consider the pressure of EU on Italian government absolutely necessary in order to ensure the equilibrium of the public budget and in order to abandon dangerous expansionary economic policies. See Mittestainer (2014).
- 39.
- 40.
Cf. Fitoussi and Saraceno (2013).
- 41.
The Crisis can be divided in two different phases: a first stage corresponding to the burst of the financial downturn (2007–2008) and a second stage (2010–2012) that has specific characteristics to Euro zone and this has required many different actions of the European Union Institutions and above all of the European Central Bank. It is important to underline that until 2010 the interest rate spreads on sovereign bond issued by each of the State member of Euro zone did not represent for European Monetary Union a problem; in fact, for international investors Greek, Italian, Spanish and German bonds were considered the same.
- 42.
According to De Grauwe (2011), p. 1 “The reason is that national governments in a monetary union issue debt in a foreign currency, i.e. one over which they have no control. As a result, they cannot guarantee to the bond holders that they will always have the necessary liquidity to pay out the bond at maturity. This contrast with stand alone countries that issue sovereign bonds in their own currencies.”.
- 43.
It should be noted that speculative attacks, justified or not by economic fundamentals, always start from small items (e.g. Grecian sovereign bonds) to arrive big ones. The former, because relatively cost less, is used as a test for verifying and implementing strategies against the latter, normally most expensive.
- 44.
- 45.
- 46.
See Peroni (2015), pp. 85–108.
- 47.
- 48.
- 49.
See articles: 2 TEU, 3, par. 2 TEU, 21 TEU, 24, par, 2 TEU, 31 TEU, 67, par. 2 TFEU, 80 TFEU, 122 TFEU, 194 TFEU, 222 TFEU.
- 50.
See Article 122 TFEU: “1. Without prejudice to any other procedures provided for in the Treaties, the Council, on a proposal from the Commission, may decide, in a spirit of solidarity between Member States, upon the measures appropriate to the economic situation, in particular if severe difficulties arise in the supply of certain products, notably in the area of energy. 2. Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, on a proposal from the Commission, may grant, under certain conditions, Union financial assistance to the Member State concerned. The President of the Council shall inform the European Parliament of the decision taken.”.
- 51.
See Creel and Saraceno (2009).
- 52.
Cf. Peroni (2013).
- 53.
Cf. Mundell (1961).
- 54.
For an accurate reconstruction of the mentioned historical phases cf. Tedeschi (2013).
- 55.
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Peroni, G. (2017). The Constitutionalization of the Washington Consensus in the European Union: Giving up the Social Market Economy. In: Sciso, E. (eds) Accountability, Transparency and Democracy in the Functioning of Bretton Woods Institutions. Springer, Cham. https://doi.org/10.1007/978-3-319-57855-2_6
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