The EU has been described as a civilian power, normative power and soft power. How would you characterise the EU’s power potential?

Perceptions of the European Union have changed remarkably over the last decade.  In the early 1980’s, many questioned whether the EU was even a serious international actor (Bull, 1982). Now the debate is what kind of international actor the European Union is. As such, this essay will outline why the European Union has become a major power within global politics and the type of power the EU has become. Defining power can be difficult, particularly given the subjective nature of the concept.  Weber describes it as “the chance of a man, or a number of men to realize their own will in communal action, even against the resistance of others”. Yet, like all definitions of power, it fails to adequately differentiate the difference between power and influence. For the purposes of this discussion, I will use the dictionary’s definition of power, which states that power is the ability to do things in a given social context and affect others to get the outcomes you desire. The European Union’s power potential should be viewed through this lens. “We are one of the most important, if not the most important, normative powers in the world” stated European Commission President José Manuel Barroso in a 2007 interview. Does his statement reflect how the EU is perceived and its ability to wield power as an international actor or is it ignorant of the vast complexities that underpin the EU’s actor hood? To suggest that the EU is merely a civilian, soft, smart or normative power is to oversimplify the debate, which does injustice to the EU’s power potential in the twenty-first century. Duchene defines the EU primarily to be a ‘civilian’ power. He argues that the EU’s power is derived from its capacity to exert a large degree of influence on third parties, based on its own successful model of using economic and political models of security and stability (Duchene, 1972). In contrast, Manners argues that the EU’s power is rooted in its normative behaviour exemplified in its model (Sjursen, 2006). Whilst Manners and Duchene’s arguments have some credit, both fail to account for the growing competency and shared EU foreign policy objectives. This essay will argue that the European Union cannot be pigeonholed into any one stream of power, rather it embodies strong elements of a ‘soft power’ and increasingly the potential to transform into a fully-fledged smart power.

A historical analysis into the formation of the EU can be useful in defining the EU’s power potential in today’s global politics. When the European Community was proposed in the 1950s, Churchill proposed that a United States of Europe with strong defence capabilities, akin to the United States of America be established. In particular, Churchill was insistent upon a European Defence Community with a standing European army. However, a war-weary Europe rejected Churchill’s proposal and decided instead to develop a European Community based on the pooling of steel and coal industries to make inter-state war difficult (Riotta, 2011).

The EU is a unique international actor and as mentioned earlier, it cannot be pigeonholed into any particular paradigm. Rather this paper suggests that the EU’s past actions reveal that it utilises ‘soft power’ as its primary form of influence. Furthermore, realists fail to account for the large degree of institutionalized multilateral cooperation embodied in the Common Security and Defence Policy (and its predecessor the European Security and Defence Policy), further straining traditional concepts of power relations(Grieco 1997). In rebuttal, Euro-sceptics and traditional realists argue that “When all you have is a pen, everything looks like a treaty” in reference to the EU’s lack of hard power (Van Ham, 2011). Consider that the CSFP and its predecessor the ESDP now comprise a central part of Europe’s security architecture. Neorealists fail to account for such institutionalized multilateral cooperation. In many ways, the EU has challenged traditional concepts of power, especially the dominant neo-realist branch of international relations. I would suggest here that the EU’s soft power capacity has been improved through its ability to adopt a common security and foreign policy agenda. This gives Europe a chance to engage in Soft power 2.0 or ‘smart power’ as suggested by Nye in the 2007 Center for Strategic and International Studies report (CSIS, 2007). Though the report was aimed at America, the European Union has been the clear driver of this concept. It has been able to innovate and transcend traditional notions of power, by relying on soft power and in more recent times utilising valuable elements of hard power. This paper suggests that the EU has the distinct advantage of a well harnessed and effective ‘soft power’ approach that will only legitimise its pursuit of a ‘smart power’ strategy in the twenty-first century.

The EU by its nature has the unique ability to muster international support for its foreign policies. In stark contrast to the American culture of over-militarization and low tolerance for long-term investments with distant pay-offs, the EU has been able to demonstrate long-term commitment to strategic projects, particularly with respect to institution-building and development (Gray, 1994, pp.593, 597). In addition, EU policy has been less confrontational and belligerent, and has the potential to succeed where U.S ‘hard power’ militarism has failed (Van Ham, 2010 pp.577). This legitimacy and attractiveness lie at the heart of the EU’s power potential.

The EU’s unique international role has allowed it to transcend beyond the Hobbesian anarchic system of international relations. Instead, it embraces the Kantian goal of perpetual peace. The ‘warrior’ mentality associated with neo-realist’s account of power politics has been challenged by the world’s largest economic bloc. The EU has often been labelled as a metro sexual power in that it has abandoned traditional hard power macho mechanisms to exert influence on the global stage (Parag Khana, 2004). Van Ham characterises this power to be weak, arguing instead that the EU shed feminine aspects of its behaviour and join the “exclusive rank of super powers run by supermen”(Parag Khana, 2004 pp.58; Van Ham, 2010 pp.587,589 ). Therein lies the tragedy. Van Ham and other sceptics of the EU’s soft power fail to recognise that the EU’s gentler, kinder and soft power approach is its greatest asset (Van Ham, 2010 pp.587). Its embrace of the soft power approach is part of a moving trend away from neorealist notions of power politics. In any case, classical realist approaches cannot be used to characterise EU relations even if it did decide to rely on hard power because neo-Realism is premised upon the state as a central actor.

The EU is a unique international actor that cannot be pigeonholed into the existing frameworks of the current international order. The European Project in many ways is a new phenomenon, and even though it has existed for some time now, few scholars have been able to accurately describe its position on the global stage. Kagan is accurate in describing Europe’s neglect of power politics as embodied in its choice to remain militarily weak (Cooper, 2003, p.159). Europe’s strategic culture has shifted dramatically in the post WWII period. In particular, its embrace of public diplomacy and other soft power tools has increased its appeal to third parties. Europe’s characterisation as a ‘soft power’ is more appropriate than a ‘normative’ power as the latter implies an emphasis on value judgements, which can often conflict with the EU’s foreign policy goals. In particular, soft power values public diplomacy highly. The EU’s public diplomacy strategy has been highly effective. If Nye’s definition of public diplomacy is taken to analyse its effectiveness, it is evident that the EU has mastered the art of public diplomacy. In particular it has been able to build lasting relationships with key individuals over many years through scholarships, exchanges, training, seminars, conferences and harnessing strategic communication methods (Nye, 2004 pp.107-111).  Nye describes this approach as a “two-way street” in which the EU has been able to engage with civil society on development issues, improved information-sharing capacities and providing guidance, advice and economic incentives; of which are attributes of the soft power approach (Nye, 2004, pp.77). For example, in a poll conducted in the 1980s in Eastern Europe, Western Europe outranked the United States as the preferred model for economic growth, democracy and individual freedoms for its citizens (Pisano-Ferry, 2010; Nye, 2004, pp.77).

Since Europe’s resources are not drowned in traditional hard power mechanisms, it has allowed it to contribute significantly towards developing its soft power tools. This is particularly evident in Europe’s contribution of more than half of all overseas development assistance to poor countries, four times more than the United States (Nye, 2011). This adds enormous legitimacy to the EU’s soft power agenda. Add to that, in recent times Europe has embraced limited elements of military power, but has done so wisely. It is reasonable to suggest then that Europe is in a transformative phase, moving from being purely a ‘soft power’ towards engaging in ‘smart power’ mechanisms. Nowhere is this more evident than in Europe’s vast contribution to peacekeeping operations under the banner of multilateral organisations. Take the EU’s policy towards Iran’s nuclear programme for example; it has demonstrated a less confrontational and belligerent foreign policy approach. If I may speculate here, it is more likely that EU policy will bring Iran closer to the international community than the hard stance taken by the United States. Though it one can only speculate as to whether ‘European diplomacy’ will always succeed (Hyde-Pryce 2008). The recent development of limited hard power mechanisms and greater cohesion in European security and defence policy embodied in the CSDP will not undermine the EU’s soft power. Rather, given they are primarily designated for peaceful purposes; they will only increase the EU’s legitimacy (Krotz, 2009).

As suggested earlier, the European Union has built on its soft power mechanisms to develop limited mechanisms of military power that will bolster its reputation as a ‘force for good’ in international power politics. The smart power narrative the EU is moving towards has allowed it to combine soft and hard power resources into formulating successful strategies for 21st century problems (Nye, 2011). This approach has built on the EU’s soft power approaches, particularly its investment in alliances, partnerships and institutions, but has added to it smart military tools. The EU’s embrace of such hard power mechanisms is a recognition that elements of hard power can be utilised to advance a progressive cause(Evans, 2003).This smart narrative has allowed the EU to invest in joint military Research & Development, defence procurements and engagements in highly efficient military operation (Schmitt, 2003). According to Van Ham, this element of military power has allowed the EU to transform into a “fully fledged statal entity on a continental scale” (Van Ham, 2010 pp.585-587).

A new smart power might well be on the rise as the EU’s influence grows on the global stage. Firstly, it has built a smart power strategy, particularly regarding the utility of ‘hard power’ in conflict zones. In stark contrast to the U.S. where foreign policy tends to be over militarized and the Pentagon’s funding dwarfs that of the State department, the EU has opted for a multilateral approach that utilizes the UN, thereby adding legitimacy and cost-effectiveness to its military operations (Nye, 2011 pp.144). Recognising that the utility of traditional methods of military power have diminished, the EU has embraced a new generation of strategies and methods that have been tailored to meet the challenges of the 21st century. This striking new level of efficiency is a key factor as to why the EU is becoming a ‘smart power’. As Nye suggests, promoting democracy, human rights and the development of civil society are not necessarily best handled with the barrel of a gun (Nye, 2011 pp.144).

The EU has pursued ‘smart power’ strategies robustly in recent times. In particular, it has been successful in designing strategies and demonstrating skilful leadership in pursuing this agenda (Nye, 2011 pp.291). Sjursen suggests in her article What kind of power, that the adoption of a more cohesive foreign policy embodied in the CSDP raises concerns about the EU’s military ambition. Yet when examined closely, after Lisbon the EU has not adopted a different foreign policy agenda, nor is it likely to in the near future. Rather, the CSDP is part of a well designed strategy to pursue a smarter EU foreign policy (Sjursen, 2006). In many respects the EU’s smart strategy is paying off. In a recent poll for example, the vast majority of Americans agreed that the European Union had an important role in solving the world’s problems, even though militarily it remains quite weak (Nye, 2011).

In conclusion, whilst the EU partially fits Duchene’s characterisation of a ‘civilian power’ in that it emphasises multilateral cooperation, improved governance and democratic norms, it fails to explain why the EU has increasingly embraced military interventions. Manners ‘normative power’ characterisation of the EU also fails to provide a clear, all-encompassing definition of the EU’s role as an international actor. Instead this essay has argued that elements of Duchene’s civilian and Manners’ normative concepts of power exist within the framework of the EU’s soft power approach. In recent times however, the soft power characterisation of the EU has proven inadequate, particularly given the growing militarization of EU foreign policy.  The EU has moved to embrace limited elements of ‘hard power’ that it had previously neglected. It has devised a series of new generation smart strategies that will utilise elements of both hard power and soft power, giving it the potential to be a ‘smart power’ or soft power 2.0 as described by Nye.


What has the EU achieved in the Middle East Quartet to date? (Aug ’11)

The formation of the Quartet in Madrid 2002 highlighted the growing influence of the European Union in international affairs, and was largely a reactionary measure by the international community to the failed unilateral approaches of the United States to solving the Palestinian-Israeli conflict. This framework gave legitimacy to the European Union’s efforts to bring about a peaceful solution to the Middle East Peace Process (MEPP) using its normative influence power. The EU has been able to influence the Quartet widely, particularly in reference to Palestinian institutional reform . Yet its grouping with the United States, Russia and the UN has also been its biggest downfall and has led the Quartet to adopt policies that conflict with the normative, all-encompassing and inclusive approach the European Union boasts as its foreign policy strength . Consider the failed disengagement policy adopted by the Quartet in the aftermath of the 2006 Palestinian elections that declared Hamas the legitimate government in Gaza. In addition, the EU’s disunity in the foreign policy realm has cast doubts on its role as a legitimate international actor.

The main criticism since the birth of the Quartet is that the disengagement policy it took on the persistence of the United States significantly hindered progress in the peace talks. The European Union’s ability to maintain relations with even the most erroneous regimes in the past has given it flexibility and legitimacy as a genuine actor in the global arena. However, the isolationist policy adopted by the Quartet prevented the EU reaching out to Hamas through economic incentives, development assistance and other diplomatic tools . This effectively stalled the peace process, and in fact only strengthened the popularity of Hamas in Gaza.

The conditions imposed  on Hamas as precursor to peace talks were three fold: the renunciation of violence, the recognition of Israel’s right to exist and commitments to previous agreements signed by the Palestinian Authority . These conditions were biased, unnecessarily rigid and overambitious as recognised by the European Union Committee House of Lord’s report, 2007 . The severance of huge sums of development aid to Gaza by the United States and the European Union crippled the Palestinian economy and reversed positive achievements in building institutional capacity and improving governance in the region .

The pairing of the European Union with the United States has undermined the European Union’s agenda, thought that trend is increasingly shifting in favour of the European Union . The Quartet’s policy towards building Palestinian governance and institutional capacity has been driven by the European Union. This policy has been relatively successful, though criticisms rage that in practice these achievements have been moderate, at best.

The European Union has been successful in shifting away from the five-decade unilateral American approach to solving the Arab-Israeli conflict. The higher credibility of the European Union and acceptance on both sides of the conflict that the EU is a legitimate interlocutor has allowed it to play a greater role in fostering cooperation and facilitating peace talks, though none have been fruitful to-date. The EU’s leadership style and its capacity to bring new ideas to the table have been popular. The Venice Declaration culminating in a proposed two-state solution is a reminder that the EC at the time was imaginative and active in the MEPP. In addition, the EU’s ability to build consensus amongst ideologically opposed parties makes it the ideal actor to lead the peace process forward . After all, the Americans have failed at every turn.

On the count of multilateralism as a key goal of the EU envisaged in the European Union’s Common Foreign and Security Policy (CSFP), the European Union has been highly effective in promoting a multilateral approach to solving the Palestinian-Israeli disputes . Yet, these multilateral forums have culminated in little concrete action and a peace solution to the decades-old conflict remains a distant utopia.

Whilst the Quartet has certainly been active, there remains disunity within the EU on foreign policy issues. It is now the year 2011, the suspension of the settlement moratorium has expired and the previous division between Fatah and Hamas now seems trivial as a bold and united Palestinian Authority (PA) takes its cause unilaterally to the United Nations. Unfortunately, there remains little unity within the EU itself as Catherine Ashton has stated that each state will make its own decision with respect to the issue of Palestinian independence, undermining the role of the EU as a united and powerful mediator .

The last eighteen months have diminished the credibility of the Quartet as a genuine multilateral forum to negotiate a peaceful solution to the Palestinian-Israeli conflict. Nearly a decade after its birth, its relevance is increasingly being questioned. In particular, the European Union’s inability to influence the position of the Quartet with relation to the disengagement policy adopted towards Hamas dealt a huge blow to the credibility of the EU. The EU’s soft power diplomatic tools were rendered obsolete amidst a militarily superior United States. Early hopes that the new multilateral framework would aid legitimacy and bring about an expedient solution to the conflict were overly optimistic. The United States continues to play the dominant role in the Quartet at the expense of a consensual, multilateral approach that reflects the normative power of the European Union. Finally, disunity within the European Union on a Common Security and Foreign Policy has undermined its legitimacy as a genuine international actor.

The Global Financial Crisis of 2008/09 was a result of policy mishap and corporate irresponsibility. Analysing the effectiveness of policy responses, this essay proposes reforms in a political context, focusing on the U.S and Europe.

This paper will examine the effectiveness of policy responses to the Global Financial Crisis (GFC) of 2008/09 and propose various reforms that will mitigate, avert or significantly reduce the risk of a future financial crisis. I will also highlight the difficulties of implementing these reforms on the premise that the financial crisis of 2008/09 was in fact global. In recognition that this topic is vast, multifaceted and rapidly changing, this essay will focus almost exclusively on the United States (U.S) and Europe as case studies. There is some debate as to what constitutes a crisis. This essay will use the parameters of Jickling’s narrow definition; that a crisis is a major disruption in financial markets that stymies the flow of credit to households and businesses, and adversely affects the consumption of goods and services in the economy . In analysing policy effectiveness to the GFC, I will rely on indicators that demonstrate whether measures taken in responding to the crisis were successful in averting or limiting human costs including unemployment, investor and consumer confidence. This essay will be divided into three sections. Firstly, I will outline the causes of the GFC, particularly focusing on the origins of the sub-prime mortgage crisis in the U.S. Secondly, I will outline the effectiveness of policy responses to the crisis in the immediate aftermath, and financial re-regulation policies aimed at re-regulating the financial markets to prevent a future financial crisis. Thirdly, I will propose a series of reforms that could help avert a financial crisis of the magnitude we experienced in 2008/09. These include tougher regulation standards by governments, improvements in crisis management, and various other technical reforms that will reduce systemic risk of the financial system. I will also explore in significant detail, the likelihood of such comprehensive reforms coming into law and the political difficulties of achieving such meaningful reform. In particular, the essay will focus on the power of financial industry lobbyists, who have been successful in thwarting any significant financial overhaul in Washington.

The causes of the crisis can be attributed to a variety of factors: wreckless borrowing and spending by consumers, the provision of easy access to credit by banks , artificially loose interest rates by the Federal Reserve (according to the ‘Austrian School’) and the sharp reversal of this policy in 2006 , and most ostensibly, poor financial regulation. A combination of the three caused the bursting of the housing market that rippled through the rest of the financial sector . In its early days, it was simply referred to as the sub-prime mortgage crisis. The exponential rises in new financial products were expected to minimize, diversify and avert risk within the financial markets. Overwhelmed by the sheer number and complexities of new financial products, investors lacked due diligence and were complacent in recognising toxic assets that were often pooled together within complex financial products as Collateralized Debt Obligations. This led to poor underwriting standards . The knock-off effect from this was significant. As investors analysed the market, they became weary of the over-leveraged nature of the market . In addition, economists such as Hyman Minsky have stated that since the Great Depression, the global economy has been stuck in a perpetual cycle of crisis, and financial boom and busts are now a natural part of the business cycle, and therefore inevitable .

The crisis prompted a new era in international economic cooperation. The Group of 20 nations (G-20) was hailed as the new forum for international cooperation in the globalized world . The group of twenty-nations, largely an addition of a series of developing nations, the G8 allowed policy coordination to stimulate the global economy . However, the G-20 failed to address multiple issues adequately. The most prominent issues were the “too big to fail” concern which featured as a high priority issue for the reform agenda, and the failure to adopt an overarching enforcement agency that would regulate global financial markets . Instead, the G20 settled for watershed measures, such as strengthening the mandate for a new Financial Stability Board (FSB), as a successor to the previously weak Financial Stability Forum , and requesting that it work in partnership with the International Monetary Fund (IMF) in providing early warnings of macroeconomic and financial risks, and providing policy recommendations for national governments . If both the FSF and the IMF had failed to predict the sub-prime mortgage crisis and the ensuing financial crisis, what is the likelihood that they won’t fail again? It is clear that the G-20 had settled for stop gap measures, rather than solving the central issues surrounding hazardous business practices by financial institutions.

There was a broader recognition that though there had been 800 years of financial crises, globalization had increased economic interdependence and consequently, the magnitude of this financial crisis which threatened to bring capitalism to its knees . Susan Soederberg, a political economy development specialist at Queen’s University, argues that the GFC was actually a crisis in capitalism itself . Using Marxist theory, she critiques the current capitalist system as fostering a culture of over-accumulation of capital, which she argues, will inevitably lead to financial crises .

The United States injected US$3 trillion in spending, loan purchases, loans and loan guarantees through the Treasury, Federal Reserve system and the Federal Deposit Insurance Corporation (FDIC), including a $787 billion economic stimulus package that was aimed at kick-starting the economy . The economic stimulus packages have largely been perceived as a failure in the U.S and political support for the White House’s economic policies under the Obama Administration remain at an all time low . Unemployment rates remain stubbornly high at 9.1% in the U.S and as high as 20% in some European countries, with the U.S managing only to create a meagre 103,000 jobs in September .

Fiscal policies (largely following Keynesian economics) enacted by most economies have been unprecedented in nature, but have largely failed to spur economic growth in the developed world, though some economists argue that they managed to prevent a deeper recession . This has also prompted a revision in the existing regulations of the financial industry . In Europe, these reforms have been much more comprehensive than those adopted in the United States. The EU managed to cover all major areas of financial re-regulation including regulation of credit rating agencies, amendments to the capital requirements directive, regulation on short-selling and the creation of multiple regulatory authorities to deal with each of the following: identifying macro financial risks, coordinate banking regulation and supervision, securities markets regulation and supervision, and the adoption of crisis regulation procedures . In contrast, the U.S financial overhaul legislation; the Dodd-Frank bill, was far less comprehensive as the bill was watered down immensely as a direct result of powerful lobbyists from Wall Street .

Several proposals have been put forward by various actors, the most significant of them are those proposed by the Institute of International Finance, the US President’s Working Group on Financial Markets Actors and the recommendations of the Financial Stability Forum . All three identified five key areas: strengthening prudential oversight, increasing transparency and information sharing on risks independent of Credit Rating Agencies (CRAs), regulating the CRAs, improving risk mitigation procedures, and adopting new methods and practices to deal with systemic risks . Other proposals advocated for increasing the mandate of the Federal Reserve in the Monetary System to give it a larger range of tools without having to seek approval from Congress . However, due to current political circumstances, particularly the deep deficit levels of the U.S economy and the unpopularity of the Federal Reserve’s decision to bail out banks and other large financial institutions in 2008/09. This move is unlikely to gather much political support domestically .

Following the bail-out of major US and European financial institutions, there was deep scepticism for using tax-payer funded takeovers of large banks and financial institutions. This was and continues to be seen as rewarding the corporate greed that contributed to the unravelling of the Global Financial crisis. Governments are also aware of the risks associated with bailing out banks and financial institutions given their magnitude and importance to the global economy . To avoid such a moral hazard in the future, governments should make it clear that no bank is too big to fail by adopting orderly bankruptcy laws that would oversee the closure of failing banks and financial institutions. This would reduce incentives for excessive risk-taking within the business . However, this measure could be seen as economically costly and overly burdensome on free flowing capital and investment. It has also been argued that this could also hurt recovery of the fragile global economy .

The Dodd-Frank legislation in the U.S was aimed at overhauling the regulation over the financial sector, so that a future financial crisis could be averted . Yet, due to a highly politicised process in Congress, the resulting bill was watered-down and did little to address the systemic problems that caused the financial crisis in the first place . Wall Street and Corporate Chief Executive Officers (CEOs) in the financial industry are fundamentally opposed to stricter regulation in the financial industry . For instance, the U.S Chamber of Commerce spent more than US$6 million in efforts against the Dodd-Frank bill. In its final form, the bill did not even make reference to the accountability of credit rating agencies whose complacency was a primary contributor to the sub-prime mortgage crisis. The compromising nature of Congress, coupled with the power of financial lobbyists only serves to add huge layers of ineffective bureaucracy, unnecessary and costly legislation. Take the Volcker rule in the bill for example, which was aimed at restricting proprietary trading by large banks. When originally proposed by Paul Volcker in the aftermath of the financial crisis, it was only 3 pages long, but when finally adopted it was around 300 pages . The failures of the U.S political system are apparent, and in a recent interview with TIME magazine, Volcker himself admitted that the rule would probably do little and cost too much .

Few doubt the power of Wall Street and the disproportionate influence lobbyists from the financial industry have on Capitol Hill. One only needs to look at the track record of financial regulation in Congress to find patterns of deregulation legislation heavily lobbied for by the industry. Most notably, the American Home ownership and Economic Opportunity Act of 2000 and the American Dream Downpayment Act of 2003 . These two signature legislations promoted deregulation and lax lending practices in the mortgage market and were the result of intense pressure by the financial industry . According to a report by Deniz Igan and Prachi Mishra at the International Monetary Fund, during the period of 2000-06, legislation that disadvantaged the financial industry was three times less likely to pass through Congress than one promoting deregulation . The Center for Responsive Politics (CRP), which tracks and reports campaign contributions and lobbying expenditures, stated in its report that, “ the financial sector is far and away the biggest source of campaign contributions to candidates and parties, with insurance companies, investment firms, real estate agents and commercial banks providing the bulk of that money . There is a direct correlation between the amount of political donations made to members of Congress and the level of influence financial industry lobbyists have on policy makers on Capitol Hill.

The power of financial lobbyists’ aside, governing the financial industry can be extremely difficult on a technical level. Lawmakers are particularly aware of the trade-off between financial innovation and protection of the financial system. Given the fragile nature of the global economy, re-regulation of the financial industry is perceived to be harmful for economic recovery . In addition, heavy regulation is perceived as highly burdensome on the economy, and such measures are often associated with the failed central planning reforms of the Soviet era. Another major problem is that governments have a tendency to be reactionary rather than pre-emptive . This policy lag means that legislation to curb malpractice in the financial industry are back-ward looking, and may not address future threats. Moreover, the U.S experience is proof that even if authorities are aware of the structural defects in the existing system, little political capital is expended to reform these areas until a crisis has erupted or is imminent .

When governments do enact regulation, they tend to be rigid and fail to counter newly emerging threats to the markets. In contrast, markets tend to be much more fluid. This brings me to Stanton’s law, which predicts that as a result of market fluidity, financial institutions will create new ways to by-pass legislation in areas where governmental regulation is weak .This was evident in the market response to the restrictions on capital requirements under Basel I, which exempted Structure Investment Vehicles (SIVs), thereby diverting large amounts of investments into complex financial products with little or no government oversight . The most effective way to regulate the financial industry in light of Stanton’s law is to regulate the markets lightly with comprehensive crisis management policies . Other ambitious proposals to regulate the global financial markets have included establishing a World Financial Organisation (WFO) similar to the World Trade Organisation’s role in managing global trade . The organisation would establish minimum standards on capital and liquidity, increase supervision and regulation of global financial markets, and ensure adequate risk aversion mechanisms and internal controls are adopted by financial institutions through enforcement mechanisms . Introducing such a powerful, multi-lateral institution would discourage cheating and even the playing-field in an inter-nationalised financial system, though policy-makers are unlikely to adopt such a measure given the current global economic turmoil. Other proposals by World leaders have urged greater international financial cooperation by the setting up of new comprehensive international institutions, perhaps a Bretton Woods II, to address the inherent problems of a globalized financial system . Similarly, in the immediate aftermath of the GFC, there were some suggestions that the IMF take on a larger role to maintain the stability of international financial system, though no far-reaching measure was adopted with respect to increasing the role of the IMF .

Given that debt levels are exceedingly high both in the United States and in Europe, particularly in light of the problems facing the Euro-zone, if another financial crisis struck either continent in the next few years, the results would be dire for the global economy. This is mainly because governments have exhausted fiscal and monetary policies, and in the process have run up extremely high debt levels, leaving little room to manoeuvre if another crisis hit . In addition, whilst bail outs in both the U.S and the EU saved many institutions, they also illustrated poor fiscal and monetary management . They have forced investors and speculators to be cautious about Central Banks intervention . Poor quarterly growths in both continents are proof of exceedingly low consumer and investment confidence .

This essay has examined the causes of the Global financial crisis of 2008/09, policy responses that were adopted in response to the crisis and their effectiveness, both in terms of averting further economic downturn and the ability to protect the financial industry to avert a future crisis. I have argued that the reforms enacted have been inadequate as they have been limited in their nature, partly due to the power of financial lobbyists in Washington, but also due to technical factors that make financial regulation difficult. The political and economic (often intertwined) reforms proposed in this paper are far-reaching and could potentially stave off a future financial crisis. However, given the current sour political and economic climate, particularly in the United States, it is unlikely that such meaningful measures will be adopted by policy makers. As a result, the risk of financial collapse in the future, as witnessed in the Global Financial Crisis of 2008/09, remains virtually unchanged today. Some have suggested more realistic measures in the short-to-medium term to deal with this problem through light government regulation coupled with comprehensive crisis management policies, but if Minsky is right about the global economy being stuck in a perpetual cycle of crisis, and history is on his side, it is only a matter of time before the next financial crisis erupts. As the world becomes even more globalized, the costs of a future global financial crisis will be more severe than they were in 2008/09.


Winds of change in the Arab world, where to from here?

The last eleven months have blown winds of change across the Arab world not seen since the end of colonial rule. Syria, Bahrain, Morroco, Egypt, Tunisia, Saudi Arabia, Libya, Yemen and Iran have all been affected in some way or another. In Syria, over 4,000 people have been killed according to the office of the United Nations High Commissioner for Refugees (UNHCR) prompting harsh economic sanctions by the Arab League on Assad’s brutal regime. In Yemen, long-time dictator of more than 30 years, Ali Abdullah Saleh has signed a deal to relinquish the presidential office on the 23rd December 2011 after wide-spread protests against his government. Libya’s Gaddafi was mercilessly killed by the opposition movement during the NATO-backed operation and his heir apparent, Saif –al Gaddafi is due to face trial at the International Criminal Court (ICC) on crimes against humanity, provided Libya’s National Transitional Council cooperates with the ICC. In Egypt, the military has been heavily criticised for cracking down on civilians, particularly during the ongoing parliamentary elections, the first ‘free and fair’ elections since Mubarak’s departure according to international observers.

Elsewhere in the Arab world, currents weren’t strong enough to substantiate significant political reform. Morroco’s king gave up some constitutional powers including the power to appoint the prime minister who would appoint senior servants, diplomats, even cabinet members but would still have to consult the king’s ministerial council. In any case, in both Egypt and Morroco, the youth have criticised the parliamentary elections as window-dressing because major decisions would continue to run through the King, in the case of Morroco and the army in the case of Egypt.

In the same way the 1967 Arab-Israeli war and the 1979 Islamic revolution in Iran changed the geopolitical dynamics of the region, 2011 has the immense potential to be seen both as the year democracy and optimism took hold in the Arab world or it may come to be seen as the year that caused vast amounts of bloodshed in an already troubled region. For all the optimism that the Arab Spring had promised, it has also caused significant loss of life and chaos in the region. Only time will prove whose side history will be on, but either way history will be written and the status quo will be revised. Now it’s a matter of who wins the largest portion of the spoils. The largest beneficiaries of the revolutionary movements to-date have been the Islamic parties, particularly in Egypt where the Muslim brotherhood and even Salafist parties have gained a significant portion of the vote. This will surely worry many Western observers who do not wish Egypt to follow the Iranian example of an Islamic state.

There is an inherent tension in Western interests between the Mubarak and Zinadine-era stable and secular states versus the newly democratically elected Islamic parties who may shun the West in an environment featuring chaos and economic stagnation. The Arab Spring turned Winter should be viewed with caution particularly as Assad’s regime continues to quash dissenters in the streets of Damascus and Homs. As Libya struggles to form a credible democratic government, the West would be wise to restrain from supporting any further military action in the Arab world.