Cyprus bailout drama underlines need for global economic co-operation

It is Cyprus this month; where next time? What follows a “Cyprus situation” is largely panic, often based on soundbites from some “experts” apportioning instant blame and implying easy solutions. There are none.

What the Cyprus crisis illustrates though is two things. First is the huge interdependency of the globalised economy. How, many ask, can a country accounting for less than 0.5 per cent of euro zone total economic output put in some jeopardy the entire currency union and by implication destabilise the world economy? The answer is clear: spillover and contagion effects in a currency union and indeed in a globalised economy, in the absence of agreed and enforceable rules of engagement.

Second, while it is evident what is needed to cope with such effects, as in Cyprus, the political process of putting this into practice is tortuous and complicated. Given the nature of the bargaining involved it is inevitable that a long game of poker will be at play, with brinkmanship evident at every turn of the game. That is the nature of all bargaining processes, especially where there are so many players involved.

In this situation we either change the rules of politics, for example by not giving each country a veto over some decisions, or we live with the uncertain political consequences of the process, in the hope that we will get to the right solution. We cannot have both full democratic legitimacy and speedy resolution of international financial crises of this nature.

There is also, though, another dimension to the recurring financial crisis. New waters are being charted and it is in effect a process of learning by doing. It is easy for armchair pundits to be clever with the advantage of hindsight. But the euro zone crisis is a huge learning experience for most policymakers and their electorates, resulting from a slow realisation of just how extensively connected the global economy is, particularly in the financial area.

The vital aspect of this interdependency is that the actions of one country can impact on the well-being of another without the other countries having any say whatsoever with regard to these actions. Ameliorating these so-called spillover effects is at the heart of many international agreements, most particularly at an EU level. Only by acting collectively and signing binding treaties can we regain freedom from the undesirable consequences of the actions of others.

It has been clear for a very long time that individuals can by co-operating enhance, not diminish, their freedom of action. Let us take the example of a stop sign or a traffic light. As individuals we cannot drive as we wish without endangering the lives of others and our own; our lives are too interdependent for this. As such we agree to binding rules to avoid the consequences for you of other people’s actions and likewise yours on them.