Andreas Dombret and Marc Uzan elaborate on the question whether the world’s regulatory architecture can survive. Their guest contribution has been originally published in Financial News.

Meetings of the World Bank and International Monetary Fund in Washington DC are traditionally a chance for the world’s finance ministers and leading central bankers to discuss how best to co-operate on the pressing issues of the day. This month’s gathering will be very different.

Underlying the discussions about the state of the world economy and the global financial system will be an unspoken fear about what the Trump administration intends for these two critical Bretton Woods institutions. As the US abandons multilateralism, will the World Bank and IMF become two more negotiating pawns for the US to achieve its economic goals?

Conceived at the 1944 Bretton Woods conference, the main architects were Harry Dexter White, the US Treasury’s chief international economist, and John Maynard Keynes, the British economist. They saw the World Bank and the IMF as cornerstones of the post-World War II global economic order.

Dominated by the US as the major shareholder, they were nevertheless multilateral institutions based on a shared vision and shared values. Together with the Marshall Plan, it signified the beginning of Pax Americana.

As President Trump sets about defenestrating the multilateral system of global governance that has prevailed since WWII, their role — conceivably their existence — is under threat. The same may be true for the G20, the main forum for international cooperation since the global financial crisis. Regulatory cooperation in the Basel Committee to oversee the global banking system is also under strain.

Project 2025, the action plan for a Trump administration drawn up by the influential Heritage Foundation in Washington, described the IMF and World Bank as organisations operated by global elites which “espouse economic theories and policies that are inimical to American free market and limited government principles”. It recommended that the US stop funding and withdraw from both institutions.

Within these institutions, there is a sense of fear and paralysis, and officials are reluctant to speak out publicly. They are acutely aware that the administration has no patience with the importance both attach to combating climate change, nor any sympathy with the World Bank’s development mission as the US shutters its own bilateral aid agency. Nor does the US want to be the major funder or participant in organisations it does not control such as the IMF, where the managing director is traditionally a European.

The current administration has a similar attitude towards the Basel Committee on Banking Supervision, the critical forum for regulatory cooperation and agreeing global banking standards for more than 50 years. It is another international body the US does not control. Already, co-operation within the Basel Committee is beginning to crumble, with the US, Japan, the UK and the EU all taking different approaches to Basel III capital reforms.

As for the G20, where the US takes over the chair next year, its approach is likely to be increasingly transactional. The indications are that the Trump administration will push to marginalise “unelected” central bankers and restore the G7, a grouping it can dominate, as the main forum for international negotiation.

Unquestionably there are reforms that need to be made to the global financial institutions. The legitimacy of the existing international financial architecture is questioned by countries in the global south which see it as western dominated.

And there is no denying the validity of some of the US’s concerns. Why, for instance, has China, the second largest economy in the world, received so much in soft loans from the World Bank? And why is it that, according to one study, US companies win only 2% of contracts financed by the World Bank, while Chinese firms secure 29%?

Playing the long game

However, the US would be wise to think twice before abandoning today’s global financial architecture. The post-WWII system has overseen a period of unprecedented prosperity for the US. Its influence in multilateral institutions has helped promote free markets, prudent fiscal policies and exchange rate liberalisation, all of which have worked to Washington’s advantage.

The system has been instrumental in entrenching the dollar at the centre of the global financial system as the world’s reserve currency, giving the US the ‘exorbitant privilege’ of borrowing in its own currency without constraint — an economic advantage that no other country enjoys.

It has also given the US enormous leverage in both economic and foreign policy. It is not just the dollar’s role in more than half of global trade, but the fact that nine out of ten foreign exchange transactions involve the dollar. This means that no international bank can risk being sanctioned by the US.

The multilateral financial institutions including the Basel Committee have also played a vital role in handling financial crises, collaborating at times of emergency. Financial stability is a global public good. It requires cross border cooperation at times of crisis and cannot be operated on a bilateral basis given the interdependent nature of the global financial markets.

The US benefits from this as much as anyone. Without the international co-ordination between G20 finance ministers, the Federal Reserve, other international central banks in the Basel Committee and the multilateral institutions, it is frightening to think how the global financial crisis might have panned out.

Perhaps the US will decide not to pull out of the the World Bank and IMF but merely seek to bend the global financial architecture from within to serve its purposes. Either way would be a dangerous step on a slippery slope.

Russia would be pleased, but ultimately the main beneficiary would be China. It has gained economic clout with its belt and road initiative and proved adept at working within international institutions. It will only increase its influence if the US steps back.

Does the US really want to see this happening? If so, it will be up to the Europeans to step up, as they are now having to do in military defence.

Prof. Dr. Andreas Dombret is a former Board Member of the Deutsche Bundesbank and former Supervisory Board Member of the ECB. He is a Member of the Board of the Atlantik-Brücke as well.

Marc Uzan is the Founder and Executive Director of „Reinventing Bretton Woods“.