Global Finance and Social Europe
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Global Finance and Social Europe

  • New Directions in Modern Economics series

Edited by John Grahl

With global finance reshaping the world economy, this insightful new book provides a full account of the EU’s financial integration strategy, together with a critical assessment arguing the case for social control over global finance. Written by acknowledged experts in European finance, this book discusses key issues from finance to general social developments, encompassing social security systems, employment relations, household saving and borrowing, and the question of economic stability. Thus far, America has been pre-eminent both in global financial markets and international banking – so how should the European Union meet this challenge? Global Finance and Social Europe constructively argues that an active response is required and highlights the importance of an integrated European financial system.
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Chapter 7: International Finance and Instability in the EU

Jan Toporowski

Extract

7. International finance and instability in the EU Jan Toporowski INTRODUCTION 7.1 Within the financial sector itself, financial instability tends to be defined in a very narrow way. The mainstream view of the International Monetary Fund, central banks and commercial financial institutions associates financial instability with excessive volatility in asset prices, unstable equilibrium in an otherwise stable general equilibrium, or the discontinuities that may arise in the financial system with the failure of a significant bank or financial institution. Instability outside the financial system (failure of non-financial firms, or volatility in markets for current production) tends therefore to be treated as a kind of Schumpeterian ‘creative destruction’, a natural condition in which markets are continually adapting to changes in competition, tastes, or technology, changes which are best left for markets to deal with. This narrowing of the scope, if not the effects, of financial instability reflects in part the regulatory capture of central banking institutions by commercial banking and financial interests. As central banks have been made increasingly independent of governments they have been more and more exposed to pressures from the financial corporations they are supposed to be regulating. Commercial banking and financial institutions have an interest in ensuring that the financial authorities do not allow those institutions to become subject to the ‘natural’ disciplines that markets impose on non-financial firms. More critical economists (for example, Minsky, 2004; Wolfson, 1994) have traditionally taken a much broader view that financial crises are features of a particular kind of capitalism that...

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