2
Introduction
The European Union (EU)’s program to establish common financial regulations
lies at the very intersection of two of the most important phenomena of current
international relations: financial globalization and EU integration. This program
embodies the clash between the growing power of global financial forces and the efforts
of state to control (or “re-regulate
1
”) these forces, albeit in the context of a gradual
process of supra-national institution building. The EU’s regulatory program can be seen
both in the light of a political intervention in the convergence process of capitalist
systems under financial globalization and in the light of a slow competition between
states and supra-national institutions on the European scene.
On the one hand, international capital flows exploded during the 1990s, pushing
world financial markets to an unprecedented level of financial integration. Net cross-
border transactions in bonds and equities alone among the G-7 countries increased from
under 10% of GDP in 1980 to 140% in 1995.
2
The volume of daily foreign exchange
transactions increased from $590 Billion in 1989 to $1.5 Trillion in 1998 and is usually
estimated to be above $2 Trillion by the early 2000s.
3
Financial globalization in the early
2000s represents a major quantum leap from early phases in the late 19
th
century and
early 20
th
century not only because of the current absolute size of financial markets and
speed of flows, but also because of the transformed nature of such flows. While early 20
th
century financial flows represented as much as 9% of GDP (case of the UK), they were
almost entirely concentrated in fixed investments such as railroad, ports, and mining.
4
Today’s flows are dominated by short-term portfolio flows and contain a high proportion
of high-tech and volatile derivatives. In Eatwell’s and Taylor’s words, “the new
international financial system, created by liberalization, is characterized by highly liquid
1
Cf Vogel 1996
2
Simmons 2001:589. Figures exclude the UK.
3
Ibid
4
Some theorists, such as Garrett 1998, Krasner 1999, and Gilpin 2000, dispute the argument that financial
globalization is a fundamentally new phenomenon. They base their arguments on Obstfeld and Taylor’s
analysis of net flows relative to GDP among a few advanced countries (1998). These arguments are flawed
in three ways. First, net flows may be a misleading indicator and may mask much smaller gross capital
flows, given that flows overwhelmingly went from Britain to the rest of the world (Britain running a
current account surplus and capital account deficit as high as 9%). Even then, the bulk of British flows
went to a score of countries, primarily Canada, Australia, and Argentina (all of which ran current account
deficits of up to 10% before World War I)
4
. Second, the nature of capital flows was very different at the
time. They comprised a much higher proportion of stable long-term flows, such as FDI and long-term
portfolio investments (such as government bonds). In their authoritative review of the debate, Bordo,
Eichengreen, and Irwin showed that the conclusions of Obstfeld and Taylor were flawed in two important
ways. Long-term Capital flows in the period from 1880 to 1914 may have been high relative to GDP, but
short-term capital flows were extremely low relative to the size of the world economy (4). Furthermore,
long-term capital flows were concentrated in only two narrow sectors: railway investments and government
bonds. For example, fully 40% of British overseas investments in securities (the bulk of global
investments) were in railways, 30% were in government bonds, and 10% were in resource-extracting
industries (mining)(30). In addition, pre-1914 capital flows were also much less volatile, due to the absence
of modern telecommunications and financial instruments like derivatives. Third, the quantity of flows was
much smaller in absolute terms and the number of players involved (countries and corporations) was also
very small in comparison to the current period. This matters because it made the game much more
predictable and controllable.
Convention