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Why would political uncertainty contribute to current crisis?

A central aspect of the global current recession is the crisis of confidence, understood as a worsening of expectations and a rise in uncertainty. The political crisis manifested nationally, but also at international level, where it begun to manifest tensions between different states. Thus, locally known political crises in Iceland or Belgium, where economic crisis has led to the collapse of the entire executive apparatus and replacement with another. Also, in some states, some ministers in key areas were replaced because they did not face the pressures involved economic crisis. The case of Germany, for example, where economy minister Michael Glos, has resigned following allegations that had been made on German economic recovery involvement in hard-hit.

Internationally, relations in the European Union are no longer quite so cordial. Following the announcement by French president indicated that he would support the auto industry because automakers will not be forced to relocate in the Czech Republic, Czech Prime Minister has accused France without any caution, showing that this measure is contrary to the principle of a single market that we have the European Union.

A second wave of political tensions in the EU is the request of Hungary and Poland to join the euro zone as soon as possible, these two countries considering that the adoption of the euro is a real protection against crisis. A number of voices in the euro area have protested against this request’ the reason is that the euro area may suffer if it will be accepted countries which still don’t have a very stable economy and are still not qualify for. Poland, for example, could not yet enter the euro area due to fluctuating reported parity between zloty and the euro. On the other side, there is uncertainty regarding the scope and impact of a crisis. In the midst of a crisis, key macroeconomic variables tend to display unusually high volatility. The resilience of the economic system and the severity of the crisis are uncertain. There is also uncertainty regarding the effectiveness of policies, which depends critically on the perceived credibility of the corrective measures when the reputation of the authorities tends to be at its lowest level. And there is uncertainty regarding the political support for reforms. Policy makers face the additional challenge of quickly mobilizing public support for often unpopular measures. Against this background of economic and political uncertainty, the policy response is often subject to "ugly" trade-offs. A prime example is the fiscal consolidation that may be required to reduce imbalances or debt burdens. This must be sufficient to strengthen confidence in the sustainability of public finances, but not so much as to undermine medium-term growth prospects. In cases where banking crisis is part of the problem, public support will likely be required to safeguard the functioning of the domestic financial system. But this support can exacerbate debt sustainability concerns and make the previously mentioned tradeoff even more difficult. Moreover, in extreme situations, administrative measures may be seen as unavoidable for quelling a banking crisis - although these risk eroding confidence in the banking system and triggering capital flight and financial disintermediation.

In cases where sovereign debt restructuring is needed, the benefits of alleviating the liquidity or solvency constraint must be weighed against the implications for future access to capital markets. In addition, policymakers may need to factor in the potential costs to the domestic financial system if bank portfolios are significantly exposed to government debt. Public finances may remain vulnerable to shocks. If public debt remains at high levels, gross financing requirements continue to be large, and thus vulnerable to shocks or spells of market drought. Banks may remain vulnerable to debt servicing difficulties of household and

corporate sectors, or because of a large exposure to sovereign debt. And in cases of sovereign debt restructuring, a country may lose access to markets for a prolonged period of time.

Perhaps most importantly, there is always a danger of "reform fatigue". As countries move out of the critical stage in the process of crisis resolution, it is not unusual to see some of them lose their drive towards reform. Several factors contribute to this: a) the erosion of political capital; b) an early positive response from investors that might lead to complacency; and c) the fact that many of the needed reforms do not induce immediately higher growth and wellbeing of the population. But here is precisely where the recurrent crises have their genesis. Once the most urgent measures have been implemented, the tendency is to put aside the important ones for later. It is critical that countries persevere with reforms to "crisis-proof" their economies and avoid recurrence of financial distress (Carstens, 2004).

Also, it should be pointed out the role of the IMF in crisis resolution. A key role of the Fund is to work with members to achieve a durable exit from crisis. The Fund helps members to consider the relevant constraints and trade-offs and to design an appropriate adjustment program that addresses underlying macroeconomic problems, as well as anchors investors' expectations about the formulation and implementation of economic policies. In helping to design this program, the Fund has to form a judgment about the appropriate balance between the availability and scale of IMF financing, the amount of domestic policy adjustment, and securing the support of other stakeholders (official and private creditors). And in forming this judgment, the Fund must also consider the implications a crisis country may have on the stability of the international financial system.

6. Conclusions

Modern society has become a risk society in the sense that it is increasingly occupied with debating, preventing and managing risks that it itself has produced. That may well be, many will object, but it is desired rather of a hysteria and politics of fear instigated and aggravated by the mass media. Global risks know no borders and global solutions are also beyond the realm of any one government. Indeed, they will require not only intergovernmental collaboration but also public-private collaboration. Better and more innovative governance has shown results in the area of global health risks. For AH1N1 treatment were succeeded in making antiretroviral drugs more easily available to populations at risk. The World Health Organization has developed an effective monitoring and information network for pandemics that operates globally. The risk of infectious disease remains high but these examples illustrate that new forms of governance can be effective even for some of the most borderless and tenacious of global risks.

The spread of the financial crisis and the resulting globaldownturn has increased the risk of retrenchment from globalization in developed and especially in developing economies. Over the past several decades, globalization has meantcountries and businesses building economic and societal ties across the world, opening new markets, providing services, generating employment and reducing poverty. A global downturn will undoubtedly place greater pressures on many economies, developed and emergent, but retrenchment, in the form of economic protectionism or unwillingness to engage on climate change, resource or security issues, could create even greater pressures. Now seems like an appropriate time to address governance gaps and thus provide frameworks offering greater certainty toboth governments and business and that will enable solutions that will benefit all.Global leaders have mounted an unprecedented response to a financial crisis, the effects of which have rippled across all regions and levels of society. The urgency of the threat to the global economy and our collective prosperity has required pragmatic and at times inventive responses that transcended

the conventions of recent history. As with past crises and episodes of dramatic change, decisions made now has the potential to impact generations to come. New models for global governance and cooperation, that are commensurate with the realities of increasing financial integration and economic interdependence, are needed. It is extremely important to reach dialogue and consensus on the development of new models for global financial governance. It is vital to bring a balanced and rich perspective to bear on these decisions.

Our future goals will be to define needed strategies, in order to improve transparency, risk control and incentive structures.

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