FUTURE OF GLOBAL FINANCIAL SYSTEM

BANJA LUKA, NOVEMBER 24 /SRNA/ - A large number of international financial organizations, such as the International Monetary Fund /IMF/ and the World Bank, are going through a period of institutional crises.

The world from which these organizations emerged simply no longer exists, and over time it is becoming increasingly clear that reforms are the only way for them to survive.

From a historical perspective, the state of the economy often shapes political circumstances as well.

The Great Depression, which shook the world in the 1930s, was one of the major factors that contributed to the outbreak of the Second World War.

The enormous economic reparations that other European states demanded from Germany after the First World War pushed the entire German population into a state of economic humiliation.

This was particularly emphasized during the peak of the Great Depression, which Adolf Hitler exploited to advance his political goals. German fascism contained an economic dimension, as Jews, in an economically weakened Germany, were portrayed as the ruling class responsible for the country's desperate economic condition.

After the devastating Second World War, it became obvious that an anarchic world needed international institutions whose focus would be the political and economic recovery of the world, as well as the establishment of institutional barriers to prevent similar crises in the future.

From that shattered world, at the initiative of the victorious powers, a new global financial system emerged. An organization like the IMF was not designed to make countries rich, but to prevent their collapse.

However, the IMF's voting structure reflects a world that no longer corresponds to real economic conditions. For example, China holds 6.4% of voting power, while Japan holds 6.47%, even though China's Gross domestic product /GDP/ is four times larger than Japan's.

Emerging economies now make up about 60% of global GDP, yet they hold only around 40% of total IMF votes. The conclusion is simple: the global financial institutions created by the Bretton Woods agreement no longer reflect the reality of the global economy, and the emergence of new crises will inevitably require reforms.

Since China did not receive a larger voting share in the IMF for political reasons, it established a series of alternative financial institutions intended to counterbalance Western dominance within the World Bank and the IMF.

The Asian Infrastructure Investment Bank, the BRICS New Development Bank, the Chiang Mai Initiative Multilateralization, the China Development Bank, and the Silk Road Fund are among the institutions meant to provide China and other states in the Eastern Hemisphere with a more balanced entry point into the global economy.

However, such initiatives contribute to the fragmentation of the global financial system.

The main argument for free trade is political in nature, as it is claimed that free trade leads to economic integration, which reduces the likelihood of armed conflict.

As long as there was a global hegemon capable of securing trade routes and the political conditions necessary for free trade through military power, free trade was feasible.

Now that the world has moved beyond the era of US unipolar hegemony and entered a period of great-power competition, economic sanctions have become a tool of aggressive foreign policy.

Although the effectiveness of sanctions is debatable, they have nevertheless accelerated the fragmentation of the global financial system.

The Society for Worldwide Interbank Financial Telecommunication /SWIFT/ is a global network for exchanging financial messages that connects more than 11,000 financial institutions and enables most of world trade to be invoiced in US dollars.

Although it portrays itself as a neutral and apolitical communication system, SWIFT has on multiple occasions acted in accordance with the strategic interests of Washington and its allies.

In 2012, under pressure from the United States, SWIFT disconnected Iranian banks from the system — a move that cost Tehran roughly half of its oil export revenues and about 30% of its total trade.

On February 26, 2022, the US and its allies announced that selected Russian banks would be excluded from SWIFT as part of sanctions introduced following the invasion of Ukraine.

In response, Russia launched its own financial messaging system - SPFS - in the same year. By the end of 2023, SPFS was processing ruble-denominated transactions and connecting more than 550 banks and organizations.

At the same time, Moscow began coordinating with Beijing to link SPFS with China's SWIFT alternative - the Cross-Border Interbank Payment System /CIPS/, established in 2015.

By May 2024, CIPS had more than 1,500 direct and indirect participants and settled transactions in Chinese yuan. Together, these systems represent deliberate efforts by major powers to construct financial infrastructures independent of American influence.

Their expansion clearly signals the accelerating geo-economic fragmentation that is reshaping the contemporary international financial order.

Another major challenge facing the modern global economy is the rise of cryptocurrencies. The establishment of any financial system presumes that states are the principal actors projecting power on the international stage.

The emergence of blockchain technology and cryptocurrencies has enabled private individuals to issue their own money, undermining the monetary sovereignty of national economies. Where once a credible state institution - such as a central bank - was necessary to issue currency, today anyone with a laptop and an internet connection can create a digital currency.

This poses a significant challenge to the mandate of international institutions to preserve global economic stability. Such global challenges require global solutions, achievable only through coordinated actions by the world's economies - which seems increasingly unlikely given the level of geo-economic fragmentation.

All indicators point toward the formation of separate geo-economic blocs, which will be interconnected in some areas and disconnected in others.

The future of the global financial system resembles a fragmented spiderweb being rewoven. As breakdowns in global economy intensify, the question arises: is the world destined for new armed conflicts and economic crises, or will the great powers reform the global financial system to ensure stable development of the global economy?