In 2009 the global open economy is facing its toughest test yet. A few months ago, spurred by the threat of a systemic financial collapse, Leaders gave a policy response which was unprecedented both for the boldness of the measures and for their degree of coordination (covering a large share of the world economy). The worst was averted, but still the real economy has suffered a sharp and widespread disruption. Uncertainty has widened the range of financial markets that are not operating properly, including credit markets and credit insurance. Businesses and households have cut back on spending as unemployment soars, sales prospects plummet and expectations turn cautious.

Against this background, the top priority at the London Summit may well be how to definitively stem the short term instability dynamics between the financial system and the real economy which feeds the crisis. To this end it could be useful to keep a comprehensive strategy, bearing in mind:

• The crucial importance of reducing uncertainty and fostering credibility. Governments need to continue acting as insurers of last resort, giving confidence to agents that depression‐like scenarios will be averted in order to allow the market mechanism to resume its normal functioning. This may require that public authorities keep some of the measures active until the crisis is over. And calls for careful selection and combination of policy tools, taking into account the need for durable effectiveness. The long term sustainability of public finances needs to be preserved in order to maintain  the credibility and time consistency of Governments´ actions. A clear message about the aim and functioning of the different measures would be of the most importance in order to make their utility understood, accept their fiscal consequences and restore confidence.
• The need for targeted actions to remove obstacles to the credit channel. Following the most successful initiatives already adopted in different countries, Governments could consider actions to address temporary market failures in insurance and credit markets, sharing with banks part of the risk for new lending or ensuring the supply of credit insurance, with particular attention to export credit.
• The need for a renewed political commitment to open markets. One of the biggest short term risks is the possibility of resorting to protectionist, short sighted solutions to appease the growing social unrest. What is at stake here is the length of the global recession and the speed to which the global economy will be able to bounce back to recover its potential growth and employment levels.

Beyond the short term, the latest events and the evidence of the economic costs of market, oversight and macroeconomic policy failures behind the crisis make the case for fundamental reform even more pressing. The 5 Principles for Reform and the Action Plan intended to put them in place are a sound basis to proceed. But the sheer number of actions, groups and working streams makes it difficult to achieve rapid progress in setting up clear foundations for a new global financial order.

Any decision will inevitably take considerable time before it is properly analysed, discussed and finally enters into force. But it is vital for Leaders to send a strong signal with a political commitment built around a few bold decisions giving a sense of direction to the whole process. These should show that there will be real change in those aspects where major failures have been identified, be it in financial markets or in the way global macroeconomic policy and financial stability challenges have been dealt with.

Regulation of financial institutions, markets and infrastructures should be overhauled to improve its economic foundations. But we must also be clear that regulation is nothing without enforcement. High quality supervision is also crucial. It is essential to continue to promote cooperation and coordination between well‐resourced supervisors in the financial sector, in particular in relation to the large financial groups.

International financial institutions need urgent change to foster their effectiveness in fighting this crisis and also in helping to prevent future crises. This should be part of a leap forward in their adaptation to a more complex and interconnected world which badly demands new global public goods to promote macroeconomic and monetary stability as well as development.

All in all, if Leaders succeed in outlining the foundations of an institutional framework which can make the benefits of globalization more sustainable and more widely shared they will make a substantial contribution to bringing confidence back. Spain puts forward the following proposals to contribute to the ongoing debate.

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