January 20, 2011
Cleaning up the debris of the 2007-2008 Great Recession is not a job for the fainthearted. It’s enough to look around us to realise that the task is herculean, as it involves efforts similar to cleaning Augias’ stables. Dealing with toxic assets, implementing harsh and unpopular austerity measures, avoiding currency and trade wars and increasing cooperation among affected countries are only some of the items on the G20 agenda this year.
We know from eminent economists like J.A. Schumpeter that a functioning market economy is one whose equilibrium has been perturbed by innovation, speculation, mercantilism or credit binges. Nothing new here. What makes this recession unique, however, is that the trade and financial imbalances within the global economy have increased to unsustainable levels. Surplus countries in Asia and elsewhere have amassed trillions of dollars in reserves, while a group of countries headed by the United States – among them Greece, Ireland or Spain – have incurred abnormally high levels of private or sovereign debt. Clearly, reducing these global imbalances significantly is the main task facing today’s politicians, East or West.
For debtor-nations, this translates into diminished consumption and lower levels of income. For surplus countries, it means exporting less and diverting products and money to their internal markets instead. For the United States, it means losing “the exorbitant privilege” it enjoyed for decades, that of getting the cheapest credit around and fuelling consumer bubbles with it.
The post-1971 financial order (the so-called Bretton Woods II) — with the US as the sole provider of a reserve currency and US-influenced institutions like the IMF and the World Bank as the chief providers of loans to the rest of the world — has all but collapsed. Many countries, especially outside Europe, are afraid of turning to the IMF for help. Instead, they prefer, like Hungary, to take unusual steps to shore up their financial base, or, like Argentina and others, to turn to Venezuela, China, Saudi Arabia or Russia to sell their bonds, thus bypassing the once-omnipotent multilateral institutions altogether.
To be sure, China has deeper pockets and the development loans it extended to African or other Asian countries come at low cost and with no political strings attached. During his December trip to India and Pakistan alone, the Chinese premier Wen Jiabao has signed bilateral contracts worth 18 and 16 billion dollars respectively with the leaders of the two countries.
The main loser emerging from this crisis is the United States. As a consequence of its financial irresponsibility and huge appetite for other nations’ money, running into trillions, the US is currently in the process of losing its hegemonic position in world affairs. Trying to demolish the euro or to stunt China’s development cannot help maintain it. Indeed, no other hegemon in the past was forced to finance itself with the help of countries – like China, Russia or Saudi Arabia – which do not share any of its values or political ideology. Ironically enough, according to Brad Setser of the Council on Foreign Relations, it is only due to their authoritarian regimes that this group of creditor-countries have been able to continue financing the US deficit in the first place. As investment in US government paper has been a losing proposition for years, a democratic China or a democratic Saudi Arabia would have put a stop to such purchases quite a few years ago. In actual fact, China’s 2009 decision to diversify its reserves makes perfect sense, any delay adding to the pile of losses already incurred by the Chinese central bank.
Replacing the current international monetary system and its main reserve currency, the US dollar, with a basket of currencies anchored to the IMF’s SDR is what the French presidency of the G20 has on the agenda for this year. Global trade and the resumption of economic growth depend heavily on the successful outcome of such efforts. However, designing a new architecture for the international monetary system is only one side of the coin. The other is the need to speed up the transition to a multipolar and multilateral world order, in order to replace the unipolar world which is collapsing as we speak. Both projects require a lot of political courage and skill, determination and the will to resist giving in to populist or nationalistic impulses.Florian Pantazi