Quite correctly, the focus of concern in the eurozone mess right now is on the potential fallout for the global economy. Should – as appears quite possible – short-term, political myopia prevent the kind of leadership from Europe’s politicians that is called for in this emergency, growth in the developed world ends for the foreseeable future. But look to others for the puts, calls and hedges — that’s not my job.
But spare a moment to consider the portentous geopolitical current running beneath this crisis. Not long ago, the idea that a global export and financial player like Italy would turn publicly for assistance to China, leading proponent of authoritarian state capitalism, would have sent American politicians into spasms of alarm. German, British and French politicians, too, would have expressed disdain for the idea that China or any other player outside the G7 could really have anything to offer. Washington would have scrambled to engineer a rescue, as it did in Mexico in 1994, South Korea in 1998 and Brazil in 1999 — and as it had (yes, belatedly) but decisively for Europe both financially and militarily in two world wars.
Instead, the collective reaction to Italy’s decision to install a red hotline phone to China in its finance ministry was a sigh of relief — and a rally in the markets. While Beijing previously has stepped in to offer loans to smaller economies, including Portugal, Spain and Greece — and it famously snapped up a portion of flailing Morgan Stanley during the depths of the 2008 crisis, the idea of a lifeline to Italy – the world’s eighth largest economy, home to some of the great industrial export powerhouses of the 20th Century – signals something new.
Patrick Chovanec (among others) is right: China has neither the capacity nor the interest in “bailing out” Italy. But this is besides the point in many ways. Even if the Fed has moved to reestablished currency swap lines to ensure the ECB and other high volume forex targets (the Japanese, the Swiss, the Canadians) can remain liquid, the overall influence of the U.S. in this most serious of current economic crises is negligible. Treasury Secretary Tim Geithner’s chiding about the need to stimulate growth in Europe – the main effort by the United States to influence events to date — was decisively rebuffed. Geithner actually apologized!
The fact is, Captain America has very little to offer in this crisis. Putting aside its own mixed reputation for economic “leadership” of late, the past five years have delivered a stark reality check to the American superpower. Offering financial help to even its closest allies these days would be an exercise in keeping up appearances. America — and Japan, Britain, France and, yes, even Germany, have their own deep financial problems.
As the perpetual crisis in the most developed economies indicates, the world that emerged out of the cauldron of the American century is unraveling. The decline of U.S. economic and political influence is clear, as is the rise of the BRICS and other emerging powers. Much has been written about the policy mistakes, demographic problems and debt woes that beset the old “West” and its Asian protege, Japan.
Most analysts, however, have underestimated the potential speed of American decline. Very few have grappled with the consequences for U.S. and its allies as the American-led status quo across the globe begins to fray and even break apart. This has enormous implications for investors who depend on the relative stability of monetary policy, currency rates and markets in the developed world. Corporate risk departments should be scouring the planet for scenario analyses of a faster than expected unraveling of the globe’s U.S.-sponsored geopolitical stability. From what I see, this simply is not happening. There remains a lazy consensus that, somehow, “normalcy” will eventually return. This is folly. This is denial.
To be sure, America’s global military dominance is still in tact. But ultimately, such advantages rest entirely on a country’s ability to pay its bills. Military juggernauts with dysfunctional economies end up in the same predicament, most recently exemplified by the fall of the Soviet Union. By the time the USSR was declared dead, even the Soviet military — only 20 years earlier a match for any on the planet — had deteriorated to the point where recruits had starved to death at one military base; warships rusted at their moorings for years; and control of the military’s version of the crown jewels, the nuclear arsenal, was seriously under threat.
No direct comparison can be drawn between the incompetence of Soviet state central planning and the flaws of American-designed global capitalism. The U.S., for all its mistakes over the past several decades, remains the vital player in global economics, and will remain the world’s largest economy for decades to come. It is slipping not because the system it designed is flawed, but because it played it so recklessly that is has damaged itself grievously, both in reputation and in tangible economic potential.
But therein lies the planetary danger: the Soviet economy’s collapse affected primarily a small group of similarly distorted economies tied to it through communism’s version of the Commonwealth – called Comecon. For Cuba, Eastern Europe, selected African despotisms and Moscow-friendly India, it was a disaster. For the rest of the planet, it was pleasant surprise and an opportunity.
In contrast, the U.S. economy is so large and the rest of the planet’s holdings of dollars and U.S. debt so endemic that America’s fate concerns everyone, friend and foe alike. China, Russia and the Gulf emirates fear an American debt default far more than American military might — as their chiding of U.S. fiscal prevaricating shows. China’s interest in Italy, after all, isn’t about nostalgia for Marco Polo.
China, too, has its well-documented (and underestimated) problems. But China’s appeals on policy grounds to eurozone leaders echo Beijing’s concerns about the United States. It urges both to put aside the parochial political concerns and take the long view with regard to growth and fiscal prudence.
The reaction to this advice is telling: eurozone leaders are deferential these days to China, in contrast to their dismissal of the U.S. Treasury chief. I suspect this is not so much because the Germans, French and other eurozone players find it any less grating to be lectured by the Chinese than the American; rather, it’s just that China’s far more likely to put its money where its mouth is.
10 Responses to “Marco…Marco…Polo”
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