Year L, 2008, Number 3, Page 194
THE FINANCIAL CRISIS AND NEW ECONOMIC BALANCES: THE RISKS OF EUROPE’S ABSENCE
As the current financial crisis makes dramatically clear, the process of globalisation has created a web of economic, financial and commercial interests so vast and so complex that it now escapes the control of governments, parliaments and international organisations. It is a financial crisis that began by bankrupting (or almost bankrupting) the biggest of the United States’ vast financial groups and insurance giants, before progressively spreading to those of Europe and other countries. The shockwave of the crisis soon reached the world’s stock exchanges, causing them to suffer a series of dramatic falls; all this inevitably impacted negatively on companies’ financial situations and on the prospects of economic growth.
Suddenly, although not entirely unexpectedly, globalisation presented the world with its most unattractive and least positive face — the face that, according to Joseph Stiglitz, reflects some of the most profound social conflicts (including those over fundamental values), in which the main contrasts of opinion concern the role of the governments and the markets. Today, even governments and economic experts are having to admit that what the global economy is currently experiencing is not a normal, cyclical crisis, but rather a structural one, from which, moreover, there seems to be no way out in the short term.
Thus, in the wake of decades of laissez-faire rhetoric and excessive belief in the market’s independence from politics, there is now renewed debate over the relationship between the state and the market, and over the role of politics in determining economic and financial choices, issues that, after the end of the Cold War and the collapse of the socialist regimes, had seemed definitively closed. In short, a fact often ignored or underestimated in recent decades has returned to the fore, namely that the democratic government of highly complex economic and financial processes, like those characterising the world today, is not something that just happens, but rather something that needs a specific political battle in order to alter the existing power framework. The aim of this brief note is to underline some aspects of the current crisis, and some of the contradictions it is generating, that highlight this need.
The affirmation of China and the emergence of India as leading players on the international stage have sharply accelerated the process of globalisation and, in the space of a few years, rendered obsolete the forecasts and analyses on the prospects of global economic growth previously issued by governments, experts and international bodies.
Over the last decade, a large proportion of direct financial flows were channelled in the direction of Asia, China in particular. But this period was also characterised by a movement in the opposite direction, towards the USA, as the excess liquidity generated by China’s trade surplus was poured not only into direct investments in America, but also into the purchase of American treasury bonds.
This phenomenon had the effect of inflating (artificially and out of all proportion with any real economic basis) the United States’ role as a superpower. Furthermore, it enabled the Federal Reserveto conduct a policy that encouraged increased government spending and also a propensity towards risk and speculation among investors (including banks) and private individuals, who were enticed by easy access to credit and mortgages available at particularly favourable conditions. Many financial institutions then went on to transfer these loans, converting the credit into shares which were then sold in the USA and in much of the world, also through investment banks, which acted unfettered by any controls or rules. In this way, the risk of insolvency was spread throughout the international financial market. When it emerged that a huge amount of debts contracted in America lacked adequate cover and that the debt/capital ratio of many important institutions had become unsustainable, the explosion of the crisis was inevitable.
In the light of all that has happened, many are beginning to question, openly, the USA’s fitness to play a leading role in the economic and financial field. Some are asking whether this is the end of the road for the laissez-faire model, while others are calling for a profound rethink of models of economic development. The fact is that no part of the world is escaping this crisis and every country is desperately trying to find ways of protecting itself against the negative effects of a recession that, now widely confirmed by all the economic indicators, many fear may turn into a depression.
The relationship between the USA and China plays a central role in all of this. Stigliz, in 2006, pointed out that the United States and China, in their economic relations, are like hostages to each other. China, which sells much more than it buys, records a huge bilateral trade surplus with the United States, but at the same time, it is China’s purchasing of billions and billions of dollars’ worth of US government bonds that funds US deficit spending. The author remarked that both countries understand the nature of this mutual dependence. Although, today, China’s faith in the US economy is more cautious than it once was, this interwoven relationship between two economies nevertheless remains.
Symptomatic of this cautious new attitude is the fact that China, which once relied largely on exports to sustain its development, is now introducing measures aimed at stimulating domestic demand and boosting internal consumption, which continues to be too low. In short, it is attempting to correct, at least in part, a development policy that, because it is too dependent on foreign sales, has been severely weakened by plummeting consumption in the developed world. However, this is an endeavour that will demand time and resources before it can bear any significant fruits. It will, after all, take much more than a few months, or even a few years, to raise the incomes of tens of millions of Chinese people to a level at which they can generate a domestic demand great enough to compensate for the declining demand on the struggling global market. Furthermore, if China wants to avoid strong social tensions internally, it will somehow have to find a way of peacefully managing its citizens’ expectations of a better standard of living. The question is, can it do this, alone?
If China finds itself in this kind of race against time, it is clear that other countries, the European ones first and foremost, must necessarily consider the question of their own economic survival. Because what is difficult for China is surely impossible for countries whose domestic markets are simply not big enough to absorb volumes of production that have for years been directed at continental or global markets. We may cite, for example, the case of Germany, still a leader in the world economy, which, having taken steps to ensure economic growth that was healthier and more robust than that of other countries (safeguarding its key industries, both traditional and advanced), now finds that it can no longer rely on outlets on foreign markets (like the Eastern European market) that are caught up in the crisis.
The current economic emergency illustrates an obvious fact: that large continental powers like the USA, China, Russia and India, despite being hard hit by the crisis, are nevertheless in a position to implement policies and plans geared at protecting and safeguarding their economies, using instruments and obtaining results (even solutions) quite different from those accessible to smaller states. What was less obvious, at least until a few years ago, was that countries belonging to an economic and monetary union — I refer, of course, to those of the euro zone — would find themselves, in times of crisis, unable to support their necessary single monetary policy with an equally indispensable single fiscal and economic policy. Indeed, in their attempt to save their own banks and enterprises, the euro zone countries are putting their monetary union, and the rules on which it is founded, under almost unbearable pressure. One need only consider that euro zone policy continues to depend on the voluntary coordination of measures taken by different national governments, given that Europe, despite its countless community institutions, does not have adequate and autonomous instruments for making decisions at supranational level, and thus for acting in the international field. In Europe, where the process of economic and monetary integration has undoubtedly brought important advances, it is nevertheless significant that each country still fears that it may be forced to suffer the effects of its neighbours’ disguised protectionist choices and reckless economic policies. This point was highlighted by Jürgen Habermas, when he explained that the unfolding of the crisis is exposing the fault inherent in the European construction, namely that every country reacts with its own economic and political measures. Because of the way competences are distributed within the European Union, Brussels and the European Court of Justice enforce the economic freedoms while the external costs they generate are foisted on the member states, and this is the reason why, today, there is no formation of a common will in the economic and political spheres. Indeed, the most important member states are divided even over the basic questions of how much state and how much market they want.
Globally, the crisis is so profound and widespread that the USA, flying in the face of decades of laissez-faire politics, has not thought twice about nationalising some of its banks and industries. The same applies to the UK, while China has suddenly become more reticent about opening up to capitalism.
In this setting, appeals to citizens, business and even banks to have renewed confidence in the market and in the prospects of an economic recovery are bound to fall on deaf ears. Confidence has been too profoundly shaken by the effects of the crisis, by the evident lack of appropriate verification of the soundness and correctness of banks’ investments, and by uncertainty over the role that American financial policy could still play at international level. Emblematic of the current widespread lack of confidence is the fact that, in Autumn 2008, a number of banks in Europe opted to place ECB loans back in the ECB’s deposit facility, rather than inject them into the market, despite being well aware that this meant forfeiting a part of these funds, which should have been used to increase liquidity on — and confidence in — the markets.
Outside Europe, in the developing countries and poorest economies, the situation is aggravated by the fact that many banks and financial institutions, being short of liquidity, have requested the repayment of loans, thereby further reducing these depressed national markets’ already poor prospects of recovery and creating unsustainable situations.
In the face of all this, ordinary economic policies are wholly inadequate and national measures insufficient to break the vicious cycle created by the lack of confidence and the economic slowdown. This lack of confidence is now casting the shadow of bankruptcy over the states: with all the governments striving to raise the funds they need in order to save their struggling banks and enterprises, there exists a very real risk that the bonds emitted for this purpose may fail to be underwritten (entirely or in part), both because of the level of competition from countries pursuing the same policy, and also because of the lack of confidence in already heavily indebted countries (so-called risk countries). And were this risk to be realised, to whom might these institutions and enterprises turn in order to find the resources they need to survive?
In America, on the other hand, were the USA to decide, once again, to have recourse to the lever of monetary expansion, in particular, were the Federal Reserve to decide to print new paper money (as the difficulties of the banks and stock exchanges have prompted it to do in abundance in recent months), in the current situation this would probably not, in itself, be a serious problem for inflation. But the global framework is no longer the same as it was when the USA could expect to stimulate both its own economy and that of the Western world through moves of this kind. The existence of severe commercial imbalances in the world, especially between the USA and China, now seriously reduce the chances of success of any manoeuvre decided unilaterally by the American government. Proof of this is provided by the fact that the 2002 devaluation of the dollar against the Chinese currency has, to date, failed to give American production any advantages over Chinese production, basically because it has not significantly altered consumption of American goods in Asia. And this is a trend that is certainly not likely to improve in a situation in which the USA’s trade deficit continues to be very high, and Chinese imports, while not falling dramatically, are certainly not rising. Moreover, there exist two further factors of uncertainty liable to condition the outcome of any American policy. These concern, on the one hand, the USA’s vast foreign debt, so far funded by the emission of government bonds, and, on the other, relations between the USA, China and Europe. The first of these question marks is over the future of the market of US bonds held by Asian and oil-producing countries. No one can say for certain how long these countries are going to go on having confidence not so much in American banks and companies as in American government policy. It is significant in this regard that at the end of 2008 the Beijing government organised a number of meetings in Asia to work out the lines of a possible Asian intergovernmental policy to prevent the uncontrolled sale of US government bonds on the international market that, were it to turn into a gigantic “clearance sale”, would trigger chain reactions whose effects on the global order it is quite impossible to predict.
The second question mark, instead, concerns the way in which the strengthening of the euro and the role now being played by Chinese financial policy on the international stage are reducing the importance of American monetary and economic policy. This is a phenomenon that is currently subject to no form of control, given that the euro is not the currency of a state and thus cannot be the instrument of a coherent international policy (only an additional source of uncertainty), while the policy of the Chinese, who lack guarantees and opposite numbers in the West, clearly cannot be expected to work in favour of global economic interests.
To deal with the risks ahead, it is not enough simply to hope that the USA will make sound decisions in the economic and monetary field. Neither is it possible to go on trusting in the spontaneous development of a responsible relationship of cooperation between the USA and China, in which each puts the safeguarding of global interests ahead of national interests. What we in Europe need to do, most of all, is consider how the Europeans might contribute tangibly to the establishment of a more cooperative and coordinated international order in the economic and monetary sphere.
In Europe, everyone realises that no state can act alone, independently of the others, in its attempts to tackle the global crises that are now unfolding and becoming interwoven. Yet despite this, the single governments insist on pursuing their own, individual policies. And what this means is that the Europeans are not actually doing anything at all to change a global power situation in which, as the reactions to the financial crisis have shown, there are states like the USA and China that, precisely because of their continental dimensions, can, for better or worse, act as centres of international power, in other words, play a role that the small European states can only pretend to play. Worse still, the absence of a credible European interlocutor has exacerbated, and is still exacerbating (rather than helping to lessen and resolve), the contradictions produced by the economic, financial, political and military imbalances that characterise the relationship between the USA and China.
In the end, it is precisely this absence of Europe that explains why, in spite of everything the dollar continues to be the main reserve currency for the countries of Asia, and for China in particular, and why Asian investments are still directed mainly towards the USA.
As Wolfgang Munchau has pointed out, to work out the world economy’s real chances of a recovery in 2009, it is not enough to make conjectures based on the amounts of state aid that will be offered, on the two sides of the Atlantic, within the respective national economies. What we need to know, finally, is whether and in what way the new American administration led by Obama intends to (and can) develop a joint strategy with China and the Europeans. The problem is that in Europe, as Munchau remarks, the governments are continuing to make unilateral decisions over what to do in the economic field before then, in order to save face before public opinion, dressing up their actions in the guise of European cooperation. This, then, is the crucial point: today, the question of whether and how a global strategic plan can be launched depends more on the Europeans than on Obama or China.
It is obvious that if at least some of the European Community’s original six founding member states were to take it upon themselves to create the initial core of a European federal state, then the euro would cease to be an instrument lacking the backing of a real and credible power. And it is equally obvious that until that happens, Washington and Beijing will not have a European interlocutor with which to share a plan, but will go on having lots of small European interlocutors, defending lots of small proposals and small national policies, which in reality can serve only to increase, rather than reduce and eliminate, economic and monetary chaos, increasing the risk of a further deepening of the crisis and of a return to protectionism, even between the members of the European Union.
Has European and world history no lessons to teach us? Has the economic crisis not yet eroded the Europeans’ standard of living enough to make them stop deluding themselves?
In his book, Lords of Finance: The Bankers Who Broke the World, Liaquat Ahamed explains in detail how the terrifying liquidity crisis of 1914 and the divergent economic and monetary policies (even then veiled as cooperation) that followed it went on to have disastrous consequences in subsequent decades. Reviewing this book, Niall Ferguson concludes: “As the world teeters on the brink of another great financial cliff, we can only hope that the modern-day Lords of Finance will co-operate to better effect. I suspect none has much time for bedtime reading these days. But should Messrs Bernanke, King and Trichet need a reminder of what can go wrong when central bankers achieve only the semblance, but not the reality, of co-operation, Lords of Finance is the book they should read.” As for Europe, the Europeans have seen for themselves that simply stepping up their cooperation with each other is not the way to secure an active role in the world. For things to change, they are going to have to accept, finally, that it is time to stop giving the world the impression of being united, so that they can become truly united.
 Joseph Stiglitz, Making Globalization Work, New York, W.W. Norton and Co, 2006.
 See Amartya Sen, Globalizzazione e libertà, Milan, Mondadori, 2003.
 Joseph Stiglitz, op. cit., p. 295.
 Jürgen Habermas, “Internationale Weltordnung Nach dem Bankrott”, Die Zeit, 6.11.2008, http://www.zeit.de/2008/46/Habermas.
 As pointed out by Eurogroup president Jean Claude Juncker when interviewed by Jean Quatremer (Libération, 31/12/08), no capital is invested in Europe now, because the money goes to the United States. It is incredible that a country with a deficit this great, and which is in the middle of a recession, can go on attracting so much capital from all over the world. If Europe fails to reverse this situation, it will because it has failed to equip itself with the same instruments.
 Wolfgang Munchau, “World Economy in 2009: three priorities for recovery”, Financial Times, 28/12/2008.
 Niall Ferguson, “The great liquidity crisis – 94 years ago”, Financial Times, 2/01/2009, http://www.ft.com/cms/s/2/d4a84d58-d6c7-11dd-9bf7-000077b07658.html?nclick_check=1