Nov 05 2011

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The EU Crisis and the Global Balance of Power

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We Are at a Crossroads in History

If further proof was necessary that we are at a fundamental crossroads in geo-politics, one need not look any further than the just concluded G-20 meeting in France.

Since 1975, the senior government officials from the developed countries of the West have met annually to discuss economic and political issues, to coordinate policy, resolve disputes and plan for the future. These meetings evolved in importance and stature over the years.

After the collapse of the Soviet Union in 1991, and the end of the Cold War, the meetings became symbolic not only of the success and dominance of Western economic constructs in global commerce, but of the continued tight control by Western nations over the infrastructure that regulated and managed the global economy.

The “G” meetings themselves, were an outgrowth of the global economic system created in the 1944 Bretton Woods agreements, that established the rules of commercial and financial relations among the world’s leading industrial powers for the period after WWII. The agreements established the World Bank Group to promote international development, as well as the International Monetary Fund (IMF).

The chief feature of the Bretton Woods system was the obligation for each country to adopt a monetary policy that maintained the exchange rate by tying its currency to the U.S. dollar, with the ability of the IMF to bridge temporary imbalance of payments.

As the global economy has grown and evolved, the Bretton Woods system – through the “G” meetings and the   IMF  – have responded.

 In the early 80s, the IMF intervened with developing countries (Mexico) that were caught between the vice of floating rate private sector loans they used to finance government operations, and Western central bankers who raised interest rates to crush inflation. In the early 1990s, the IMF played a critical role in the restructuring of the eastern European countries previously in the Warsaw Pact. And in 1997, the IMF intervened in the Asian financial crisis to bring stability to global system.

IMF help did not come without strings, with countries receiving assistance forced to implement stark austerity programs that raised taxes and cut spending to bring current account deficits in line.

Beyond responding to economic crises, the “G” meetings also set economic and social development priorities goals, rooted in the Western model and tradition. For instance, the agenda for the G8 meeting hosted by British Prime Minister Tony Blair in 2005 included economic aid to sub-Saharan Africa and climate change.

Taken together, the strict IMF diktats in distressed economies and the almost “paternalistic” Western view of global development, created and implemented by Western nations, led to resentment and an emerging North-South chasm.

Today, that chasm is at a decisive tipping point.

Hindsight clearly illustrates that despite the best of intentions, the introduction of the Euro in 1999 violated the founding purpose of the Bretton Woods system, which was to maintain international exchange rates to the dollar.

While the Euro itself could be fixed to the dollar through the monetary policy of European Central Bank (ECB), the EU had no control over the fiscal policies of the individual Euro-participating nations. Although the Maastricht Treaty set strict guidelines for allowable current account deficits and debt to GDP levels, these were quickly flouted.

What resulted over the last 12 years was a more fully integrated and powerful economic bloc, that produces $14 trillion in goods and services each year.

The downside of that integration, particularly financial integration, was the structure that allowed all member states to be treated equally for the purposes of sovereign lending, which allowed the least credit worthy members in the bloc to receive the most credit worthy interest rates.

As a result of that fatal flaw, the Euro-zone is now effective $3 trillion in the hole in a complex web of sovereign and private sector debt.  The crisis has mushroomed as “at risk” nations with huge debt burdens still require additional borrowing to meet social commitments, as questions of their overall solvency rise, while overall EU growth stalls as confidence dries up. This trifecta threatens to bring down not just the economies of “at risk” nations, but of more financially responsible nations as well.

Nothing that the EU has done since the Greek crisis was exposed eighteen months ago has addressed a compelling an unalterable fact:  there is not enough money in Europe to bailout Europe.

What resources that are available – what radical plans that could meaningfully alter Europe’s course – are further compromised by national politics, where “at risk” countries resent EU/IMF dictated austerity, while wealthier nations resent bailing out spend-thrifts.

The much hyped, recently agreed, comprehensive EU settlement illustrates the most Europe can do politically as well as the gaping chasm of what is left undone economically.

This G-20 meeting confirmed that the developed countries of the West, the nations that have called the shots for the past 67 years, cannot solve the European debt crisis.

The United States, mired in $15 trillion in debt and annual deficits topping over $1 trillion for as far as the eye can see, is in no position to offer a bailout.

So by circumstance and necessity, Europe’s salvation lies in the hands of the only nations with current account surpluses and hard cash – developing countries.  In particular, China, India and Brazil, as well as the sovereign wealth funds of Middle East.

But to attract that cash will require more than a still dubious argument that the EU is a good economic bet.

Emerging countries will likely insist that any substantive bailout be tied to a change in political arrangements regarding who leads and staffs the organizations managing the global economy, providing developing countries with a genuine seat at the table. Such a move would recognize the pivotal moment that an IMF which was once funded by developed countries to aid developing nations, is now effectively operating in reverse.

It could also lead to a historic realignment of power on the UN Security Council where a post-WWII construct that included France and Britain as “great” nations looks increasing outdated with the rise of Japan, India, Indonesia and Brazil.

Of course, Europe’s relevance and power is derived from the very institutions it will have to give up in order to receive the bailout the Europe itself will not front. This will join the economic crises that boils over to a fresh political crisis as necessity requires European marginalization on the world stage.

In sum, we have arrived at a decision point in history where the cradle of Western civilization – self absorbed, short-term and undisciplined –  has proved incapable of managing its own affairs. As a result, global power will pass to new international players.

This G-20 was the beginning of that long road to serfdom.


1 comment

  1. Mike K

    I guess this means that the U.S. can leave the countries we occupy for protective services, ours and theirs, and let the new powers holding our Cash to protect the emerging countries?


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