By Pierre Buhler
PARIS: The unfolding “currency war,” which is likely to dominate discussions at the upcoming G-20 summit in Seoul, must be assessed against the backdrop of the new landscape of power — a landscape that has been transformed, in just two years, by the first crisis of the globalized economy.
The economic consequences of the crisis have left a number of developed countries in a severe slump and scrambling to bring about a healthy recovery. By contrast, the emerging-market countries, after a short slide, have managed to re-ignite their growth engines and are sailing full-speed ahead, racking up impressive growth rates.
There have been financial and monetary consequences as well. Although no currency is as of yet qualified to replace the dollar as the world’s reserve and transaction currency, this “exorbitant privilege,” as Charles de Gaulle put it, has come under stealthy attack. In March 2010, the “ASEAN + 3” grouping, which includes China, Japan, and South Korea, established a reserve fund of $120 billion, under the so-called “Chiang Mai Initiative.” This time, unlike in 1997, the United States did not even attempt to torpedo this embryonic “Asian Monetary Fund.”
After coping well initially, Europe entered choppy waters when confronted with the prospect of Greece defaulting on its public debt. The “crisis within the crisis” exposed the eurozone’s weak governance and revived doubts about the viability of a monetary union with large competitiveness gaps between its members.
The crisis has also intensified political problems. Japan, arguably the hardest hit by the global recession, faces an increasingly severe moral, demographic, and governance crisis, highlighted by its recent loss, to China, of its status as the world’s second largest economy. In Europe, bickering between leaders revealed the lack of solidarity underpinning European ideals and gave full view to the persistence of national egoisms against which the European project had managed to define itself since the end of World War II.
Finally, the crisis has shattered the ideological dominance of the West. In previous decades, financial crises often originated in emerging economies, sanctimoniously patronized by the “virtuous” West and its institutions. This time, powered by the dogma of market resilience and self-correction, the storm formed at the heart of the world economy, the US.
The natural instinct of many is still, as in the past, to look at the American economy, towering over the rest of the world with its $14 trillion GDP, as the engine of global recovery. Indeed, the US retains an edge, owing to its capacity for innovation, its technological advances, its entrepreneurial spirit, and its indefatigable optimism.
But doubts are growing. The economic powerhouse that for decades confidently provided hegemonic stability to the global economy seems at pains to continue doing so. An increasingly uncompetitive civilian industry, the burden of military commitments overseas, wage stagnation: all signal that the American titan may be wearying.
The most worrisome sign, though, is America’s rising public debt — now at 95 percent of GDP and, even according to the official General Accounting Office’s conservative estimate, set to soar to $18.4 trillion by 2018. When the implied liabilities of the Social Security and Medicare systems are added on, an unprecedented level of peacetime debt confronts the US.
The paradox here is that, as its hegemonic power fades, America must rely increasingly on foreign creditors, above all China, to stay afloat. Unfortunately, the proverbial Washington political gridlock leaves little hope for fixing the problem, adding to the impression of a giant with clay feet.
The alternative to a world in which America guarantees global prosperity and stability within a liberal order is one of increasing conflict, replete with mercantilism, protectionism, and currency wars. Only a multilateral settlement among all major actors can ensure a smoothly working global order — a cause advanced in late 2008, when the technical G-20 forum was quickly upgraded to a full summit in charge of global governance. Encompassing all big emerging economies, this appeared to be the most effective way to muster the legitimacy denied to the G-7.
But can the G-20 deliver on its promise? As the chaos at the climate-change conference in Copenhagen last December amply demonstrated, both the number of members around the table and the differences between them — even within the group of emerging countries — do not bode well for the future. The present “currency war” is but another sign of that disorder.
Of course, due to its sheer military might and numerous alliances, the US will remain on top for the foreseeable future. Indeed, while hubris and the crisis have seriously undermined the world’s “hyperpower,” no multipolar order has emerged to follow America’s “unipolar moment.” America has become the “default power”, because China, the most likely challenger, is, by its own admission, a long way from economic or military parity with the US.
But military dominance alone is unable to confer authority, as the Afghan quagmire reminds us every day. Having succeeded in integrating the West through prosperity and security following WWII, America must begin to craft a new global leadership structure.
The task is even more daunting than in the years after 1945, for today a number of fiercely independent-minded, aspiring world powers must be herded into the global order. As the main architect of globalization, which awakened awareness worldwide of the need for global public goods, the US must, even in its weariness, summon its creative resources.
Pierre Buhler, a former French diplomat, was an associate professor at Sciences Po, Paris. This commentary is published by Daily News Egypt in collaboration with Project Syndicate, www.project-syndicate.org.