After the mini-avalanche in the markets last week, it would be comforting to conclude they are oversold and investors will soon come to their senses. Could be. But behind the clear indications of slower growth in Europe, Asia, and elsewhere, there are longer-term shifts in the global economy that justify all the high anxiety.
Deeper trends now visible suggest that this is one of those transitional moments we get from time to time on our way to another kind of world. For those of a certain age, it isn’t going to be the world we were brought up to expect.
Europe’s steady slide toward another recession, noted at the IMF-World Bank meeting last week, is the consequence of bad policy, plain and simple, and there’s no secular shift to talk about in this case. That Europe now threatens the American recovery comes down to a supreme irony.
The austerity policies in fashion in recent years are rooted in Anglo-American neoliberalism—for my money, a misinterpretation of Adam Smith and others of the 18th century Scottish Enlightenment. Naturally enough, Americans and Britons have been the most vigorous exponents of budgetary austerity as a response to recession. Continental thinking, by tradition, has been fertilized—or corrupted, depending on your point of view—by the social democratic ideas that emerged in the 19th century.
But look what’s happened since the financial-economic-and-now-political crisis that erupted in 2008-09. Americans mitigated the neoliberal extreme sufficiently to start recovering, if belatedly. Easy money helped bring unemployment down and—surprise, surprise—demand and therefore investment are inching up.
The Europeans, having faint faith in themselves, bought into the neoliberal shtick in a pure form. Into deep recession they tumbled, and now they can’t get out of it. In the oddest of places, the triumph of Anglo-American austerity proves the defeat of economic resilience. The control in the experiment is Britain. The Cameron government makes the mistake of believing its own propaganda and continues to wallow.
The other factor in Europe’s new near-crisis is Germany, and here note the long shadow history often casts. The hyperinflation of the Weimar years scarred German economic thinking, producing Berlin’s strict budgetary austerity. To put the point simply, it was a mistake to locate the European Central Bank in Frankfurt, given that ECB policy has proven too strong a drink for much of the eurozone to imbibe.
Now, as even the German economy starts to stall, Chancellor Merkel offers a glimmer of light. Late last week she appeared to indicate that Berlin is willing to begin a round of Keynesian stimulus spending. If this comes to pass, the Christian Democrat from East Germany will once again prove her capacity to think flexibly. She’ll also prove no austerian can hold out against reality forever.
So much for misguided European Union policy. Now to movements in the global economy that have nothing to do with policy. They are history’s wheel turning, and the smartest thing policy makers can do is recognize the wheel’s revolution and make strategies to do well in the global economy gradually emerging before our eyes.
The main players here are the BRICS—Brazil, Russia, India, China, and South Africa—and BRIC wannabes such as Iran. Western governments should listen more carefully to what they are telling us.
China’s growth shows signs of slowing, but don’t worry about a command economy on which the political elite depends for its survival. Last week the Financial Times published an investigative series showing that as the EU is mired in crisis, Chinese investors have been quietly piling into European assets. This is the future arriving.
Private and state-owned companies are all over the EU, it turns out—pushing direct investment up more than fivefold since 2008, to more than €25 billion ($31.5 billion). Interesting enough, among the hottest destinations for Chinese capital are the most fearful cases—Italy, Portugal, and Spain.
Combine this with news of Beijing’s plan to finance a regional development bank to rival the influence of the Western-dominated World Bank and Asian Development Bank. China’s in for a $50 billion capitalization—for starters, that is. Washington objects, but on grounds even inside-the-Beltway officials admit are hopelessly lame. Why isn’t the Obama administration smart enough to take the finger out of the dyke and start riding the rising tide?
In the same vein, I was struck the other day by news that the Americans and Canadians are actually boycotting a World Health Organization meeting on global tobacco control because this session happens to be taking place in Moscow. It’s America nickel-and-diming itself into a place on the wrong side of history.
Since Russia and China signed a $400 billion gas deal last May, and Vladimir Putin followed it with a highly visible, highly beneficial swing through Latin America, there’s no excuse for not paying attention to what’s happening in the world around us. Limp-wristed sanctions and silly campaigns to demonize the Russian leader are risible responses to the emergence of a non-Western alternative to Atlantic economic primacy.
Russo-Iranian deals, Russo-Indian deals, Russo-Brazilian deals, Sino-everybody deals seem to get scant attention in Washington and it’s a drastic miscalculation. When the Chinese start underwriting EU businesses because Europeans are broke, and when Chancellor Merkel says in so many words, “We need Russia a lot more than we need sanctions,” isn’t it time to recognize we are coming into a new global order?
The takeaway: Europe’s apparently imminent downturn is a short-term regret requiring immediate, non-ideological remedy. But let’s not let the urgent crowd out the important. Europe’s predicament coincides with a lot more out in the middle distance, and it’s all about secular change, not economic cycles or the policies that can induce them. Time to get with the program.
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