Contributors
John Hancock works at the World Trade Organization in Geneva, Switzerland, where he has served as senior policy advisor to the Director-General, representative to the IMF and World Bank, and head of investment issues. He also coordinated the WTO's Aid-for-Trade initiative, and was secretary of the 2006 Task Force on the subject. Prior to the WTO, Mr. Hancock was senior advisor to Canada's trade minister. He has also been a guest lecturer at Cambridge University, IMD, and the University of St Gallen. He holds a PhD in economic history from Cambridge, and has written and spoken frequently on international issues. Rage Against the Machine
Voters in France have spoken. Their clear message is one of anger and disillusionment with mainstream democratic parties. After the first round of the presidential election on Sunday, listless support for Francois Hollande, the Socialist candidate, and President Nicolas Sarkozy, the Gaullist, barely reached 55 per cent – while one in five French voters cast ballots for the extreme right, nearly double the 2007 total, and one in nine for the extreme left.
France is hardly unique in this respect. Across the western world, voters are deserting the centre ground of politics for fringe parties and populist movements. The rise of the Tea Party in the United States, the resurgence of Scottish nationalism, even the surprise ascent of Canada’s perennial also-rans, the NDP, all reflect voters’ deep desire for “change” – any change – and an even deeper contempt for politicians, parties and, in some cases, government itself. More …
Comment (1)After the Commodity Boom
The government’s dream of turning Canada into a resource superpower is predicated on one crucial assumption: that global commodity prices will continue their inexorable rise.
That assumption is – at best – optimistic. Hard as it is to believe with gasoline prices surging passed $1.30 per litre, the current decade-long commodity boom is a temporary aberration in the otherwise relentless decline in raw-material prices over the past 200 years. This is not the first time in history that commodity markets have soared: Prices rose before the First World War, after the Second, and again in the 1970s. But each great boom was invariably followed by a great bust. And over the long run, the real price of almost every raw material – from oil to iron to copper to corn – has slid steadily downwards. More …
The Secret of China’s Success
The U.S. is in denial. Alarmed by China’s relentless economic rise and its own relative decline, the U.S. has convinced itself that China is cheating (through low wages, currency manipulation, technology theft, and “state-capitalism”) and that only a get-tough policy will arrest its rise and put the U.S. back on top. As U.S. President Barack Obama warned while visiting China’s Vice-President Xi Jinping last week, China has to start playing by the economic rules. The reality that China is simply more competitive than the U.S. – that there’s a mathematical inevitability about 1.3 billion educated, disciplined, hard-working Chinese overtaking the U.S., and that China’s economic ascendency cannot be stopped – has yet to dawn on a political establishment that cannot imagine a world in which the U.S. is not on top. More …
Quitting Kyoto: Un-Canadian
It is particularly disturbing when nice countries do bad things. When “peaceful” Norway slaughters whales. Or when “neutral” Switzerland exports arms. Or when “liberal” Australia interns refugees on a remote Pacific island reminiscent of a 19th century penal colony.
“Internationalist” Canada’s decision to pull out of the Kyoto Treaty on global warming is much worse. At a minimum, it has seriously damaged Canada’s reputation abroad, which only a month ago, was ranked the “best country brand” in the world. The lead story on CNN and BBC today is how Canada has “quit” the global climate change agreement – just hours after the rest of the world reached a last-minute deal in Durban, South Africa at the climate change conference. This news may play well in Calgary, but it plays disastrously everywhere else. Caring and compassionate Canada has morphed overnight into Canada the selfish and belligerent. More …
Top Four Reasons We Should Ignore Rankings (But Won’t)
Foreign Policy Magazine has just published – amid great anticipation – its Top 100 Global Thinkers for 2011. Not content with merely ranking the world’s most competitive economies, prestigious universities, livable cities, or effective ways to leave your lover, FP has gone for the “big picture” and identified the brainiest people on the planet (at least until next year). Leaving aside that the list is suspiciously top heavy on politicians, economists, and do-good activists who claim to be changing the world – and silent on the geneticists, physicists, and computer scientists who are actually transforming it – there are several reasons to be concerned about these top “whatever” lists, and even more concerned about why we all rush to read them.
Here are my top four reasons:
1. What qualifies FP to rank the world’s Top 100 Thinkers, anyway? Or, for that matter, the World Economic Forum to decide the most competitive economies? Or Maclean’s the top universities? These lists are delivered with such authority and gravitas that few of us question the data or methods used to compile them. Yet many, if not most, are closer to fiction than to fact. FP, for example, doesn’t even bother to explain how it reached its conclusions – which is probably wise given that the process seems to involve little more than asking friends-of-the-editor who this year’s big thinkers are, and then jotting down the list over morning coffee.
2. Why do the rankings change so dramatically from year to year? Bill Gates and Warren Buffett were the Top Global Thinkers of 2010, according to FP, but, a year later, Bill has slipped to the 13th spot and Warren has fallen off the list entirely. Did the Sage of Omaha suddenly stop thinking big thoughts? Or did FP get it wrong the year before? And, come to think of it, why did the United States tumble from the world’s most competitive economy in 2007, according to the WEF, to fifth place (and falling fast) this year? Sure, lots of bad economic things happened to the United States in the intervening four years, but none diminished the basic productivity of American workers or factories. If anything, the Great Recession, together with mass unemployment, has actually spurred U.S. productivity in the form of longer hours, leaner wages, and less “fat” all around. Static, unchanging lists would not be nearly as suspenseful – or marketable – but they would be a lot more credible.
3. Is the impact of individuals, institutions, or countries even measurable, given that what’s being assessed are qualities more than quantities? Profound thinkers have an impact that is, well, profound – often not fully grasped for years, decades, or even centuries. Johannes Gutenberg, for instance, would almost certainly not have made FP’s list – he died poor, embittered, and largely ignored, but his printing revolution turned out to be one of the most important events of the modern age, making possible the renaissance, the reformation, and the scientific revolution. If it is hard enough to instantly measure the impact of great thinkers, how much harder is it to measure the impact of whole institutions or countries?
4. Even if the global impact of individuals or institutions were measurable, does it make any sense to rank them? Ranking is a zero-sum game in which one participant’s gain is unavoidably the other’s loss. McGill being ranked Canada’s No. 1 university in this year’s Maclean’s survey necessarily pushes someone else – in this case, the University of Toronto –into second place. But does this blunt ranking say anything about how similar these two universities are? Or how different (apples versus oranges)? And what if the quality of university professors and students is generally improving across the board, so that the university that fell from, say, the fifth to eighth spot actually got better? A one-two-three ranking sheds no light on that trend – in fact, it obscures it.
Maybe the modern world’s obsession with ranking everything – from brightest minds to coolest gadgets to sexiest women and men – says more about us than the subjects we are listing. In a chaotic and ever-changing world, we grasp on to numbers and rankings to provide us with “facts” and “truth,” embracing the illusion that someone (anyone) can deliver “certainty” in an uncertain age. Casting doubt on a Top Global Thinkers list is tantamount to suggesting that no one really knows what’s going on – even the great minds identified by FP! And that’s a little too much truth for most of us to handle.
Then again, maybe it’s all American Idol‘s fault.
Photo courtesy of Reuters.
War or Peace
Buried in its otherwise dry and business-like global economic forecast last spring, the International Monetary Fund quietly offered this world-changing prediction: China’s economy will overtake America’s in real terms in 2016 – just five years from now. For the first time in over a century, the United States will no longer be the world’s largest economy. For the first time in two centuries, a non-western, non-democratic power will be economically dominant.
Some try to downplay the significance of this coming event. They point out that extrapolating GDP growth to predict future power is an imprecise science. In the mid-1950s, then-Communist-leader Nikita Khrushchev boasted that a fast-growing Soviet Union would “bury” the U.S. – and we know how that worked out. Japan, the rising economic superpower of the 1980s, was on track to become the world’s biggest economy by the late 1990s, according to some forecasters. We are still waiting. And yet, China’s sheer size – and the speed of its industrialization – seems to place it in an entirely different category. In 2000, U.S. economic output was three times that of China. By 2030, even with conservative growth estimates, China’s output will be three times America’s. This will mark a complete reversal of their relative economic importance in just 30 years.
Roland Paris argues that U.S. policy toward China is a “politely-veiled” containment.
Others argue that economics is not destiny. They point out that the U.S. military is now bigger than the next dozen powers combined, and more technologically advanced – witness the lethal impact of drones, stealth bombers, and other sci-fi-like weaponry. They also note that that America’s dense network of overseas alliances, as well as its domination of international institutions, allows it to project global influence in a way that China, for all its growth, can only dream of doing.
And yet, if history is any guide, China’s rising economic strength will inexorably translate into military strength. During the Napoleonic Wars, it was fast-industrializing Britain that ultimately triumphed over a militarily stronger, but still agrarian, France. And it was the industrial power of the United States – the “arsenal of democracy” – that decisively tipped the balance in all the great wars of the 20th century. Indeed, as Paul Kennedy famously argued, military overspending – or “imperial overstretch” – far from replacing economic power, actually hastens its decline.
The past six decades have been remarkably peaceful – especially compared to the 35 million dead in the First World War, or the 50 – 70 million dead in the Second. This is in no small part due to the relatively benign hegemony exercised by a dominant United States. What will replace Pax Americana?
One school of thought – held by the self-styled “realists” – paints a relatively pessimistic picture of the future. While economic power is a positive-sum game (growth in the East creates export opportunities for the West), political power is unfortunately a zero-sum game (one country’s military gain is another’s loss). China’s ascent will inevitably lead to greater competition and conflict with the United States, it is argued, because rising powers seek global supremacy, and declining powers try to resist. In a back-to-the-future world of great power rivalries, the United States’ strategic goals should be to contain China’s expansion, reach out to Asian allies, and establish a new balance of power.
Another school of thought – call it idealist – paints a more optimistic picture of the future on the grounds that world politics is changing in fundamental ways. The globalization of trade and investment has woven economies tightly together – and no two economies more than the U.S. and China. Even if Washington and Beijing wanted military confrontation, deep economic interdependence stands in the way – as the CEOs of Boeing, Caterpillar, or Lenovo never tire of reminding their political leaders.
Even more powerful than the globalization of economies is the globalization of information and ideas via the internet – YouTube, Facebook, fast-multiplying blogs – creating a global audience, and even global public opinion. As Harvard’s Steven Pinker convincingly argues, the modern world’s increasingly educated, informed, and rational citizens are rejecting the irrational appeal of nationalism, chauvinism, and war that so devastated past eras, which explains why international conflict is declining. The strategic goal should not be to isolate China, but to embed it even more deeply in the existing liberal international order, and to encourage China’s own policy of economic openness and integration. According to the idealists, a military confrontation between the U.S. and China will be as unthinkable in the future as another war between France and Germany.
The one certainty is that the world is approaching a turning point, and more quickly than we think. A key question – as Roland Paris brilliantly argued in his last two posts – is how the U.S. will react to a rising China, and vice versa. Another key question: Whose side – if any – is Canada on?
Photo courtesy Reuters.
Power to the People
Across the western world – in Athens, Rome, London, and New York – people are taking to the streets, literally and figuratively, to reclaim democracy from the tyranny of globalization. But who exactly is the enemy? And how should we measure victory?
It is fitting that Greece, the cradle of democracy, is the central stage on which this drama is being played out, although the storyline is becoming familiar throughout Europe and North America. Globalization robs citizens of power; it hijacks democratic choice. Backed by unaccountable international organizations, like the European Commission and the International Monetary Fund (IMF), it forces governments to cut spending and slash social programs, even as it rewards the already rich. Greece is just the latest, and most vulnerable, victim of a voracious and predatory capitalist system that has grown out of control. No wonder we sympathize with the young Greek protestors fighting back against unbridled financial markets. Greece’s David is standing up to capitalism’s Goliath.
Except for one problem. Greece is not powerless, and never has been. Greece was not forced by global capital markets to run unsustainable public deficits for over three decades, accumulating a debt mountain reaching 180 per cent of its gross domestic product. International bankers did not coerce Greece into floating its bonds on foreign markets. Brussels did not blackmail Athens into adopting the euro in 2002 – in fact, Greece browbeat skeptical EU members, like France, into letting it join, precisely because it wanted to exchange monetary “flexibility” (i.e., uncertainty) for monetary stability. And Greek voters were not intimidated into electing a succession of governments that conveniently ignored one of the most lax tax regimes, generous pension systems, over-staffed bureaucracies, and ridged labour markets in the Organisation for Economic Co-operation and Development – and then “cooked the books” to hide the extent of the problem. By the same token, there is nothing stopping Greece from deciding to leave the euro or default on its debts – as Argentina did in 2002 or as Russia did in 1998.
Europe’s problems are also of its own choosing. European governments chose to turn a blind eye to the serial deficits of Greece, Portugal, Italy, and other Eurozone members. Indeed, export powerhouses, like Germany, have benefited enormously in selling everything from cars to telecommunications equipment to debt-fuelled southern consumers. European banks, until it was too late, chose to ignore the inherent risks of lending to an increasingly insolvent Greece – even though Greece has spent half of the past two centuries in default – just as European financial regulators chose to ignore their banks’ dangerous over-exposure to sovereign debt. In the same way, the solution to the European Union’s escalating financial crisis rests in Europe’s hands: Bail out the indebted South, ramp up exports to the creditor North, and/or allow Europe’s periphery to default or devalue (i.e., leave the Eurozone). What’s stopping Europe is its own bickering and dithering over whom picks up the tab for past mistakes and how to share the inevitable economic and social pain.
Indebtedness is rarely empowering. Bankrupt countries – like bankrupt individuals – want to blame financial markets for their misfortunes, but the main cause is their own short-sightedness, reckless policies, and resulting vulnerability. They find themselves at the mercy of capital markets, sovereign lenders, or the IMF, simply because they want to borrow money. And, if their fiscal situation is dire enough, they have relatively little say over the conditions (higher risk premiums or explicit policy reforms) that wary foreign lenders attach to their loans. This same basic dynamic explains the relative weakness of all deficit countries – Greece, Italy, Spain, even the “mighty” United States – versus the relative strength of surplus countries – Switzerland, Singapore, or China. It’s worth noting that no one is telling Singapore how to tighten its tax system or slash social spending. That’s why, since the 1997 Asian financial crisis, so many developing countries have rushed to cut current account deficits and accumulate foreign reserves. Never again was the IMF going to interfere in the domestic affairs of Korea under the threat of withholding financial first aid.
Even so, what’s striking about the Greek financial crisis is how fears about its knock-on effects have probably increased Greece’s influence – proving the adage that if you owe the bank $1,000 it’s your problem; if you owe the bank $1,000,000 it’s the bank’s problem. Europe wants to avoid a Greek sovereign default because it will turn the spotlight on other low-growth, high-debt Eurozone members, as is already happening with Italy, and highlight the vulnerability of Europe’s banks. The world wants to avoid a Greek default because it will expose how badly over-leveraged the whole global economy has become, highlighting our failure to undertake the painful task of transferring wealth from creditors to debtors, through default, inflation, or fiscal rectitude. Some countries, like Canada, feel smug because their national accounts are relatively healthy; other countries, like Britain, feel superior because they stayed out of the Eurozone. But if Europe slips into recession, or worse, the Eurozone cracks up, the whole world will feel the repercussions.
Doesn’t this mean that economic integration (i.e., globalization) undermines sovereignty? Not unless you believe that the splendid isolation of a North Korea or a Myanmar makes them world powers. Countries open up to trade and investment because it is in their economic interests to do so. They agree to abide by international rules because they want other countries to live by the same rules. And they join international organizations because in tackling shared global challenges, their sovereignty is increased, not diminished, by working in concert with others. In short, integration is a choice, with consequences.
The idea that globalization makes national governments unnecessary is even less valid than the idea that it makes them powerless. For countries to successfully harness globalization, inspired public policy – sound finances, effective regulation, empowering social programs, rigorous and creative education systems, state-of-the-art infrastructure – is more critical than ever. If globalization punished social democracy then Sweden would be on the way down and Nigeria would be on the way up. If globalization rewarded low, or no, regulations, Bangladesh would be the star and Singapore would be the failure. If globalization was all about unfettered banking and bigger bonuses, the United States would be riding high and Canada would be on its knees. Policy matters, in a competitive, integrated and fast-changing world more than ever.
That globalization is imposed on us, strangling our sovereignty and freedom, is the “big lie” of the modern age. In fact, globalization is the exact opposite. It’s all about the decentralization of economic power and the supremacy of individual choice. What drives the global marketplace is the pressure of consumers, electorates, you and me, for more growth, better jobs, higher living standards – the latest gadgets, nicer vacations, better health care, improved education for our kids – which in turn pushes governments to join, not retreat from, globalization. It could even be argued that what people find most scary about this unstable, unpredictable, fast-globalizing world is the result of too much choice, too much individual empowerment, even too much freedom – but that’s a subject for another day.
Photo courtesy of Reuters.
The Club That Matters
G20 leaders meeting in Cannes, France, like to pretend they are the world’s executive board. But real power increasingly lies with a more exclusive club—call it the G2—comprised of the U.S. and China.
Europe has effectively dealt itself out of a global power role because it can’t manage itself—as the paralysis over Greece makes embarrassingly clear—let alone project a unified foreign policy. As long as Britain, Germany, France and Italy insist on their own seats at the G20 table, the E.U. president might as well stay home. Japan could be a bigger global force, but it shuns the limelight (and responsibility). India, Brazil, and Russia dream of global power status, but they remain regional players. Meanwhile, Canada is in the club because the U.S. wants a friend. Australia is in because Canada is in. Argentina and Mexico are in because Brazil is in. And Turkey, Saudi Arabia and South Africa are in because… well, no one quite knows why they are in.
It is U.S.-China agreement—or, more likely, disagreement—that matters on all the big issues. Take global imbalances, the subject that should have been at the top of the G20’s agenda were it not for Europe’s ADD. The instability and uncertainty that has rocked the global financial system for a decade will only get worse as long as China—the world’s biggest exporter and saver—accumulates ever larger surpluses, and the U.S.—the world’s biggest importer and consumer—accumulates ever larger deficits. Although the problem is global, the solution rests mainly with the U.S. and China.
The same is true of the deadlocked Doha Round of free trade talks. With a $45.6 billion trade deficit in August, imports from China exceeding exports by a factor of four, and real unemployment approaching 16%, the U.S. desperately needs China to cut tariffs and stimulate imports if it is to have any hope of selling a global free trade deal at home. But the U.S. has limited leverage since its market is already largely open and China’s export powerhouse benefits enormously from the status quo. So world trade negotiations—already in their 10th year—remain on hold until the U.S. and China figure out how to untie this Gordian knot.
It’s a similar story with climate change negotiations. Even if the U.S. were prepared politically to commit to more radical and immediate carbon emissions targets, it will not do so without China—the world’s second biggest economy and already the biggest C02 emitter— moving in lockstep, not least because of fears that a decision to “go it alone” would place U.S. manufacturing at a competitive disadvantage vis-a-vis China’s industrial machine. As with free trade, a global breakthrough on climate change will only result from a China-U.S. breakthrough.
What places America and China in a league of their own is shear economic weight. Despite the housing bubble collapse and lingering recession, the U.S. economy still represents almost 20% of world output and China’s economy over 14% (calculated at purchasing power parity). In comparison, Brazil makes up only 2.8% of the global economy, Russia 3%, and Canada 2%. Just as significant is the way the U.S. and China have grown so economically intertwined, even co-dependent—as a result of mutually reinforcing trade and financial flows—despite their political differences. Chinamerica—Niall Ferguson’s label for their symbiotic relationship—has essentially become the core of globalization.
Likewise, when the U.S. and China clash, the reverberations are felt worldwide. Frustrated by repeated failures to persuade China to raise an undervalued Renminbi, the U.S. Senate has passed legislation that would allow America to slap punitive trade sanctions on China for unfair currency manipulation. At the same time, the U.S. is effectively de-valuing the dollar—and flooding the world with liquidity—through its policy of quantitative easing. In response to the global shock waves emanating from China and America, a number of countries (notably Japan and Switzerland) have been aggressively intervening in money markets to drive down their exchange rates, while Brazil is threatening unilateral tariff hikes to cope with a fast-rising Real. With good reason, Brazil’s finance minister has warned darkly of coming “currency wars” if the U.S. and China do not get their acts together.
Does this make the G20 pointless? Not at all. It provides a useful way to shroud our bipolar world in a cloak of multilateralism. It allows helpful countries, like Canada, to inject creative ideas into the policy mix—ideas that, curiously, great powers often seem lack. And it encourages the 18 other actors in the G20 drama to take collective ownership for what are effectively bilateral decisions. But while the G20 provides lofty communiqués and great photo ops, no one should be under any illusions that it is calling the shots. That’s the job of the G2.
Photo courtesy of Reuters.
The Great Confusion
At one point last Thursday, the Dow Jones industrial average plunged a heart-stopping 527 points on new recession fears. Six weeks before it soared 430 points on signs of recovery—its tenth highest point gain in history. That was just a day after its worst decline since 2008—a 635 point plunge—amid worries about US and European finances. If there’s one thing the market is clearly telling us, it’s that it has no clue where the US—and global—economy is headed.
This uncertainty has infected the economic debate. Everyone is looking for the magic policy that will fix the economy—especially in the US, where an election is looming—but it’s hard to agree on the right policy “fix” when no one agrees—even three years after the financial crisis—on the source of the problem. Are we mainly suffering the aftershocks of the burst US housing bubble? Or the future shocks of fast-rising China, India, and other emerging giants? Is the problem too little fiscal stimulus, as Paul Krugman and other Keynsians remind us ad nauseum? Or too much debt, as the dour disciples of von Mises and von Hayek would have us believe? Is this the brink of economic collapse, or the cusp of economic boom?
No one knows. This uncertainty partly explains why the policy debate in the US, as elsewhere, has become so shrill and polarized—as if arguing a case loud and long enough will make it true. Uncertainty about the future—ironically—has also made the debate even more dependent on the “insights” of long-dead economists and the ”lessons” of economic history—with Hoover, Keynes, and the Great Depression haunting the current economic drama as pervasively as the King haunted Hamlet.
Which is perhaps the biggest problem. We are all looking in the rear-view mirror when the one certainty about today’s economy is the way it’s being utterly reshaped by technological change—a process which, almost by definition, obscures the future and renders existing models obsolete. Signs of massive economic transformation are everywhere: Google growing from university start up to the world’s most valuable brand (worth a staggering $48 billion) in just over a decade; the US suffering simultaneously from high unemployment and acute labour shortages; a global economy whip-sawed between massive western deficits and massive eastern surpluses; China’s and India’s billions industrializing at a pace never seen in history—and that will never be seen again.
This is Schumpeter’s “creative destruction” on steroids.
In the long run (and if we don’t screw up), the deep structural changes that are reshaping the global economy—innovation, integration, accelerating development—promise not just a brighter future, but one that’s quite literally ’unimaginably’ brighter. But in the short-run, change is unsettling—a recipe for uncertainty, disruption, a world gyrating wildly between hope and fear.
So forget the “Great Recession”, the “Great Stagnation”, the “Great Bubble” and all the other Great Events that experts confidently predict will define the future. Get used instead to the Great Confusion—and learn to live with, if not love, the roller-coaster ride that’s modernity.
Photo courtesy Reuters.
Globalization’s Achilles Heel
Who is to blame for the financial crisis engulfing Europe – and possibly the world? The frivolous Greeks? The dithering politicians? The hubristic architects of Europe’s single currency? All these actors have played a part, but the main culprits – as with America’s financial meltdown three years ago – are surely the banks.
Somehow this story has morphed into a morality tale about the folly of the European Union and the bankruptcy of social democracy. This is blaming the victim for the crime. Sure Greece borrowed beyond its means, as did the governments of Portugal, Italy and others. Sure its over-generous welfare state – and sieve-like tax system – was unsustainable. And yes the single currency led Greece, like other euro-zone members, to believe it could borrow endlessly on the same market terms as Germany.
But the real cause of Europe’s financial crisis is not government, socialism, or the false security of the euro-zone – it’s the banks who lent so recklessly and lavishly to overstretched governments, and now find themselves facing insurmountable losses if (or rather when) Greece and others default. To focus on the failure of Greece to borrow prudently is to miss the much bigger and systemically critical failure of the banks to lend prudently – and to recognize the risks of Greek debt (even when denominated in euros), given Greece’s record of serial financial crises since 1945.
The failure was spectacular. By some estimates Europe’s banks are in worse shape than America’s. According to the Wall Street Journal, the total debt of the big three U.S. banks (Bank of America, JP Morgan and Citigroup) is $5.86 trillion, or 39% of GDP, while the debts of France’s giants, BNP, Crédit Agricole and Société General, amount to euro 4.7 trillion, or 250% of GDP – a suicidal level of exposure concealed up till now by regulators apparently more focused on protecting the incestuous network of bankers, bureaucrats and politicians that dominate French finance than shedding light on the health of the financial system.
This threat of a banking collapse – and an implosion of the financial system – is the gun being held at European governments and taxpayers. The debate now is no longer about how Greece will repay or whether it will default – clearly little more can squeezed out of Greece – but about who will pick up the tab for the banks’ blunders.
Many blame the Euro ‘straight jacket’ for the crisis, arguing that it prevents Greece from devaluing its ways to economic health. But how would returning to a drastically devalued Drachma improve banks’ balance sheets, the core of the problem? Devaluation is just default by another name. Others point the finger at the E.U., arguing that its rambling, decentralized structure has made policy coordination difficult and left no one institution in charge. But how would dismantling the E.U. – disintegrating Europe- improve coordination and efficiency? Back-to-the-future proposals are a recipe for even more chaos.
Besides these debates obscure the real question – what to do about the banks, the Achilles heel of globalization? Despite Basel III, despite G-20 pledges, despite promised domestic reform, we still find ourselves in a world where spectacularly ill-judged decisions by too-big-to-fail banks threaten to bring the world financial system to its knees – and to unravel not just European but global integration.
Thomas Jefferson supposedly claimed that ‘banking institutions are more dangerous to our liberties than standing armies.’ As the global economy stumbles again – for the second time in just three years – it’s hard not to be reminded of his warning.
Photo courtesy of Reuters.
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