It has to be, without a doubt, that the fall of the Berlin Wall and the subsequent collapse of communism constituted the single most transformative event of the past 40 years. Since man walked the surface of the moon, the collapse of communism signified the predominance of ‘one’ over the ‘other.’ A New World Order was beginning, in which the U.S. stood preeminent – the single economic and military superpower. However, this very victory led (inevitable some would say) to the end of American hegemony over the world.
No, it was not the events of September 11th, 2001 and the subsequent ill-advised and ill-executed wars of Iraq and Afghanistan that revealed the true nature of ‘the emperor new clothes.’ Rather, it was a financial crisis which originated in the U.S. and caused a GLOBAL recession that exposed both the weaknesses of free markets and the vulnerabilities of the American financial system (the pride of capitalism as we know it). The financial crisis exposed the interconnectedness of this new (post soviet) world – a world that the U.S. cannot control (nor fix) on its own. This New World Order is a ‘triangle’ one in which the U.S., the EU and China will share both the blame for any problems and provide the solutions for future crisis.
When I say China I also include the nations of Eastern and Southeastern Asia. Japan, South Korea, Taiwan, Singapore, Indonesia, and the rest of Indochina, together with China form a closely integrated market with overlapping investments, supply chains and trade dependencies – an informal precursor of the EU’s common market. I identify China as the ‘central’ piece of this economic juggernaut, and believe that in the near future China’s economic performance will dictate growth in the rest of the region.
As we know by now, the global recession was caused by a housing bubble in the U.S., fueled by the greed of the financial sector flush with foreign money. EU banks and other global investor’s poured money into the U.S. housing market through their investments on Wall Street banks. U.S. banks were able to loan money for houses due to low interest rates. Interest rates stay low because of foreign purchases of U.S. government debt (U.S. Treasury Securities), by China, Japan and the oil-producing nations. Low interest rates fueled consumption of cheep goods from China and further outsourcing of U.S. manufacturing. The global shift of manufacturing to China and the surrounding region further exacerbated the global trade imbalance with the U.S.
The greatest economy in the world was supposed to fully accommodate global trading needs, and be both a safe destination for their hard-earned savings and a reliable consumer for their goods. Well, guess what? The emperor mistakenly thought that he was fully covered!
China, and the rest of the region, relies heavily on exporting to the U.S. and EU for economic growth. As the U.S. and EU consumption drops, so will the region’s economic prosperity. China needs to increase domestic consumption to deal with future sluggishness of the U.S. and EU economies. Furthermore, China (like other developing countries) has been investing its hard earned money from exporting in U.S. government debt. As of March 2011, China and the other regional economies held $2.5 trillion of U.S. government debt out of a total $4.48 trillion held by all foreigners. Such an exposure demands diversification.
Therefore, China needs a functioning EU market with a stable and reliable currency, to be both an alternative to the U.S. market for its exports and to operate an alternative reserve currency. China should be helping to stabilize the sovereign debt crisis in the EU. On the other hand, the U.S. (and to a certain degree the EU as well) need not only to cut government debt, but also save more and invest domestically. The U.S. needs to do what it does best, which is innovate! The U.S. must put into productive use its own savings and that of other countries by creating the next technological evolution – which will lead to the next economic breakthrough, and the creation of new industries and new products.
Finally, the EU needs to stay the course and pursue further integration, both economic and political. The ‘United States of Europe’ must be a reliable market domestically with a reserve currency internationally, but also a partner for global stability and security. Further successful EU integration can inevitably produce a global power capable of checking Russian ambition in the region, alleviate poverty and civil unrest in Africa and the Middle East, and champion environmental protection and human rights around the world.
The ‘Arab Spring’ –
Furthermore, everyone monitoring the developments in North Africa and the Middle East can’t help but notice what is common among the revolting populations of the ‘Arab Spring.’ The people of the Arab world have lived for far too long under authoritative regimes and they have recently experience an increase of their economic disparities. The dictators have been the same for the past 30 years (in most of these countries), but what is new is the increase in income disparities heightened by a sudden spike on food prices throughout the region.
The big question about uprisings against corrupt and oppressive regimes in the Middle East isn’t so much why they’re happening as why they’re happening now. Many believe that sky-high food prices have been an important trigger for popular rage. The rise in food prices can be attributed to both inflation in China and global weather developments. China’s overheating economy is leading to inflation, which along with other weather conditions around the world, is contributing to the rise in global food prices. That recent development has put new pressures on the cost of living of citizens around the Middle East, which has contributed to the willingness of the people to “risk everything for a better tomorrow.” What is happening in China is having a direct (intentional or unintentional) effect around the world, including the revolts in the Arab world.
Global Economic Interconnectedness –
From the U.S. housing market to the EU’s sovereign debt crisis, and from inflation in China to civil unrest in the Arab world, local developments in the U.S., China and the EU are impacting each other and the global economy in dramatic fashion. The economies of the U.S., the EU and China, are interconnected in a way that their respective growth and prosperity are directly linked to each-others successes and failures. Global cooperation will be mandatory for future growth, and failure by either one of the big three (U.S., EU and China) to understand the symbiotic nature of the global economy and focus only on their domestic problems will be detrimental to the global recovery.
The next few years will be very critical to the global economy and world prosperity. Will China’s rise damage recovery efforts in the West, or will slower demand in the West doom China’s efforts to grow? Will U.S. and EU cooperation facilitate the ‘Arab Spring’ and usher in a new era for human rights and development in the region? Will China help support the Euro, or will the European sovereign debt crisis cause a second global financial crisis? OR will the big three see that only through cooperation they can grow the ‘global economic pie,’ protect the environment, stabilize global financial and currency markets, and nurture the citizens movement in the Arab world?
So far, the indications are not very promising for global cooperation. Stay tuned…