28 September 2011

Bruegel: Transatlantic relations and globalisation in time of crisis?

It is impressive to compare these indicators with the prospects for 2050. Such long-term perspective suggests a profound long-term change going forwards. In the century from 1950 to 2050, the share of Europe and European Offshoots will have fallen from about 57 per cent to about 40 per cent of world GDP. Western Europe will have fallen from 26.2 per cent to 17.9 per cent, and the US from 27.3 per cent to 19.6 per cent. In the same period, Asia will have moved from about 18.4 per cent to 36.5 per cent. To a very large extent these trends reflect the reversal of the Great Divergence that took place from the mid-1700s to the mid-1950s and led to dominance of World Trade and Finance by Europe and European off-shoots.

The shifting patterns of power going forwards are clear. Effective cooperation and coordination in the global economy require that governance of multilateral organisations and groups adapts to these changing patterns. The process of transition may be characterised by growing multipolarity. There can be no guarantees that the transition will proceed smoothly. A cooperative and multilateral approach (that I am tempted to label the European approach) is only one possible way to conceive the transition. But, in whatever way it occurs, the transition at global level will have profound effects on transatlantic political, economic and financial relations. Global transition is a powerful undercurrent that persistently influences transatlantic relations.

This undercurrent operates today in an environment dominated by the Global Crisis. The Crisis is often referred to as the first crisis of Globalisation. If that were the case it would be without historical precedent. However, I think it is the case that our crisis is one of few crises on record that affected the very core of the international financial system. Dates that come to mind are 1825, 1873 and 1929. In all these cases history bears witness of profound changes in economic and financial regimes. The same can reasonably be expected also this time around.

In Washington, the sovereign debt crisis in the euro area, together with banking fragility, was lively debated and widely regarded as the single most important risk for the global economy. At the same time, developments in the United States are also a cause for concern with persistent high budget deficits and increasing debt ratios combined with a weak economy. Risks affecting global developments are identified as centring in the north Atlantic area. Specifically, the IMF in its World Economic Outlook identifies the two main risks for world economic prospects as: “The first, that the euro area debt crisis runs beyond the control of policy-makers, notwithstanding the strong political response agreed in the July 21, 2011 EU summit … Leaders must stand by their commitments to do whatever it takes to preserve trust in their national policies and the euro.” And the WEO continues: “The second is that activity in the United States, already softening, might suffer further blows—for example, from a political impasse over fiscal consolidation, a weak housing market, rapid increases in household saving rates, or deteriorating financial conditions. Deep political divisions leave the course of US policy highly uncertain.”

And the WEO concludes “Either one of these eventualities would have severe repercussions for global growth. The renewed stress could undermine financial markets and institutions in advanced economies, which remain unusually vulnerable. Commodity prices and global trade and capital flows would likely decline abruptly, dragging down growth in emerging and developing economies. The extent to which this could lower global growth is illustrated in more detail in a downside scenario––the euro area and the United States could fall back into recession, with activity some three percentage points lower in 2012 than envisaged in WEO projections. Damage to other economies would also be significant.”

It seems likely that the fact that Europe and the US are now perceived as at the root of the two most important sources of risk for the global economy will accelerate the shifting in patterns of power that would likely occur in any event. Relative positions are changing rapidly and a new paradigm seems to be closer. It is clear that in this context the world governance model will need to change. Europe and the US should be prepared to work constructively to adapt global governance as required

The financial crisis has represented a turning point for global governance, both politically and economically. The crisis has spread globally through strong economic and financial linkages. In fact, the inter-linkages and the spill-over effects across countries were evident as never before. In this context, a new willingness to engage in multilateral co-ordinations and co-operation became apparent.

However, further progress is necessary. The economic and political power will need to be reorganised so that it can include rising powers. This change will inevitably require the involvement of more countries in the centre of world’s decisions. The G20 meetings are a clear example of this change. This is a further example of the relevance of the reference to multipolarity.

The United States and the European Union have a lot in common. Fundamental values range from democracy and human rights to the market as the predominant resource allocation mechanism. A recent survey of the German Marshall Fund (released in July 2011) contains much interesting material and illustrates many important points. Let me give you just a few examples. To the question “How desirable is it that US exert strong global leadership?” 85 per cent of Americans find that desirable and 14 per cent undesirable. For the EU12, the balance is also positive with 54 per cent and 39 per cent respectively. When the same question is asked about the EU, 69 per cent of Americans are positive while only 20 per cent find it undesirable. The corresponding proportions for the EU12 are, respectively, 76 per cent and 18 per cent. Interestingly, to the answer to the question “To what extent do you agree with the following: economic power is more important than military power?” 85 per cent of respondents from EU12 agree, while the majority in agreement in the USA is also quite impressive at 71 per cent.

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