The weary titan

Nov 9, 2010

By Pierre Buhler

THE unfolding 'currency war', which is likely to dominate discussions at the Group of 20 (G-20) summit in Seoul this week, must be assessed against the backdrop of the new landscape of power - a landscape transformed in just two years by the first crisis of the globalised economy.

The crisis has left a number of developed countries in a severe slump and scrambling to bring about a healthy recovery. By contrast, emerging-market countries, after a short slide, have managed to reignite their growth engines and are racking up impressive growth rates.

There have been financial and monetary consequences as well. Although no currency is as yet qualified to replace the US dollar as the world's reserve currency, this 'exorbitant privilege' that the Americans have enjoyed, to use Charles de Gaulle's phrase, has come under stealthy attack.

In March, the Asean Plus Three grouping, which includes the 10 member-states of Asean as well as China, Japan and South Korea, established a reserve fund of US$120 billion (S$154 billion), under the so-called Chiang Mai Initiative. Unlike in 1997, this time 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 euro zone's weak governance and revived doubts about the viability of a monetary union with large competitiveness gaps between its member-states.

The crisis has also intensified political problems. Japan, arguably the hardest hit, faces an increasingly severe demographic and governance crisis, highlighted by the recent loss to China of its status as the world's second largest economy.

Finally, the crisis has shattered the ideological dominance of the West. In previous decades, financial crises often originated in emerging economies, sanctimoniously patronised by the 'virtuous' West and its institutions. This time, powered by the dogma of self-correcting markets, the storm formed at the heart of the world economy, the US.

The natural instinct of many is still to look at the American economy, towering over the rest of the world with its US$14 trillion gross domestic product (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 provided hegemonic stability to the global economy seems to be having difficulty continuing to do 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 per cent of its GDP and set to soar to US$18.4 trillion by 2018. When the implied liabilities of the Social Security and Medicare systems are added, 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 America's fundamental problems, adding to the impression of a giant with clay feet.

In place of a world in which America guarantees global prosperity and stability within a liberal order, there is the risk of a world replete with conflict, 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 Group of Seven.

But can the G-20 deliver on its promise? The differences between the G-20 states - 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 multi-polar 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.

Military dominance alone will be unable to confer authority, as the Afghan quagmire reminds us every day. Having succeeded in integrating the West through prosperity and security following World War II, America must begin to craft a new global leadership structure.

The task is even more daunting now than it was in 1945, for today a number of fiercely independent-minded, aspiring world powers must be herded into the global order. As the main architect of globalisation, the US must, even in its weariness, summon its creative resources.

The writer, a former French ambassador to Singapore, was an associate professor at Sciences Po, Paris.

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