Wednesday, October 8, 2008

End of America? Not so fast

Oct 8, 2008

From the current crisis, US will emerge humbler but still a superpower

By Jonathan Eyal

THE torrent of bad economic news shows no signs of abating. Yet many Europeans already claim to know how the crisis will end:�with the collapse of US global domination, similar to the end of the British empire half a century ago.

'Capitalism in its current form is dead,' French President Nicolas Sarkozy proclaimed last week. 'The US will lose its status as the superpower,' added German Finance Minister Peer Steinbruck.

Barely two decades ago, the so-called 'Washington Consensus' - advocating free markets, free elections and free everything else apart, perhaps, from love - was the dogma that ruled the world. Those who preferred other approaches were dismissed as freaks, outcasts from what the United States saw as the 'international community'.

But now, the country of unfettered capitalism has intervened in its economy on a scale not seen since the 1930s. Ancient investment banks with globally recognised brand names have disappeared, and the US real estate market has essentially been nationalised. The American model is surely consigned to history's dustbin.

And yet, to paraphrase the writer Mark Twain, reports of America's imminent demise as a superpower remain greatly exaggerated. The current crisis may be severe, but it is not comparable to the Great Depression of the 1930s, when thousands of banks failed, millions of people lost their savings and 25 per cent of Americans were jobless.

Despite its current difficulties, the US economy still towers above the world. It is equal to the combined size of the economies of the next four top trading nations, three times as big as Japan's and almost five times bigger than China's.

True, others are growing faster. Nevertheless, those considered as future big powers will need decades of uninterrupted growth to realise their dreams.

India's total economy is currently less than one-twelfth that of America. In terms of per capita income, China stands 99th in the world.

US economic power is also complemented by military might. Washington is responsible for half of the world's total defence expenditure and a whopping 80 per cent of all weapons development.

Believers in the theory of America's eclipse argue that the process need not to be sudden: A US decline can be gradual, but still inevitable.

The problem with this argument is that it was put forward many times before, and invariably proven wrong. After World War II, the Soviet Union hunkered down to a Cold War, in the sure knowledge that US capitalism was 'doomed'. The Soviet Union went down instead.

After the Vietnam war, similar predictions were made: Humiliated in a military campaign and torn from inside by racial conflicts, the great republic was apparently declining. But it didn't.

And only a few decades ago, experts were projecting that Japan's economy would overtake that of the US. Then came the age of private computers, software and the Internet, and Japan was left behind.

Of course, past performance is not necessarily a guide to the future. With less than 5 per cent of the world's population, US supremacy is neither granted nor interminable.

But the alternatives to America's primacy are not immediately apparent. Capitalism in its current format may be 'dead', but there is no replacement ideology: tighter regulation of markets is the only bright idea.

Nor is there an obvious alternative to the US greenback. Those who are attracted by history suggest China's yuan could be the reserve money of the future. Perhaps. But people will have to be persuaded that the yuan will remain easily convertible and, more importantly, that it is a good store of value.

The euro - Europe's single currency - looks like a more formidable competitor to the US dollar. At its launch in 1999, it accounted for less than a fifth of the world's official reserves; today, this has increased to around a quarter. But the silly behaviour of individual European countries at the moment - rushing to defend their own banks, often at the expense of their neighbours - has raised serious doubts about the future of the euro.

The reality is that Europe is now embroiled in its own financial crisis. Hardly a reassuring recommendation for the world's future currency.

The US runs huge budget deficits, which other countries finance. Theoretically, if the world stops doing so, America will be in trouble.�But the old adage still applies: If you owe the bank $1,000, you have a problem, but if you owe the bank $1 million, the bank has a problem.

Up to two-thirds of the world's foreign exchange reserves are in greenbacks. Selling such large quantities will result in massive losses for national treasuries.

None of these arguments suggests the current crisis should be ignored. America's reputation has suffered a painful drubbing: Never again will Washington be able to preach prudent housekeeping or good governance; it has itself failed on both counts.

Former French president Francois Mitterrand once prophetically said, 'Growth is in the East, and debts are in the West'; if the process is not reversed, strategic consequences are sure to follow.

But the result may not necessarily be the emergence of a 'multi-polar' world. Instead, we are more likely to witness the creation of a non-polar environment: America will have to make larger concessions to its chief economic creditors, yet still have the greatest political and military influence.

We have been this way before. During the late 19th century, the British pound's share of the world's currency reserves was never bigger than that of the French franc or German mark combined. But Britain still ruled supreme.

And so it may prove to be with the current financial meltdown. Out of this may come a more humble US, very much still a superpower, but one which no longer has the luxury to pick either its friends or enemies. It will be the one cheerful conclusion to an otherwise miserable period.

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