For those not shaken enough by the Greek financial crisis (and this is more than possible as the Greek’s spending behavior seemed so abnormally destructive and self deluding, in other words ‘that’s the Greeks, not us’) the collapse of the Irish debt situation should get your attention. More importantly, it should awaken those tasked with running the United States government. The Wall Street Journal breaks down the steps Ireland will need to take to get their house in order (emphasis mine):

The measures are draconian. The government plans to shed nearly 25,000 public-sector jobs, slash welfare spending and reduce the minimum wage. A new property tax will be introduced, water charges imposed, and the tax base expanded to bring in lower-income earners. It all adds up to €10 billion in cuts and €5 billion in taxes over the next four years.

Ministers argue that such radical measures are needed to tame Ireland’s gargantuan budget deficit, which this year stands at 32% of GDP—the largest in Europe—and to reasssure investors who have stampeded out of Irish government debt. Yields of Ireland’s 10-year bonds reached a record Friday of nearly seven percentage points above benchmark German bunds.

Yikes. Though the US debt level is no where near Ireland’s astounding 32% level, it is solidly moving in the wrong direction. Ireland is now forced to live the worst of both worlds for a modernized economic state: higher taxes and less government services.

Economist Robert Samuelson describes the Irish bailout’s fallout for the rest of Europe:

The proposed rescue of Ireland, as with Greece before, represents a gamble that Europe can arrest growing doubts and win the patience of bond holders and voters: the investors not to continue dumping bonds (of Ireland and other countries) in panic, which raises interest rates and could precipitate a self-fulfilling financial collapse; and the ordinary citizens to tolerate austerity (higher unemployment, lower social benefits, heavier taxes) without resorting to paralyzing street protests or ineffectual parliamentary coalitions. Whether the gamble will succeed is unclear, as are the potentially chaotic consequences if it doesn’t.

With Portugal on the docket, and much more critically Spain (whose economy is bigger than Ireland, Portugal, and Greece’s economies combined), the EU is undoubtedly facing a financial crisis. When will the German voters bankrolling these bailouts say ‘enough’s enough’? Will the protests in Britain and France over government decisions to either cut back on education spending or raise the retirement age start to paralyze their respective state’s ability to address their growing debt issues?

These crises in Europe may not only foreshadow a future one in the United States, but according to Dr. Robert Shapiro, who served as Under Secretary of Commerce for Economic Affairs in President Clinton’s administration, they may negatively impact our economy drastically right now. Shapiro argues that “a default in Spain would endanger French and German banks and that would have serious consequences for U.S. financial institutions because they all have counterparty risk. Just as Lehman Brothers spread to Europe, a European banking crisis would spread to the United States.”

Many Western states have been living a life of getting their cake and eating it too. ‘I want low taxes and lots and lots of entitlement goodies.’ This combined with a willingness to pay for this all by letting others buy your bonds is unsustainable. In many ways, I view the rioting teenagers and college students in Britain and France as rather pathetic. The situation they’ve been handed is almost entirely not their fault, but now their just worried about getting to eat their cake. Want another metaphor? These youth are seemingly willing to throw good money after bad. Well, the way these governments have spent, more like bad money after bad.

For a worthwhile debate on the present and future role of American government and spending, I highly recommend this debate between Congressman Paul Ryan and New York Times columnist David Brooks.

In a review of Martin Wolf’s ‘Fixing Global Finance,’ IR scholar Professor Harold James states: 

International financial institutions have largely stood on the sidelines of the meltdown. Since the end of World War II, there has been a belief that international cooperation can tackle major problems. But that faith is now being tested. The current financial collapse is the first international financial crisis since the 1944 Bretton Woods Conference in which the International Monetary Fund has played no role at all in tackling the causes of the problem and only a secondary part in managing its consequences. In addition, the current financial crisis threatens to trigger trade protectionism precisely at a time when the sputtering of the Doha Round of multilateral trade negotiations has weakened the World Trade Organization. Institutions such as the IMF and the WTO have become largely ineffective and irrelevant because of a general shift away from the belief in a rule-based international order and toward a Machiavellian view of the world in which power is all-important. Critical decisions about an international response to the financial crisis have been left largely to the G-7 (the group of highly industrialized states), a patently unrepresentative body that excludes major new centers of global savings and trade surpluses, such as China.

Is the faith in international institutions and cooperation being tested?  Definitely.  Has there been a ‘shift’ away from a belief in rules-based international order and toward a ‘Machiavellian’ view of world relative power overcomes all other considerations?  Well, this one is a bit more complicated to answer.

James and Wolf are correct in their analysis that the current economic crisis is causing states to become more insular and weary of other governments, states, and international institutions adversely affecting their bottom line.  Though it was only a couple months ago when most of the world’s significant economies sent representatives to DC to figure out a multilateral way to mitigate the ongoing disaster, the world’s states have not made much progress as a whole.  States are concentrating on their own crisis.  For instance, the US is enamored with the Obama’s trillion dollar stimulus package, not how we should reinvent the IMF or World Bank.  The same can be said for Europe and China.  Though there have been calls for a Bretton Woods II, it is having trouble getting off the ground and Obama has not emphasized a dramatic international shakeup as of yet.

These inward-looking policies are not surprising and I think they will be slightly temporary, at least in their intensity.  I actually don’t believe that a great change has been made because as I see it, these states have for the most part been selfish, power seekers for years now.  When states worked with each other in the IMF, WTO, etc. they were there to further their own interest, but hopefully in a way that would help others as well.  The IMF is definitely facing a crucial turn and needs reform (James and Wolf offer interesting solutions, but they seem to encroach on state sovereignty a bit much), but didn’t it before?  

I guess your starting viewpoint of how/why state’s act will strongly impact how you see the impact of the global crisis on international integration.  How do you see it?  Hopefully you’re not as confused as I am right now!

Fresh off the foreign policy presses, Foreign Affairs magazine’s newest issue has an article by Roger C. Altman analyzing the economic crisis and makes several claims about the decline of the West and the rise of China. Here are some of his claims that are worth discussing:

1. The US and the EU will have neither the resources nor the economic credibility to continue to hold their current integral positions in world affairs. The world’s center of gravity is shifting away from the United States.

2. China is the state most likely to gain from the West’s loss and will become a stronger relative global player.

3. The US financial system, which has been a crucial aspect of US soft power and ‘intellectual strength,’ is seen to have failed.

Let’s start with the one which has the strongest base, No. 2. Though China has indeed been adversely effected by the global economic crisis, it is true that it is in a stronger financial position than the West, as its financial structure was not nearly as compromised and its tremendous federal reserves provide shelter. As the American and European budgets contract, China will find more places around the globe to fill foreign investment gaps, especially in states rich in energy resources. China’s increasing influence around the globe will be a most definite outcome of what is turning out to be a tumultuous economic period.

"Everything's all right. I Swear!

The other two claims are a bit more cloudy. Yes, it is true that the US and Europe will have fewer resources, especially to use abroad. And yes, these states will start to look inward at their own problems and be less concerned with ones in ‘far off places’ as Obama’s political campaign detailed. But it is not like the United States and Europe are bankrupt. They are far from it. The United States just gave Georgia a Billion dollar bill, is raising its troop presence in Afghanistan by 50%, and as was discussed here a few days ago, increasing its foreign presence in such places as Sub-Saharan Africa. However, it is very likely that foreign endeavors, even ones with little controversy, will face greater political battles and hurdles in America’s near future, as budgets and tax revenues continue to decline.

The third claim by Altman is probably even more serious than the other two. Has the US/EU global capitalist economic system been compromised? Have the world’s leaders and citizens lost faith in its ability to bring growth and prosperity? Though the system has had its detractors and a far from perfect track record, many states in the global south have failed to experience the prosperity of the global north, since World War II and especially since the end of the Cold War, the American lead system has been seen as a way to wealth and higher standards of living. Is this now gone?

The actions of the US and European government’s themselves show a West that is itself shaken and losing confidence. Governments have started to buy up ownership in the banking and financial sectors and the US federal government just gave the automakers a large loan with many stipulations as to how they have to operate their business. It is widely expected that an Obama administration, along with several others in Europe and around the world, will ratchet up regulations, furthering government’s grasp into the private business sector. If the Americans are becoming less capitalist and more regulatory, than why should we other states and leaders profess confidence in the capitalist world economy? Look what has happened to us!

Altman’s claims are important for us to debate, especially the third one. Do you think the US has lost credibility in leading a global economic system based on capitalism? Can it get it back? What will this mean for world’s outlook? Is this a huge overreaction?

Beijing Bling!

As the financial crisis first hit the US and then dominoed around the globe, hope was held out that China’s economy would not only stay strong, but that its strength would help bring the rest of us out of the cold. With poor reports coming in daily now regarding China’s economic viability and future prospects, the above is becoming increasingly less likely.

The World Bank’s Quarterly report for China was not overly pessimestic, but it contained some warnings that tougher times were on horizon:  

The impact of the international financial and economic turmoil on China’s economy has been manageable so far, but is expected to intensify.

Here is an interview with the report’s authors and a breakdown by the Council on Foreign Relations blog and CNreviews.com.  The report asserts that many of the nation’s industries (textiles) have indeed been hurt by a fall in world demand, especially from here in the US, but that other industries (more highly skilled and intensive products) were still strong.  But the most damning news came today, when the Chinese government released statistics stating that exports had dropped 2.2% since last November and that foreign investment had also dropped by 36% during the same time period.  Wang Tao, a securities analyst stated, “We were expecting a slowdown, but the magnitude is a bit shocking.”  There are now fears that China will not maintain its previously forecasted 9% GDP growth rate for the year.  

There are obvious downsides to this news as it is just another sign of the dismal state of the world economy and it falters hopes that the Chinese manufacturing and exporting machine could spur economic growth elsewhere.  But, as the Chinese Communist government surely knows, the nation’s political and social stability is at risk as well, and this will have repercussions around the globe.  I had never heard this before, but Chinese communists have reportedly put a number on the percentage of growth needed to maintain political stability for the large and diverse nation, 7%.  China’s President Hu Jintao is feeling the heat:

“China is under growing tension from its large population, limited resources and environmental problems, and needs faster reform of its economic growth pattern to achieve sustainable development,”

The Chinese Communist government has based its legitimacy largely on its continued stewardship of a growing economy.  If it is seen as not fulfilling this role, all of a sudden protest voices may garner greater sympathy from the populace.  Combine this rising unrest questioning the ruling regime with a greater amount of unemployed workers and bosses with no factories to boss and the situation becomes outright scary for Hu and his buddies.  Instability in China, let alone a change of government, would send ripples throughout the region and create havoc on the world economy, especially in states that depend on its cheap imports, foreign businesses who are knee deep in investments in the Middle Kingdom, and in many third world countries where Beijing has become a powerful investor.  Elizabeth Economy has already called China out for its lack of leadership during the financial crisis, portraying the state as a ‘responsible partner’ not a global leader.

This post is not to scare the bejeebies out of you or predict the Chinese demise, but the slowdown of China is indeed a major story in international politics and economics.  The Chinese government has proven it can handle crisis with a firm and strong hand before, and they are already being proactive in many ways to thwart a further economic tailspin.  

Am I making a mountain out of a mole hill?  What do you predict for the Chinese economic and political future?  Are they as connected as I believe they are?  Is this just a bump in China’s rise as a global power?