IT takes time for new realities to sink in, especially in economics and geopolitics. One reason why the G20 meeting in Seoul won’t achieve anything of any real substance is that the old order still believes that it can play by the old rules – and by that I mean primarily the Americans. The Fed’s decision to engage in a fresh round of quantitative easing last week, even though its economy grew by an annualised two per cent in the third quarter, was the last straw for the emerging nations. They are convinced that this is a deliberate ploy to weaken the greenback, inflate away the US?national debt (much of which is held overseas) and boost US exports at the expense of other countries.
There was a time when the rest of the world would merely have lumped it and accepted its fate. No longer. We are now truly in a multi-polar world yet one devoid of a proper roadmap. The US remains the world’s most important superpower but can no longer impose its will either militarily or economically; China is hugely powerful, is starting to throw its weight about but remains a developing country; the same is true, to a lesser degree, of India and Brazil. Europe is in steady relative decline; it remains wealthy and stable but has lost its ability to translate its large GDP into true power and influence. Japan is also in decline, its economy eroded by an ageing population.
Any of these countries or regions can now derail the global economy; America last managed in 2008; there is at least an outside chance that Europe could do the same if its sovereign debt crisis spirals out of control and triggers another financial nightmare. A recession in China would be a disaster for the whole world. Three factors make this situation even more unstable.
The first is that all of the new economic superpowers are flawed, at least in part; all are giants with feet of clay. China is a dictatorship, attempting to construct a new civilisation based on state capitalism; its currency is deliberately under-valued, its consumers don’t spend enough, its central bank is hoarding too many assets and its government desperately attempting to prevent a new bubble. India remains bureaucratic. Brazil has yet to emerge from its regional sphere of influence. The Western economies suffer from excessive national debts, failing welfare states and bankrupt state pension systems; the emerging economies lack a truly trustworthy rule of law and their democracies, in most cases, remain fragile.
The second problem is that there is no proper mechanism for these powers to communicate. The G20 is too unwieldy; the UN is flawed; all the existing global institutions – from the IMF to the WTO – are relics of a previous era. The third, related problem, is that the world continues to use the dollar as its main reserve currency and unit of account, even though it is a paper money that is primarily used by the US to serve its own interests. This relic of the post-Bretton Woods era is no longer sustainable.
Remember when clever-silly pundits used to believe that the euro was about to dethrone the greenback as the world’s currency? Today, with the Eurozone on the verge of break-up, this is self-evidently nonsense. A much more sensible prediction is being made by HSBC’s currency team, which believes that the renminbi could become the dollar’s main rival. We shall see; but don’t expect any real answers from the G20 today.