Euro and dollar

Winners and losers in the new geopolitics

Bulletin article
01 June 2009

Both the global economic crisis and the arrival of Barack Obama are transforming the geopolitical landscape. But how exactly is not yet apparent. Many Europeans and Asians predict a decline in the relative power of the US, partly because its model of capitalism is being blamed for the crisis. They regard lax Anglo-Saxon financial regulation, rather than global economic imbalances, as the principal cause. With the Chinese and Indian economies coming through the global downturn with quite strong growth rates, they say, power is shifting to Asia.

But such arguments are unconvincing. Several factors are likely to boost American soft power: the US will probably lead the world out of recession; the heavy involvement of the federal government in the economy is showing other countries that the US model of capitalism is no longer so different; and Obama’s fresh approach to foreign policy is generating much goodwill. Therefore, a growth in the authority of both the US and China seems more plausible than a power shift to Asia (which is not to say that such a ‘G2’ can on its own solve many of the world’s problems).

Beijing’s proposals for a new international reserve currency reflect not only concern about future US inflation eroding the value of its dollar holdings, but also greater confidence in playing a global role. Relations between the Chinese leadership and a pragmatic Obama administration that has put less emphasis on human rights are warm. But the economic crisis could cool this relationship. Growing economic nationalism in China – where the competition authorities recently blocked Coca-Cola’s purchase of a Chinese drinks company – could lead to pressure for retaliation in the US. Furthermore, a China that is more focused on trying to shore up growth rates may be less willing to sign up to a climate change deal in Copenhagen in December – a cause championed by Obama and the EU. However, many other countries will also be reluctant to sign up to anything that could impose burdens on their industries.

The recession will not enhance Europe’s power and prestige. Europe’s recovery looks like being very slow, with the IMF forecasting that the German economy will shrink by twice as much as the US economy this year. Europeans will be preoccupied with the need to prop up the badly hit economies of Eastern Europe, both within and beyond the EU. And in the longer run they may have to worry about the ability of South European countries suffering from declining competitiveness (such as Greece) to stay in the euro.

The EU’s enlargement process has virtually stopped, while uncertainty over the fate of the Lisbon treaty means that the Union remains focused on its institutions. All of this pushes Europeans to introversion. They are also divided over key foreign policy questions such as how to deal with Russia, and unwilling to send many soldiers to the dangerous parts of Afghanistan. Obama is learning fast about the limitations of the EU’s foreign and defence policy. Both economically and politically, the transatlantic relationship looks like becoming increasingly unbalanced.

Another reason why the crisis may strengthen the relative power of the US is that the countries it has most problems with are doing particularly badly. Russia, Iran and Venezuela have been hit by declining oil prices, which have cut export earnings and damaged government finances. Furthermore, Obama has reached out to both Moscow and Tehran, disconcerting hardliners in both places. However, this new American approach carries risks. Although their economic woes could make Russia and Iran somewhat more willing to cooperate, they may well give Obama little of what he wants, in which case he will be attacked at home for weakness.

In Russia the leadership has adopted a softer style but not yet changed the fundamentals of its foreign policy. Obama has indicated that although he is willing to go slow on missile defence and NATO enlargement, he cannot accept that Russia should have a sphere of influence over its neighbourhood. Yet the Kremlin seems to be trying to use the economic problems of its neighbours to extend its sway over them (for example, in Azerbaijan, Kyrgyzstan and Moldova). A major clash over Georgia or Ukraine would destroy any rapprochement between Moscow and Washington.

So could rows over Iran. Obama wants Russia to help dissuade Iran from pursuing its nuclear programme. US officials say that if the current diplomacy – including Obama’s offer to talk to Iran’s leaders – does not yield results by year end only one diplomatic option remains: very tough economic sanctions. Russia and China see little value in further sanctions against Iran, and if they refuse to follow the US (and the EU, which is likely to support tough sanctions) down that path, their relations with Obama will suffer. American officials believe that a failure to agree on tougher sanctions would greatly increase the risk of Israel attacking Iran.

One positive result of the recession is likely to be better global governance. The G20 has emerged as a useful body with more legitimacy than the G8. The membership of the Financial Stability Forum is widening to include the world’s leading economies – and the same may happen for the International Energy Agency. The IMF has got more money and will give a bigger voice to emerging powers. There is even a chance of reforming the wholly unrepresentative UN Security Council.

 One negative result is that the world’s poorest countries will suffer most from the shrinkage of international capital flows. In March the World Bank said that developing countries will face a financing gap of up to $700 billion this year. There will almost certainly be more failed states, of the Somalian variety, which may attract terrorists as well as pirates. American officials talk nobly about the UN reviving the idea of ‘trusteeship’ (ie, international supervision) for the worst cases, but the practical obstacles would seem to be immense.

Even if the recession shifts power to the G2 rather than to Asia, the West has certainly lost its shine. If the West wants to strengthen its standing in the world it needs to rethink its narrative. The emphasis on democracy, human rights and deregulation is no longer so compelling in many parts of the world. A new narrative should not forget liberty but needs to focus on social justice and security, both within countries and in relations between them – and that means a larger role for multilateral institutions.

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