NEW YORK — When the European Union finally admitted on Thursday that it would have to join Niger, Cambodia, Haiti, Iceland and countless other troubled economies in line for International Monetary Fund (IMF) emergency funding, the already serious leak in the dam of Western economic credibility turned into a roaring torrent.
The first blow came in October 2008, of course, when the recklessness of a deregulated financial services industry in the U.S. and Britain nearly threw the globe into a depression. Now, the smug Eurocrats have joined the arrogant pinstriped set in the Emperors Without Clothes Club.
The rest of the world has noticed. Zhu Min, deputy governor of the People’s Bank of China, told a conference in Hong Kong last week he viewed Greece as the tip of a huge fiscally dysfunctional iceberg, one likely to swallow up European hopes for growth for years to come. Sounding vaguely Reaganite, he criticized the way governments in the West seem unable to live within their means, and noted that the United States and Britain were little better than Greece, Portugal or other weaker EU economies.
“The U.K. is weak. America itself is weak, because in a two- to four-year horizon, U.S. debt will climb to 110 percent [of GDP] and stay there for a while,” he said. “The governments tried to put every burden from the financial sector onto their own children. Now they find nobody can save them.”
Newt Gingrich couldn’t have put it more clearly.
With Western geopolitical credibility already severely weakened by the Iraq fiasco, this latest blow can only accelerate the rising influence of China on the world’s many aspiring powers.
Imagine this: You’re the finance minister of a medium emerging-market economy, and the drop off in exports caused by the global recession has led you to turn to the International Monetary Fund for a loan. But the IMF — its funds tacitly controlled by the U.S., the EU and Japan — is refusing to extend the relatively small $20 billion line of credit your country needs to avoid being downgraded by the world’s credit agencies. Your budget, normally in surplus, suddenly is showing a deficit of almost 12 percent of your economy’s annual output.
So the IMF insists on draconian cuts to public services, including education, health care and public sector salaries — the latter of which keeps 65 percent of your population, including the all-important army, barely above subsistence. What’s more, the West used its United Nations Security Council votes to condemn a crackdown on dissent by your president-for-life just last month, making the prospect of bending to the “imperialists” even less savory.
Enter China. “Who are these Westerners to dictate terms to you?” the man from the China Investment Corporation, Beijing’s primary sovereign wealth fund, whispers in your ear. “We will give you the $20 billion you seek, with no interference in your internal affairs. We just want you to let our oil company build a liquefied natural gas terminal on your coast, and a promise that you will export 80 percent of all your precious metals and petroleum products to us.”
Over the course of 18 months, many of the cozy economic assumptions of the “post-war world” have unraveled spectacularly. For the second time in two decades, a radical transformation of geopolitical and geo-economic relationships are coursing through the global bloodstream, inducing changes we can’t yet see on the surface and can only make educated guesses about going forward.
Think of the first of these changes: The Cold War’s end brought all the things which were obvious the day the Berlin Wall came down 20 years ago — political freedom, a “peace dividend” and the end to the hair-trigger world of U.S.-Soviet Armageddon. At least as important, however, were the things no one thought of for years: the unleashing of frozen ethnic conflicts in Europe (the Balkans, particularly); an upsurge in proliferation aimed at remaking the old five-member “nuclear club”; and most importantly, the addition of 3 billion new, low-wage workers to the world’s capitalist labor force.
Only now is this last factor showing surface symptoms. The European Union’s ignominious decision to turn to the International Monetary Fund to bail out a member state, Greece, is a canary in the coal mine. It the world we live in today, what multinational firm in its right mind would build a factory in Greece, where the work week is legislated at 35 hours, vacation time equals six weeks, the retirement age is 61 and hiring and firing strictly limited by law — instead of India, Brazil, Vietnam, South Africa, Mexico or China?
It’s not just Greece. The rest of the “PIIGS” — Portugal, Italy, Ireland, (Greece) and Spain — suffer from similar problems, though each case has its own flavor. Indeed, Britain could turn out the be the biggest “pig” in Europe — its government deficit now flirting with 8 percent of GDP, and overall national debt at 59 percent of GDP and rising. (The U.S. figure, by comparison, is 53 percent, and the Congressional Budget Office expects that to reach 100 percent during the coming decade before it starts falling again).
On this side of the Atlantic, meanwhile, sub-economies much larger than the laggard Greek one teeter on the edge. We’re talking here about the “NINCs” — New York, Illinois, New Jersey and, most of all, California, which for reasons not so different than those pushing Greece toward tragedy, have spent themselves into a corner.
Now, profligate states have something this week’s events in the EU proved Europe lacks: a bailout of last resort. Ours is called the Fed, and its literal license to print money means California, in spite of its self-inflicted idiocy, will never really go bankrupt.
But that’s cold comfort for those who, following the collapse of the Berlin Wall, hired themselves out as gurus to what used to the vanquished states of the Soviet bloc and developing nations worried about being left behind. Increasingly, nations in both of those categories — Emerging Markets in the jargon of today — are viewing China’s example, advice and business as preferable.