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The writer was a central banker until 2013. He is the author of “Global Discord”.
An important element was largely missing from recent discussions among economists and economic policy specialists on the sidelines of the spring meetings of the IMF and the World Bank in Washington DC. The new geopolitics has rarely surfaced.
For example, “friendshoring,” the shifting of production to politically friendly countries, has been discussed in terms of social costs, but without questioning whether it could help the world’s liberal democracies survive conflicts between superpowers. Economic models take peace and order for granted.
The need for domestic redistribution has been rightly discussed, but without recognizing the additional budgetary constraints associated with increased defense spending. The dollar’s fluctuations were inevitably a fixation, but without really telling the extent to which maintaining its global status, and thus Washington’s role in keeping the sea lanes open, depends on the Federal Reserve’s willingness to engineer a return to the stability of domestic prices.
The divergent approaches to climate change of the United States (generally, subsidies) and Europe (taxes) have been considered without dwelling on what they might say about strategic positioning regarding from Beijing. The IMF and the World Trade Organization have been discussed as if they are still at the apex of an uncontested international system, when in reality they are in danger of becoming orphans of a discordant world order.
Although there is an element of exaggeration in all of this, I think it would be helpful if economists, business people and financial market participants made more of an effort to recognize the profound change in the geopolitical context . The struggle between Beijing and wealthy liberal democracies, which is as much about ideology as power, is likely to last for many decades, even if China’s economy stumbles in the near term.
The fundamental goal of the West should be to retain the distinctive way of life that characterizes constitutional democracy. In addition to living up to our core norms and thereby healing our domestic politics, this involves ensuring the resilience of the core systems we rely on; avoid costly and direct policy errors; and maintain alliances and friendships across the world.
Although these prescriptions seem obvious, they are not at all. The unforced political errors continue as if we were back in the mid-1990s, when it was safe to experiment with regimes and organizations because, with Washington as the only real power, the stakes are low.
It should be obvious that the West cannot afford another financial crisis, which only benefited Beijing after 2008. Yet huge policy mistakes have led to messy and dangerous bank failures on both sides of the the Atlantic last year. Although the U.S. Congress has reached bipartisan consensus on some external threats, it has yet to understand that a highly resilient financial system is essential to national security. The same myopia extends to many other areas.
Ultimately, each state can cautiously cooperate more ambitiously with those states with which it has more in common and with which it is least afraid. This indicates a world of concentric circles of cooperation. The outermost circle is where the thinnest international conventions seek to preserve peaceful coexistence, allowing innocuous trade that does not dangerously expose either party to the other. For each state, as it moves closer to shared circles with increasingly like-minded nations and peoples, cooperation becomes denser and deeper.
The stakes of a transatlantic relationship in which the parties sometimes seem uncertain about what they have in common are currently enormous. On the one hand, Washington rightly wants European capitals to contribute more to their defense. But if you go too far, Europe will eventually re-emerge as a hard power, a recipe for fracturing the West and shrinking America again – something to remember as the US presidential election approaches of November.
On the other hand, it is not uncommon for Europe to be unhappy with Washington’s extraterritorial exercise in dollar domination. But if it ever contributes to weakening the dollar’s preeminence, it risks undermining the security framework under which Europeans have thrived for so long.
Dealing with all this requires extraordinary leadership, just when domestic politics seems abandoned. But everything will be even more difficult if Western governments, legislatures and technocrats fail to break out of the intellectual and political silos that were harmless as long as their global leadership seemed inscribed in the “end of history.” Judging from last week’s meetings, this work remains in progress.