While the worlds largest economies yammered through the night at last weeks Group of 20 summit in Seoul, the European Unions common currency headed toward a new crisis. These euro developments threaten “the European project” — a drive toward continental unification to prevent war and encourage prosperity. They could also frustrate worldwide recovery, crippling the worlds largest — $20 trillion — combined market and affecting $4 trillion in trans-Atlantic sales. For all the hyperbole about “emerging markets” and intra-Asian trade, the 27-nation EU and the U.S. represent half the worlds gross domestic product, even if recently they have not been a source for global growth.
But its clear why no G-20 palliatives were forthcoming. What Seoul exhibited was a cats cradle of conflicting interests unlike the productive working alliances of the post-World War II era. And, to continue our metaphor, there will be no flip of the wrist to bring the tangled strings back into geometric order.
Of course, there were lots of G-20 coteries. One, based on the belief that international payments imbalances are the root of all current world economic evil, found the deficit countries, led by the U.S., naming China as Public Enemy No. 1. But other export-led surplus economies — Japan, South Korea and even Germany — were having none of the remedy proposed by U.S. Treasury Secretary Timothy F. Geithner. Washington was leading the pack, too, for greater market access — especially against Beijings restrictions. And the U.S. found allies in protectionist India (whose own rapidly increasingly bilateral China trade is stung by cheap imports), and in German, French and British exporters. But the American-led front ran up against the great stonewall of China, with Beijing going into the meeting with a record trade surplus despite ailing foreign markets for its goods.
It was the Federal Reserves efforts to reverse domestic deflation with another $600 billion “stimulus” that made it the butt of all and sundry in Seoul. The Feds global critics fear any American market growth would be offset by a cascade of liquidity into their coffers. China worries about “hot money,” now sitting in real estate, waiting for an “inevitable” re-evaluation that Beijing now adamantly rejects. South Africa fears inflows would produce inflationary, noncompetitive prices for its exports. And Brazil already has thrown up surtaxes to fend off speculators, punishing investors.
Fed Chairman Ben S. Bernanke might be pooh-poohing inflation possibilities. But the Peoples Bank of China, with questionable success, was trying to stave off higher prices, particularly in food, as was India. The Mideast oil producers worried that the Fed action would reduce further the value of petrodollars, as speculators bid up oil along with gold, copper and grain, in what looks like a looming world shortage. And that in turn has upset China, as its “world factory” is the globes second biggest oil importer and largest customer for iron ore and other raw materials.
But Beijing, already grimly absorbed by succession struggles at home, nevertheless exhibited a level of hubris unseen since the Japanese were perceived as ready to dominate the international economic system in the 1970s. Chinas boasting over its record of growth and stability was contagious: A Hong Kong bank analyst suggested the yuan — a nonconvertible, overvalued, non-market currency under no monetary controls worth the name — might blossom into a “redback,” a new international reserve.
The EU, meanwhile, had its own little incestuous currency war to deal with. After narrowly avoiding disaster with last springs successful Greek bailout, the threat of bankruptcy this time comes with a few new wrinkles. Chancellor Angela Merkel, head of a shaky coalition playing to her ultraconservative German polity, plotted for a new emergency. But she unnerved the markets by publicly demanding that commercial banks take some of the “hit” with a preordained “haircut” for their bond holdings, if and when the crisis came. Fair dinkum, as the Australians say; why shouldnt the principal beneficiaries of speculative lending share the losses with taxpayers when the game collapses? But her talk of new banking loss risks raised costs for struggling Ireland, Portugal and a politically unstable Spain, already desperately trying to meet their debts to stay in the euro club.
Furthermore, the severe austerity medicine that nanny governments such as Greece are now plying might not be enough, even though the prescription has come perilously close to endangering their officeholders. French mobs, playing their traditional role as leader of continental fads, were back in the streets. More seriously, the new austerity could include higher taxes — or tougher collection of existing taxes from notoriously recalcitrant Greek taxpayers — that might stunt growth. Growth, after all, is eventually the only permanent way out of the morass.
It was all very well for a young Portuguese to tell the Financial Times that he “could not imagine life without the euro.” But increasingly, there seems to be a choice: Either the southern Europeans revive their national currencies, gaining an ability to maneuver separately from Germanys euro interests, or some sort of two-tiered euro monstrosity might be cooked up by the ever clever-by-half Brussels bureaucrats who concocted this “Eurostein” in the first place.
*Sol Sanders, veteran foreign correspondent and analyst, writes weekly on the convergence of international politics, business and economics. He can be reached at solsanders@cox.net.
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