| 2008: financial or breakdown crisis? Strategic Outlook |
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The correlation between economic and financial data with geopolitics endeavours suggests that no long-term economic and financial solution can be implemented without first re-defining a sustainable geopolitical environment. Today time is not ripe to change the 1944-45 balance of world powers. Sooner rather than later it will be possible to tackle this critical issue and to found a more inclusive international governance system, though establishing a new world order. However, it is of paramount importance that the debate and the diplomatic negotiations resume as soon as possible around the reform of the Security Council of the United Nations. The WTO model may prove useful also to reform the IMF and the World Bank systems. This would probably spare the world new geopolitical tensions and armed conflicts. Politics first! In order to see beyond the numbers it is necessary to set aside the temper on the ongoing crisis. Financials appear to be at odds with economic fundamentals. The media obsessive spam of financial data and demand driven negative reports are shadowing the economic reality. Haunting the economic life with the ghost of the 1930s is dramatically wrong. For instance, the industrial production sloped 47% in 1930 while in August 2008 it was up 4.5%. Similarly, the GDP is currently stagnating or in slight regression while in the 1930s dropped 30%. US unemployment rate was 25% in 1930 while today is about 6.1%. Economics first! It should be acknowledged that the globalization and the market are well alive while the states and the governments are struggling to re-assert some sort of "imperial" sovereignty in a system that has largely bypassed them. The nomadic attribute of capital in the globalized world does not change the requirements for market efficiency and return on investments. The current violent deleveraging and disinvestment in the financial markets confirms this attitude. Governments squabbling with markets over regulations risk making more damages than profits. Instead, global regulatory systems should be set to prevent and repress financial piracy as well as unworthy management conducts of financial actors. The benevolent treatment to commercial and central bankers so far is sending the wrong signal to both shareholders and stakeholders. Market first! Analysis In 1971 President Nixon decision transformed the US dollar from an economic value unit into a politically driven value. Since then, the return on capital investment has been determined by an escalating valuation of assets that de-materialized the economic value of listed economic activity. Since the mid 1980s three factors enhanced this distortion: a) The orchestrated diffusion of inventive financial vehicles that artificially lifted the valuation of stocks traded in either New York or London stock markets; b) The effective use of monetarist policies backed by the IMF, the World Bank and the OECD to peg world economies to the US$ debt re-financing needs; c) The indiscriminate use of agencies and consultancies to implement structural adjustment programs worldwide, in either public or private sectors. As a result these measures doped the market that entered a cycle of "perma-crisis", financially bubbling on. The 2000 Internet bubble blast shocked the governments, more than any other before it. They realized the poor effectiveness of the state sovereign and regulatory systems: Central Banks; Treasury departments; Stock Exchange Commissions. This explains the policies that Western governments adopted thereon trying to re-assert sovereignty on the markets: a) To levy on fiscal policies to stimulate and to keep economic growth (tax cuts, favouring the high wealth people); b) To use military and political coercion. In the 2000s, the financial crises have been ravaging all economic sectors creating panic and despair among investors and employees worldwide. However, the good news is that the virulence of the market reaction is wiping out a number of structures that brewed monstrous growth and power. They could do so because they were the perfect gearwheels of the governments' distortion system: auditing and certification companies; investment banks; rating agencies; hedge funds; management consulting firms. It is not by accident that wealth strained and budget rippled Western governments are now confronted with the fierce competition of "sovereign funds" originated in and pegged to non democratic systems with high energy or trade surplus in current balances. Western governments fear the financial "attack" of these new actors on their devalued assets. More than the transfer of wealth, they fear the transfer of sovereignty that would be stigmatized if loosing symbolic attributes such as the national capacity to retain profits, and the national influence on the governance of large corporate and public structures. This fear explains the irrational bailouts strategy implemented West-wide on the credit and commercial banking system. On the effectiveness and sustainability of such a strategy we share Nouriel Roubini's remarks reported below in this paper. On November 12, 2008, unexpectedly the US Treasury backed away from using the $700bn bail-out fund to purchase toxic assets and said he favored a second round of capital injections into financial institutions. The current crisis is very different from any other before it: it is a system breakdown that requires geopolitics negotiations to be sorted out. Imposing new regulatory mechanisms on a system that is stalled cannot produce anything but further erosion of wealth and destruction of assets. The points above explain why governments are less united than officially acknowledged. Seemingly, the 2008 mid-November G20 summit is set to approve a globally coordinated fiscal stimulus: tax cuts or public spending increases appear attractive because interest rates have lost some of their power to boost economies. Albeit these coordinated measures may produce better effects than isolated ones, they are fire-fighting measures. When it comes to long-term fixes the G20 governments should start thinking outside the box. But time for this does not seem ripe yet. The US elections 2008 offset visible change. However, the caution of the new President-elect suggests that the US long term strategic goals will probably remain those eloquently summarized by George W. Bush at his inaugural speech on January 20, 2005: "We go forward with complete confidence in the eventual triumph of freedom. Not because history runs on the wheels of inevitability; it is human choices that move events. Not because we consider ourselves a chosen nation; God moves and chooses as He wills. We have confidence because freedom is the permanent hope of mankind, the hunger in dark places, the longing of the soul. When our Founders declared a new order of the ages; when soldiers died in wave upon wave for a union based on liberty; when citizens marched in peaceful outrage under the banner "Freedom Now" - they were acting on an ancient hope that is meant to be fulfilled. History has an ebb and flow of justice, but history also has a visible direction, set by liberty and the Author of Liberty". The program outlined in 2005 will go on as announced, albeit the constant decline of the American model that will become ever more irreversible within about a decade. Most probably, under President Obama a new alliance will be forged between the United States of America, most of Europe (maybe the 15 states of the Eurozone plus the UK) and half a dozen other states (the four: Brazil; China; India; Russia; plus two: Indonesia; Mexico). Seemingly, Washington will continue for a couple of decades to provide assistance and strategic coverage to its allies, sharing the costs of its defence as well as, more importantly, the costs of its enormous debt to finance it. It is also foreseeable that in the short term no serious action will be taken to revaluate emerging powers' currencies. As Robert Kagan put it "America will be dominant but cannot dominate". Meanwhile, the European Union is still holding to the Euro but the French presidency call for unity of action remained ineffective. The EU Commission adds its worry: Joaquin Almunia, the European Union's monetary affairs commissioner, said EU governments must work together to prevent protectionism and economic nationalism from turning the downturn into a more profound problem. The French presidency failed attempt to reinforce the presidency of the Eurozone, de facto bypassing the conundrum of the 27-states shared responsibility in the EU/Ecofin, shows the gravity of the impasse facing Europe. The EU has been so far unable to adopt a single anti crisis plan agreeing only on some coordination of national mechanisms. European historical nation-states greed for world stage and power is still alive. The current financial crisis has just exacerbated the spirits. It is so that each of the four main European states (France; Germany; Italy; Spain) is mobilizing all its geopolitics connections of influence to show up and gain some visibility beyond the common EU interest. Moreover, the historical ideological divides between traditional left and right politics continues to undermine any attempt to settle unity at least on national or European interest. The European Union is a process studied and envied by many. Its history tells us that times of crisis have been its best founding moments. We hope so! by Dr. Paolo Raffone , The CIPI Foundation Published on November 14, 2008
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| Last Updated on Monday, 23 February 2009 03:55 |
