Contours of a Euro Bailout
Will the current financial crisis be remembered as a devasting collapse or just a minor shifting of the ground?
October 14, 2008
In the past, Great Displacements in the financial system were accompanied by violence — for example, between the two World Wars when an overextended Britain began to cede global supremacy to the US, decoupling sterling from the gold standard in the 1930s and then seeing it displaced by the dollar at Bretton Woods.
Today, it may be appropriate for Europe to ease the burdens on an over-stretched United States and begin positioning the Euro as the world's reserve currency.
Europe, of course, is not a world military power, but this time (bar an unexpected trigger — such as an imploding Pakistan dislodging a horde of nuclear backpackers), the Displacement does promise to be less violent.
Many doomsayers forget that the current system of nation-states is generally more robust than it was in the confused, fractious scramble for preserving Empires in the first four decades of the 20th century.
Meanwhile, across much of the world today, national self-interest is clearer and easier to define. The links between elites and the masses may be as amorphous as they have always been, but far more people have a stake in continuity than they did in the past. Even the collapse of the Soviet Union did not result in a Third World War.
And yet, the current financial earthquake will be accompanied by a considerable amount of uncertainty, and no doubt a large load of misery. Such pains will be felt beyond investment bankers in New York and their fellow travellers in the borderless web of global finance beyond.
The poorest of the poor — in Africa and Latin America, in India and China, and some of their counterparts in the West — cannot extricate themselves easily from the hugely interdependent architecture of today's world economy.
Unlike bankers (or Professor Francis Fukuyama), most common people have the gift of hindsight.
For financiers, the failure of a bank (or a cluster of banks) centers on money, even in its late 20th century incarnation — as the handiwork of magicians levering already-leveraged assets in a mystifying mirage of rope tricks.
Two examples from ancient Greece best illustrate their quandary: Ouroboros — the snake that swallowed its own tail, and the great Archimedes — who said, "Give me a lever long enough and a place to stand, and I could move the earth itself."
Although the global financial system masterfully fabricated a sufficiently lengthy lever, its architects now find no place left to stand. Instead, they sit perilously perched atop their designer penthouses, tails in their mouths, as their earth quakes.
In the final analysis, with some hindsight, it is important to underline what money actually does. It leverages faith, in the future; the 'promise' on any bank note attests to this.
Such faith now rests wholly on demand, value creation (and finance) which has begun (in some cases, very quickly) to move East.
In this scenario, the only serious question for the next U.S. President would be the price America is willing to pay for a leveraged buyout by the secretive custodians of China, Inc.
The $700 billion American banking “rescue package”, incidentally, corresponds to the growth in Chinese foreign currency holdings in just the first ten months of 2008. The Economist (not always prone to hype) reported in June that China's foreign reserves were rising at the rate of $100 million an hour (or $2.4 billion a day).
Still, the wealthy Western guardians of the global financial order are not confined to Americans alone. Europe too shares some of the blame.
Overwhelmed by challenges like drafting a 46-page Action Plan on the “interdependence between the EU and Moldova”, Europe has shirked its responsibilities in recent years as the world's predominant economic and trading power, armed with its strongest currency and a Weltanschaung, in some senses, diametrically opposed to the United States. Indeed, Europe alone could have imposed meaningful reality checks on the latter.
There is still time for a change in course. But this requires both resolve and imagination. The fundamental mission would be to withdraw the global financial system from further clinical trials at the intensive care unit in Wall Street.
Such a task will be up to Europe.
In spite of China's beefy stockpiles of U.S. dollars and India's globetrotting corporations and managers, neither has the economic size or depth of expertise to furnish a world currency or underpin a global financial system.
Nor do Japan, France, Germany or the UK. “Europe”, however, does. Moreover, as the world's first post-national State, it also carries a host of other soft advantages to make a strong case in making a pitch for the Euro as a global reserve currency.
And yet, Europe is also a mature market with an aging, largely-satiated population. Its totems are sustainability not growth, vacations and pensions instead of jobs, and above all tradition rather than the next New Thing — all in dramatic contrast to the United States (or India and China).
Should Europe seriously wish to displace the United States, it will have to think how best to engage more forcefully and meaningfully with China and India.
The deployment by the United States of the talents of 600,000 Indians spiced up Silicon Valley, built the nuts-and-bolts of the Internet — and hollowed out the white-collar American workforce. Within the past three years, the American-led financial system underpinned Indian buys of Western jewels like Jaguar, Arcelor, Corus and more. It also led to technology giants like IBM and GE employing more Indians than Americans.
But it is from China where the chickens have finally come home to roost. U.S. investments in low-cost Chinese mass manufacturing built up the colossal trade deficits which are the root cause of today's fragility in the dollar-based global financial system.
Europe's real opportunity lies in looking beyond – financing the huge mass of untapped needs in China and India. The rise of a billion Chinese and Indians (simply to average global consumption levels) will impact on everything from food prices to global warming. This is an area where the U.S. and its financial Merlins have shown little interest or inclination to do much.
Europe, on the other hand, can. While New India's engagement with the United States led to the spawning of more Indian billionaires than Japan, Europe's engagement with a once-poor country like Greece has led to per capita incomes in the latter reaching 96% that of Germany.
Setting up a long-term Euro-denominated infrastructure/environment investment vehicle for the booming Indian and Chinese economies would lay foundations for meeting the real needs and challenges of tomorrow's real world.
Given the sheer scale of such needs, the size of the Indian and Chinese populations, and their role as locomotives of the world economy, it would pave the way for the emergence of a stable, Euro-based global financial system. It may also be the best hedge against the demographic fault-lines in Europe's massive (but poorly performing) pension funds.