Thursday, December 18, 2014

A wider order comes into view

It may take months to discover whether the actions taken by last week’s Group of 20 summit in London are enough to rescue the world economy from a prolonged recession, if not depression. The substance of its conclusions will have to convince capital markets, global financial institutions, investors and humble consumers that they can start to spend, borrow or lend again.

But the symbolism of the event may be more important than the substance. For even if the G20 countries are a strange ad hoc selection, initially brought together by the Asian financial crisis in 1997, they represent a whole new element in the world order. They are not the Group of Seven – the club of western powers and Japan – or the G8 (the G7 plus Russia). The use of the G20 at this moment of global crisis is a clear indication that the old order has outlived its time.

Another pointer came four months ago when the US National Intelligence Council, part of Washington’s security apparatus, published a startling forecast. The international system as constructed after the second world war would, it predicted, be “unrecognisable” by 2025, thanks to globalisation, the rise of emerging powers and “an historic transfer of relative wealth and economic power from west to east”.

“The next 20 years of transition to a new system are fraught with risks,” the document declared. “Strategic rivalries are most likely to revolve around trade, investments and technological innovation and acquisition, but we cannot rule out a 19th-century scenario of arms races, territorial expansion, and military rivalries.”

That report was largely written before the full force of the financial and economic crisis had become apparent. Nevertheless, its authors were convinced that the “unipolar moment” of unchallenged US hegemony after the Berlin Wall came down was already drawing to an end. The future world order would be “multipolar”.

The extraordinary thing about the present moment is that several fundamental adjustments are taking place at the same time. That is what makes the outcome so unpredictable.

The end of the cold war, with the fall of the Wall in 1989, cleared the way for new powers to rise – China and India in particular – and removed ideological obstacles to globalisation. Cross-border migration has surged. The technological revolution of the internet has transformed international communications, the flow of information, financial trading and political awareness.

The breakdown in the global financial system, caused not just by the bubble that burst in the US subprime mortgage market but also the explosion of financial speculation across world markets, has rapidly turned into a recession in the real economy. No one has been spared. Credit has frozen up in markets from Africa to eastern Europe.

A massive rebalancing is starting to take place in world trade flows between the unsustainable US trade deficit and the equally unsustainable surpluses of China and other big exporters. US consumers are no longer going to be the engine for Chinese export-led growth, but nor can Chinese savers continue to finance American borrowing.

Finally there is the underlying adjustment – one that would normally still take decades to be realised – that the NIC report identifies, of the switch in power from west to east, especially the rise of China and India to reassume the prominence they held when Europe was in the Dark Ages.

There is an assumption in many parts of the world that the “crisis of capitalism” represented by the freezing up of the financial system will accelerate the long-term geopolitical shift, heralding the decline of US power and European influence. Last year’s choice of the G20 as the forum to tackle the crisis was a belated recognition that China, India and Brazil, at the very least, must be at the table. But will the G20 provide lasting leadership? It smacks of an emergency solution, not a considered construction.

For a start, it has no permanent secretariat. Gordon Brown, UK prime minister, as current chairman struggled for months with a tiny team of British civil servants to forge a consensus. There were divisions between the US and Europe. More important, there were different priorities for the industrialised countries and emerging economies. It was remarkable they managed to agree on a communiqué.

“It is an arrangement that works for finance ministers and central bank governors to meet once a year,” says Trevor Manuel, the South African finance minister. “When you take it up to heads of state and government, the imbalances are accentuated.”

But at least there were few signs of schadenfreude in London. Expectations in 2007 and 2008 of a “decoupling” between the crisis-hit economies of the west and the less exposed emerging markets have vanished. The pain is global and the solution had to be, too.

The real economic effect of the financial crisis has hit emerging markets harder than the developed economies, with a collapse in trade flows and a dramatic fall in commodity prices. It is clear that those worst hit will be the poorest – especially in Africa – who have the least to fall back on.

Second hardest hit are those commodity producers that have always faced big social and demographic challenges, such as energy-rich Russia, Iran, Nigeria and Venezuela. Even Gulf oil producers have been affected. All had become used to swollen export and tax revenues and face readjustment.

Finally, emerging economies still in transition from poverty to prosperity – or from communism to democracy – have been caught by the economic crunch before they could build stable systems of governance and root out endemic corruption. They include many in central and eastern Europe that emerged from the Soviet empire.

Some observers are sceptical about the geopolitical fallout from any financial crisis. “Geopolitical events like the disappearance of Mao in China, or the fall of the Berlin Wall, have far greater consequences than financial shocks,” says Robert Cooper, director-general of external affairs at the Council of the European Union . “Look at the technology bubble in the 1990s. There were no obvious consequences. Or the 1970s crisis with oil prices. Any geopolitical consequences rapidly disappeared.”

Yet he admits that two financial crises of the 20th century – the Depression of the 1930s and economic collapse in Europe after the second world war – did have important results. The former led to the rise of Nazi Germany, the isolationism of America and the outbreak of war. The latter, far more positive, resulted in the Marshall Plan that financed the German Wirtschafts­wunder and economic revival across the rest of the continent, which led to the eventual establishment of the EU.

The lessons of the 1930s also led to the setting up of the Bretton Woods institutions – the World Bank and International Monetary Fund – to bring monetary order to the main industrialised states and a system of crisis management that has survived for more than 60 years. But today their legitimacy and representativeness are being called into question.

The central nation in the ongoing geopolitical transformation is China. It is also the most difficult to read. “They want everything and nothing,” says a senior IMF official. “What they really want is just to be among the big players. The coming 20 to 30 years will be the era of the US and China. They are preparing for this game.”

Beijing wants a bigger share of votes at the IMF, to reflect its rapidly growing economy. But before the G20, it did not want to contribute from its massive foreign reserves to increasing the Fund’s resources because China is still, per capita, a poor country. In the end, Mr Brown announced that Beijing would contribute $40bn, alongside $100bn each from the EU and Japan, as part of a $500bn total. “The crisis emphasises that China is a pivotal world player,” says Bobo Lo of the Centre for European Reform in London. “It might not be a global superpower yet, but it has accelerated that trend.”

If China is a cautious winner, Russia is the most obvious loser from the upheaval. The choice of the G20 as the crisis forum rather than the G8 has abolished Russia’s privileged position as the only outsider at the same table as the wealthiest countries. At the G20 it is one of many middle-sized economies, such as South Korea and Turkey.

But Russia’s weakness is more fundamental. The oil price may rise and fall but the crisis has exposed its failure to diversify beyond the energy sector. Its financial institutions are inefficient, its judicial system corrupt. In the longer term, it faces a chronic demographic crisis likely to result in severe labour shortages in the next two decades.

What of the rest of Europe in the new world order? Like Russia, the continent has an ageing, shrinking population. Slow growth is inevitable, although most west European economies have the reserves and the social safety net to cope with the recession. That is not true of eastern Europe.economy1

For the EU, the risk is that solidarity within the Union will crack, as sneaking protectionism undermines the single market and the old member states show reluctance to bail out the new ones that face acute social crises, with a freeze on bank credit and investment.

The outcome of the G20 – reinforcement of the international financial institutions and a big emphasis on regulation – is what Europe wanted. But it may be a mixed blessing. On the one hand, Europeans have a strong voice in the institutions, especially the IMF. But they will have to give up some of that influence in exchange for China’s contribution and the representation of other developing countries.

As for the G20 itself, the chemistry of the group is unstable. But what seems clear is that without a firm line from Barack Obama’s new US administration, the outcome would have been more feeble. It was Washington that wanted to triple IMF resources. The EU was happy just to double them. Mr Obama played the role of mediator.

France’s Nicolas Sarkozy was the only one who insisted last week that the crisis spelt the demise of “Anglo-Saxon capitalism”. Yet experience suggests that of all the countries affected, the US has the greatest resilience and capacity to recover quickly. The EU and Japan seem stuck in sluggish growth and declining demographics.

As for China, the requirement to adapt from export-led growth to a radical expansion of domestic demand could be a huge political challenge. The Communist party will have to countenance a much faster growth of the middle classes than it has prepared for.

A new world order may be replacing the old – but it will be a bumpy ride.

By Quentin Peel
FT.com

Danish PM to head Nato

Nato leaders have agreed that the alliance’s new secretary general will be Danish Prime Minister Anders Fogh Rasmussen, who sent troops to fight alongside the Americans in Iraq.

The 56-year-old takes over from Jaap de Hoop Scheffer, who is due to leave this summer.

Ahead of the April Nato summit, Mr Rasmussen appeared to have the backing of heavyweight Nato members, notably the US, UK, France and Germany.

But Turkey remained a significant obstacle. Turkish Prime Minister Recep Tayyip Erdogan told Mr Rasmussen personally about the “serious indignation” in Muslim countries over his stance on the row over cartoons of the Prophet Muhammad in 2006.

‘No comment’

Mr Rasmussen, a liberal who has led three consecutive centre-right governments in the last eight years, had repeatedly refused to comment on his candidacy, or even confirm he was in the running.

However, his reticence is believed to have been a tactical move to avoid interfering in any of the diplomatic efforts taking place behind closed doors, rather than signalling a lack of interest in the post.

Mr Rasmussen will face a challenging time at the helm of Nato, with the war in Afghanistan hit by severe setbacks and the alliance debating whether to take in more ex-Soviet countries.

But after more than seven years as prime minister, he is considered a veteran of international politics, whose attention to detail and strong communication skills will stand him in good stead in his new job.

Deal maker

Mr Rasmussen brings considerable experience to the table.

When Denmark held the rotating EU presidency in 2002, it was Mr Rasmussen who led the complex negotiations which resulted in 10 European countries joining the EU in the union’s biggest enlargement to date.

A personal friend of former US President George W Bush, Mr Rasmussen was one of the foreign leaders who most strongly supported the US-led “war on terror”.

Under Mr Rasmussen, Denmark not only supplied troops for the invasion of Iraq in 2003, but also sent 700 soldiers to fight under the Nato banner in Afghanistan.

However, his support for the US in Iraq and Afghanistan and his uncompromising stand in the row over Danish cartoons mocking the Prophet Muhammad severely damaged his standing in the Muslim world.

Mr Rasmussen has all along refused to apologise for the controversial cartoons published in a Danish newspaper in 2005.

He has stressed the freedom of the Danish press and said it was not for him to limit or judge what the press published.

Muslims who opposed the cartoons said his tough stance on the matter completely disregarded Islamic sensitivities.

Facebook-friendly

In recent years, Mr Rasmussen has led diplomatic efforts to get major countries such as the US, China, India and Brazil to back a new UN climate agreement.

The agreement is scheduled to be signed in Copenhagen in December 2009, at the so-called COP15 climate summit.

Environmental campaigners fear that the chances of a deal being reached could be diminished if Mr Rasmussen were to leave office before then.

As well as campaigning for an international deal to prevent climate change, Mr Rasmussen was also quick off the mark in embracing social networking sites on the internet.

He was the first top European politician to use Facebook, the popular networking service, to engage with voters. He now boasts 12,000 Facebook friends.

His wife also joined the ranks of celebrity recently when she participated in a television dance show. She has since quit her job in childcare.

NATO Meeting to Highlight Strains on Afghanistan

STRASBOURG, France – NATO leaders gathered here Friday to celebrate the 60th anniversary of an alliance that deterred the Soviet Union, opened the door to emerging democracies, battled ethnic cleansing and now welcomes the return of France as a full member. But they also must face the harsh reality that NATO’s first military mission outside Europe is failing in a way that risks fracturing the alliance.

As President Obama takes ownership of the fight against Al Qaeda and its Taliban allies, aides say he is determined to turn around the war in Afghanistan with a regional approach, recognizing that the stability of neighboring Pakistan, where Al Qaeda hides, is increasingly at risk. Mr. Obama, who left London for Strasbourg Friday after attending the Group of 20 summit meeting, is trying to fashion an efficient counterinsurgency strategy, as in Iraq, with a comprehensive surge of military and civilian reinforcements.

But his increasing American troops in Afghanistan to some 68,000 by the end of the year, from 38,000 today, is also likely to significantly Americanize an operation that in recent years had been divided equally between American troops and allied forces. By year’s end, American troops will outnumber allied forces by at least two to one.

His NATO allies are giving the president considerable vocal support for the newly integrated strategy. But they are giving him very few new troops on the ground, underlining the fundamental strains in the alliance.

The allies will offer more funds but no more than several thousand new personnel members, according to alliance military planners. Many of those will not be soldiers, but police trainers to meet a central pillar of the president’s new Afghan strategy, which focuses on an expansion of Afghan security forces. But even for the small numbers of European combat reinforcements, check the fine print: Nearly all will be sent to provide security for Afghanistan’s elections this summer, and will not be permanently deployed.

The war in Afghanistan has not drawn the enormous public protests in Europe that preceded the 2003 American-led invasion of Iraq. However, there were clashes in Strasbourg on Thursday between police firing tear gas and nearly 1,000 protesters who tried to enter the city center. The protesters, some of them masked, set garbage cans on fire and smashed a dozen bus stop shelters. On Friday, the French police said that of 300 protesters who had been detained, 107 remained in custody, The Associated Press reported.

The anti-NATO protesters marched from a so-called “peace camp” set up on the outskirts of Strasbourg, where security is already tight. As many as 30,000 police officers are on duty in the city and just over the border in Kehl and Baden-Baden, Germany, where some events will take place.

The war in Afghanistan was the first time that NATO invoked its Article 5, which requires collective defense of a member under attack. It was an important signal of support for the United States after Sept. 11, 2001, and maintaining the alliance was always considered more important than the inefficiencies of the effort, where each national parliament could decide what its troops could do. But Mr. Obama’s approach reflects a decision that to salvage the war now requires a dominant American role.

“As a candidate, Obama had expectations that Europe would make a serious increase in troop levels after he became president,” said Charles A. Kupchan of the Council on Foreign Relations in Washington. “But there is a realization now that Europe’s main contribution will be police trainers, economic assistance and development assistance.”

Defense Secretary Robert M. Gates and his British counterpart, John Hutton, have publicly warned that the performance of some European troops demonstrates that NATO risks slipping toward a two-tiered alliance. In that event, it would be divided between those that can and will fight, like Britain, Canada, France and Poland, and those that cannot or will not because of public opinion at home.

In many cases, European capitals have placed severe restrictions on their forces assigned to NATO’s International Security Assistance Force, or I.S.A.F. That has been such a hindrance to the war effort, in the view of some American commanders, that they ruefully say the alliance mission’s initials now stand for “I Saw America Fight.”

To be sure, a number of NATO and other partner nations have sent troops to Afghanistan who have fought and died in percentages larger than those of the American military. Australian, British, Canadian, Dutch and French conventional forces have shed much blood, and commando units from some of the smaller, newer NATO allies in the Baltics have punched far above their weight, according to American Special Operations commanders.

But even in allied countries whose soldiers have fought so well, public opinion does not support an increase of troops sent to what seems to be an endless war far away in a country that has always ejected foreign occupiers.

Under Mr. Obama’s plan, the United States is scheduled next year to take over from the Europeans the command in southern Afghanistan, which has seen the worst resurgence of violence. The United States will retain the command in fiercely contested eastern Afghanistan, across from Pakistan’s lawless tribal areas, where Richard C. Holbrooke, the special envoy to Afghanistan and Pakistan, has said that Osama bin Laden and important Qaeda leaders reside.

That means that by next year, the allies will be in charge only in the relatively combat-free northern and western regions.

Mr. Obama and Mr. Holbrooke understood early on that European members of NATO would not provide many troops beyond the approximately 30,000 already there, led by Britain, Germany and France. Instead, the Europeans will focus on the training of the police, of the army and of the civilian administration. The new goal, according to American military planners and NATO-nation diplomats, is to produce an Afghan Army of some 220,000 troops and an enlarged police force of 180,000.

What Afghanistan needs, a senior German official said, is not more foreign soldiers but more Afghan troops and police officers. Germany is sending in new police mentoring teams, and several hundred more police officers and gendarmes will come from France, Italy, the Netherlands, Portugal, Romania and Spain, according to the French foreign minister, Bernard Kouchner. France is trying to coordinate a second pillar of the European police force in Afghanistan to do training in the countryside for periods of up to 11 months. That project, which European officials say is more efficient than trying to send local police officers to Kabul, can have a European label.

Europeans will also concentrate on the “civilian surge” to help create functioning Afghan political, judicial and security structures in the countryside.

Daniel P. Fata, the Pentagon’s senior official for European and NATO issues during the Bush administration, said that Mr. Obama must not lower the NATO flag in Afghanistan, as that might provide allies an excuse to go home. “No European country wants to be the first to leave Afghanistan,” said Mr. Fata, a vice president with the Cohen Group, a global business consulting practice. “But many would be happy to be the second, third or fourth.”

Europeans praise the new policy, which “includes for the first time the words ‘exit strategy,’ ” another senior German official said. “But if the real problem is in western Pakistan, for that no one – not Europe and not the U.S. – has any easy answer.”

The New York Times
By THOM SHANKER and STEVEN ERLANGER
Steven Erlanger reported from Strasbourg, France, and Thom Shanker from Washington.