The New Economic Club Will Produce Conflict, Not Cooperation

A great piece from Ian Bremmer and Nouriel Roubini, at Foreign Affairs, "A G-Zero World":

The recent financial crisis and global market meltdown have sent a much larger shock wave through the international system than anything that followed the collapse of the Soviet bloc. In September 2008, fears that the global economy stood on the brink of catastrophe hastened the inevitable transition to the G-20, an organization that includes the world’s largest and most important emerging-market states. The first gatherings of the club -- in Washington in November 2008 and London in April 2009 -- produced an agreement on joint monetary and fiscal expansion, increased funding for the International Monetary Fund (IMF), and new rules for financial institutions. These successes came mainly because all the members felt threatened by the same plagues at the same time.

But as the economic recovery began, the sense of crisis abated in some countries. It became clear that China and other large developing economies had suffered less damage and would recover faster than the world’s wealthiest countries. Chinese and Indian banks had been less exposed than Western ones to the contagion effects from the meltdown of U.S. and European banks. Moreover, China’s foreign reserves had protected its government and banks from the liquidity panic that took hold in the West. Beijing’s ability to direct state spending toward infrastructure projects quickly generated new jobs, easing fears that the decline in U.S. and European consumer demand might trigger large-scale unemployment and civil unrest in China.

As China and other emerging countries rebounded, the West’s fear and frustration grew more intense. In the United States, stubbornly high unemployment and fears of a double-dip recession fueled a rise in antigovernment activism and shifted power to the Republicans. Governments fell out of favor in France and Germany -- and lost elections in Japan and the United Kingdom. Fiscal crises provoked intense public anger from Greece to Ireland and the Baltic states to Spain.

Meanwhile, Brazil, China, India, Turkey, and other developing countries moved forward as the developed world remained stuck in an anemic recovery. (Ironically, the only major developing country that has struggled to recover is the petrostate Russia, the first state welcomed into the G-7 club.) As the wealthy and the developing states’ needs and interests began to diverge, the G-20 and other international institutions lost the sense of urgency they needed to produce coordinated and coherent multilateral policy responses.

Politicians in Western countries, battered by criticism that they have failed to produce a robust recovery, have blamed scapegoats overseas. U.S.-Chinese political tensions have risen significantly over the past several months. China continues to defy calls from Washington to allow the value of its currency to rise substantially. Policymakers in Beijing insist that they must protect their country during a delicate moment in its development, as lawmakers in Washington become more serious about taking action against Chinese trade and currency policies that they say are unfair. In the past three years, there has been a sharp spike in the number of domestic trade and World Trade Organization cases that China and the United States have filed against each other. Meanwhile, the G-20 has gone from a modestly effective international institution to an active arena of conflict.

I love this essay: It's short, to the point, and totally doomsday-ish!

Check back at the Foreign Affairs article and at the homepage. There's lots more coverage of global currencies, and I'll have some updates later ...