Gideon Rachman
This week marks not just the tenth anniversary of 9/11?it is also the third anniversary of 9/15, the day when Lehman Brothers collapsed. But while world politics is no longer dominated by the ?war on terror?, a different form of terror is stalking the world?s financial markets.
The current mood among top financiers?the people formerly known as Masters of the Universe?is now more panicky than at any time since the financial crisis broke. Last week, George Soros warned that the European debt problem ?has the potential to be a lot worse than Lehman Brothers?. Top bankers have been saying similar things in private for months. European politicians provide little cheer, either. One of the men charged with sorting out the euro, could be heard speculating last week about ?a new Great Depression and the resurgence of nationalism?.
This gloom is even more worrying because there is little sign of effective international co-operation or global leadership to deal with mounting concern about the international economy. Without such leadership, there is a rising danger of a drift into protectionism and ?currency wars?.
The new mood of barely-suppressed hysteria set in over the summer, when the European debt-crisis spread to Spain and Italy. The European Central Bank has had to step in as a major buyer of Italian and Spanish bonds?a policy so controversial that it has just provoked the resignation of J?rgen Stark, the German member of the ECB?s governing board.
European politicians are desperately trying to cram the genie back into the bottle. One finance minister says it is imperative that ?Greece should be isolated?. But it may be too late for that. The fear is that a serious worsening of Greece?s situation would lead both to bank failures elsewhere in Europe and to further sovereign debt crises, as the markets refused to lend to the likes of Italy and Spain. The economy of the European Union?taken as a whole?is larger than that of China or the US. So a European economic, banking and debt seizure inevitably has global ramifications?particularly when the US economy is so weak.
But while there are plenty of politicians who can eloquently describe the current dangers, there is little sign of a global response. That is a stark contrast to the reaction to the collapse of Lehman Brothers. In 2009, the world?s leaders, meeting at the Group of 20 summit, agreed a co-ordinated blast of economic stimulus that helped to restore confidence to the markets. Just as important is what they did not do. In the face of widespread predictions of a drift into 1930s style tariff wars, the major powers committed themselves to resisting protectionism.
Now compare the mood today. The appetite for international co-operation is gravely diminished. Key political leaders are looking inwards.
The European Union?s leaders lurch from one emergency summit to another. Angela Merkel, chancellor of Germany, spends most of her time managing an increasingly fraught domestic debate, which has now taken a new twist with the resignation of Mr Stark. David Cameron of Britain wants to avoid paying the bills for the euro-mess, so is content to watch from the sidelines. In France, Nicolas Sarkozy would clearly like to use his leadership of the G20 to burnish his own re-election campaign?but that means that any initiatives he proposes are likely to be tailored to the media rather than the markets.
The G20, once touted as a more efficient alternative to the UN, is in trouble. President Obama is pre-occupied by America?s own daunting economic problems and engaged in a never-ending punch-up with the Republicans. The Chinese government remains reliably egotistical.
With international politics drifting, there is now a clear danger that the world will belatedly slide into protectionism.
Last week Mitt Romney, one of the front-runners for the Republican party nomination in the US and a man who is generally regarded as a free-marketeer, called for the imposition of tariffs on Chinese goods, if China does not allow its currency to float. Brazil took action last week, as the government imposed ?anti-dumping? duties on imports of steel tubes from China. President Dilma Rousseff?s statement was a text-book example of how an economic crisis can lead to protectionism: ?In the case of the current international crisis,? she announced, ?our principal weapon is to expand and defend our internal market.?
It was the Brazilian finance minister, Guido Mantega, who gave the world the expression ?currency wars? to describe the process of competitive devaluation, as struggling economies seek to promote their exports. Last week also saw a further twist in the currency wars, as Switzerland decided that it could no longer allow the markets to drive the Swiss franc up to unprecedented levels.
If other countries follow the examples of Brazil and Switzerland, and adopt drastic measures to manage their currencies, then the principle of free movement of capital around the world?one of the underpinnings of globalisation?will be weakened. There is also no scenario for the break-up of the eurozone that does not involve the reimposition of capital controls, at least for a period.
Historical parallels are never precise. However, politicians might be jerked into more urgent action if they recalled the history of the 1930s. Back then, what began with a financial crisis on Wall Street turned into a Great Depression when it was followed by the rise of protectionism and a banking crisis in Europe.
? The Financial Times Limited 2011