Monday, March 02, 2009

Now For the Hard Part

British economic historian and Harvard professor Niall Ferguson was in Ottawa last week. In an interview with The Globe and Mail, he predicted that the global economic crisis is far from over. In fact, he said, things could get pretty nasty. "There will be blood, in the sense that a crisis of this magnitude is bound to increase political as well as economic [conflict]. It is bound to destabilize some countries. It will cause civil wars to break out, that have been dormant. It will topple governments that were moderate and bring in governments that are extreme. These things are pretty predictable. The question is whether the general destabilization, the return of, if you like, political risk, ultimately leads to something really big in the realm of geopolitics."

And from Europe this morning comes a story, in The New York Times, that things could be falling apart in the European Union. "The leaders of the European Union gathered Sunday in Brussels," ran the lead, "in an emergency summit meeting that seemed to highlight the very worries it was designed to calm." The economic crisis has driven a wedge between the countries of what Donald Rumsfeld called "new and old Europe." The problem, according to the Times, is that "the 16 nations that use the euro -- introduced in 1999 and one of the proudest European accomplishments -- must submit to the monetary leadership of the European Central Bank. That keeps some members hardest hit by the economic downturn, like Ireland, Spain, Italy and Greece, from unilaterally taking radical steps to stimulate their economies." And newer members of the Union, "including Hungary, Romania and the Baltic states, are in a state of near-meltdown."

The crisis is forcing countries to reach across cultures and political systems. And this is particularly true of the United States and China. Ferguson believes that what he has dubbed "Chimerica" -- the fusion of the United States and China -- "really is the key to how the global financial system works." The United States is the major market for Chinese exports; and social stability in China rests on the system of factories which export to America. The Chinese are the major holders of American debt, which is growing astronomically as the United States seeks to stimulate and stabilize its economy. Despite the deep seated distrust which has existed for sixty years between the two nations, it is essential that they work together.

Unfortunately, says Ferguson, even if Europe and Chimerica manage to finesse their differences, "This is a very unfair crisis. The epicentre is the United States, but the rest of the world, and particularly America's trading partners, will get hit harder than the U.S." That includes Canada. But because our economy -- unlike the economies of Asia -- is not wholly focused on exporting to the United States, things will not get as bad as they could get. That is small comfort.

We now know the downside of globalization. The brave new world of globalized trade hangs by a thread. As Ferguson has been warning for years, "it's a fragile system."

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