2014-11-29 By Harald Malmgren
Economics, politics and global threats are reinforcing a shift away from the globalism of the past thirty years and posing the possibility of a new phase of global development, in which nationalism returns as a clearer definer of the way ahead for the global system.
It has been more than six years since the Lehman collapse in September, 2008, and the start of the Great Financial Crisis.
That crisis had debilitating effects on both advanced and emerging market economies. For almost six decades prior to the Lehman shock the world had experienced growth in world trade at a pace roughly twice as fast as domestic growth. This enabled many economies to escape slow domestic consumption and weak government spending by turning to exports as an engine of faster growth.
The Lehman shock not only set in motion systemic challenges to the world’s banking system and financial markets. It also brought about a collapse in world trade into the longest, deepest contraction since the 1930s.
By 2010 world trade recovered to a level comparable to where it had been in August 2008.
However, this pickup was not sustained.
Instead, trade again relapsed and settled in at a far slower pace than had prevailed during the previous six decades. At close to the end of this year, it would appear world trade growth has slowed further, hovering near stagnation.
Not surprisingly, the many national economies around the world that had become dependent for growth on exports into swelling world markets found their economies had lost traction.
GDP growth slipped back to the pace of growth in domestic demand, which had been suppressed, by both inadequate consumption and investment, and negative consequences of continuing global financial market stress.
Some popular analysts pronounced the world had entered a “new normal” path of sub-2% growth, with threatening risks of slipping back into recession and renewal of systemic crises among financial institutions.
Economic growth this year did not demonstrate the recovery forecasted by public and private forecasters. Instead, what materialized in 2014 was a mix of continued minimal growth or stagnation in luckier nations and recession in others.
Global stock markets prospered this year, levitated by various extraordinary monetary measures by central banks, but the gains in wealth from trading paper assets failed to lift the economic conditions of most people. Economic policy debate increasingly turned attention to what appeared to be a long term trend of growing income inequality throughout the world.
In 2014 more and more national governments and their central banks felt growing pressure to devise measures to ease the pains of high unemployment, declining wages, rising health care costs, weakened retirement systems, and growing debt of both governments and individual families.
As it became evident that international common efforts to revive global growth had failed, and as national economic policy priorities rose, consideration of the effects of domestic policies on other economies around the world faded into the background.
Following the Lehman crisis central banks intensified cooperation with one another to stabilize world financial markets. The US Federal Reserve agreed to initiate or enlarge swap lines with a variety of other central banks among advanced and emerging market economies. The Fed also guided US federal government assistance to banks in a manner that would enable troubled European megabanks to gain substantial benefits from US Government aid to large banks and nonbank financial institutions.
The G20 Summit of 2008 was called to formalize cooperation among central banks, finance ministries, and financial regulators. Summit leaders announced creation of a new multilateral Financial Stability Board (FSB), which would undertake continuous deliberations among financial market officials of all countries.
This new consultative framework did succeed in helping most national authorities to develop common ideas on financial regulatory reforms aimed at averting new systemic financial crises.
In particular it advanced collective international discussion of new, heightened capital requirements for banks, identification of systemically important financial institutions (SIFIs), new attention to liquidity risks in addition to solvency risks, and need for international oversight of derivatives contracts of hundreds of trillions of dollars in scale.
However, by the time the G20 met in Brisbane mid-November this year, the failure of economic recovery to appear had changed international interaction. The scene became set for a return to economic nationalism. This was particularly evident at the Brisbane Summit, where leaders agreed action was needed to lift global economic growth, but could not agree on specific steps or new forms of international cooperation and policy coordination among them.
Expecting currency and monetary policy clashes, they could not even agree to establish multilateral mechanisms to manage differences in national trade, currency and monetary policies. They were only able to announce a purely rhetorical $2 trillion stimulus to global economic growth – an empty pledge without serious national action commitments.
Even the cohesion of the EU and the Eurozone is now being dramatically weakened as individual European governments find themselves unable to agree with each other on how to implement meaningful, synchronized fiscal and monetary actions.
They could not even agree or how to proceed with common financial market reforms such as the proposed EU Banking Union.
What started out a year ago as European teamwork to identify strengths and weaknesses of European financial institutions fell apart in efforts to defend past regulatory practices and national political objectives.
New EU/ECB bank stress tests were announced as a serious effort to gain full transparency of strengths and weaknesses of European financial institutions.
As the stress tests evolved towards the October target date for imposing common criteria for measuring the health of European banks, national priorities overwhelmed the need for common measurements of risk and valuations of bank capital. Instead, myriad parallel measures of bank health were permitted throughout Europe, with every government and every bank permitted to seek means of minimalizing exposure to non-performing assets and maximize estimations of quality capital.
The October EU and ECB stress tests once again hid the most serious vulnerabilities to systemic risk in hopes that optimistic test results would be sufficient to induce private investors to invest in banks once again and encourage banks to resume lending.
EU and ECB authorities made significant efforts to devise and impose common regulatory reforms, particularly requirements for increased bank capital relative to assets, and increased “liquidity buffers” for the biggest banks. However, ongoing disputes developed with US regulators about such questions as imposition of common platforms for trading derivatives, and common capital requirements for US and foreign banks operating in the US.
Late this year European authorities cited these disputes as an excuse for postponing for several more years tougher capital-asset ratios and liquidity buffers on European banks.
One might summarize the European financial market reform process as an intellectual exercise in devising regulatory reforms while simultaneously seeking reasons for delaying such reforms as long as possible.
Domestic political dissatisfaction with austerity fiscal policies, no growth in wages, youth unemployment extremes, out of control immigration, health care and retirement uncertainties, growing public and private debt, and a host of other national and local political issues now preoccupy politics of most national governments.
With widening public disappointment in economic conditions, domestic regional and local political dissent is now rising in many European nations.
The US Federal Reserve modified its traditional domestic bias when world markets and world financial institutions stumbled or came to near collapse during the Great Financial Crisis of recent years. To help stabilize global financial stability, the Fed arranged substantial increases in its swap lines with other central banks to help prevent a global liquidity collapse.
In some cases the swap lines became instruments of specific bank rescue, as when the Fed increased its swap line with the Swiss National Bank (SNB) in order to enable the SNB to bail out UBS bank.
The Fed also facilitated availability of US bank rescue funds like TARP to non-US banks, especially European banks. Now, however, internal Fed discussions are far more focused on the continuing slow growth in the US economy, with far less deference to concerns of Asia and Europe.
The failure of the world economy to bounce back turned attention of central banks inward to execution of national measures to levitate their own national markets.
National governments seemed politically unable to develop coherent fiscal and structural policies to revitalize their respective economies. In the absence of fiscal and structural reforms, central banks sought monetary measures that might avert or at least postpone steep economic downturn or collapse of key financial institutions.
Gradually the attention of central banks moved beyond the objective of ensuring financial market stability to stimulus of economic growth in the absence of needed fiscal and regulatory actions.
The US Federal Reserve and the Bank of England initiated and gradually expanded QE measures, ostensibly to prop up their banking systems. Now the US and UK extraordinary liquidity injections have come to an end, and both the BOE and Fed are refocused on domestic priorities, especially unwinding the influence of central banks on financial market behavior.
In short, the return to a more economic nationalistic stance reinforces a number of global security trends where nationalism is spurring conflict.
Economics, politics and threats are working together to shape the decade ahead for this part of the 21st century.
The post-WWII international institutions that were crafted to reduce conflicts between nations and deter forceful resolution of disputes all seem to be losing influence. In their place currency wars, resource conflicts, regulatory clashes, and assertions of sovereignty in areas of long unresolved disputes are likely to emerge.
Once again nations will meet in hopes of averting more serious physical conflicts, as they did from the time of Bretton Woods through the rest of the 20th Century.
However, in the present context of global economic stagnation and faltering national responses it will be far harder for individual governments to agree to collective action.
Working in concert now would likely entail yielding some degree of national sovereignty, including sovereignty of parliaments and the historic autonomy of the US Congress. to transnational decision bodies.
A rise of nationalism at a time when most governments are increasingly paralyzed politically by unhappy citizenries will encourage regional and global use of military force to exploit vulnerabilities of some nations relative to others.
Uncontained, rising nationalism could easily degenerate into another era of local, regional, and eventually global military confrontations.