How economic regions face up to the storm
1) Are economic regions effective?
Even though US foreign trade is anchored in NAFTA, and the trade interdependence of Canada and the US is quite large, US economic policy is seldom based on a consideration of regional integration.
Only Europe and to some extent North-east and South-east Asia conceive of themselves as macro-economic regions. Europe’s integration is based on a unified market and on common institutional integration, to the point where it is generally considered that it could not be undone, but clearly not to the point where it would become a federation.
Asia’s integration is based on an increasingly unified production (as opposed to market) base, and on similar externally based growth strategies and economic security guarantees, mainly in the form of huge foreign currency reserves.
Each of the region – if one considers the US themselves as a region – enjoys advantages of size. But they play out differently.
They are most evident in the US capacity to import cheaply and to borrow indefinitely thanks to belief in an inexhaustible market. And by definition, the US is a sovereign political unit – although the level of infighting in Congress might diminish that certainty. Being a single political unit has distinct advantages.
Europe has played the size of its unified market, but has not extended this to a public borrowing strategy, in part because its monetary unity was not sufficiently based on macro-economic pillars: long before the so-called eurocrisis broke out, Europe’s central bank knew that the euro could only be a passive international currency, useful to mitigate exchange price risks in foreign trade, but could not become an active international currency because it lacked a common fiscal and economic policy. Almost all questions having to do with the resolution of the present market crisis have to do with the issue of Europe’s effectiveness as a political unit under conditions of market stress – eg with fast and dependable political decisions needed.
East Asia (eg.North-east + South-east Asia) has benefited least of all from economies of scale, because it is least institutionally integrated. Yet because trade, banking and monetary policies have converged after 1998, it has become more of a block and has acquired an often unrecognized bargaining power. China has been the main beneficiary of this, because it has been the focus of externally-driven growth, yet has been shielded from criticism by other Asian economies with shared interests. East Asians compete against each other but often have negative unity when faced with external demands.
Thus, no “protectionist” trade policy can target China without hurting Japan, South Korea and Taiwan: China’s foreign export drive is embedded in intra-Asian trade relations (intra-Asian trade is about 54 % of GDP, close to Europe, and FTAs target external markets from Asian production bases). No call for the re-evaluation of the RMB can be effective if it does not have Japanese participation – and whatever its other relations with China, Japan has effectively given up on demands in that direction since 2002, under the pressure of its own MNCs. China can also cite the precedents of Japan and Korea in the service and public procurement sectors.
In effect, while there is much discussion of strategic competition, geopolitical irritants and so on, East Asia has behaved as a rational economic actor in the negative dimension – protecting its imbalances (exports, investment, currency reserves) with the rest of the world. But since Asian states don’t coordinate effectively, their convergence is only negative, and does not extend to positive integration. As a result,they are so much in a dollar zone that it functions also as a dollar trap.
The Asian paradox is therefore that its continued prosperity rests on two pillars: monetary and financial policies set elsewhere, mainly in the US; and the capacity of the EU and US to absorb exports.
2) “It’s the politics, stupid”
After three decades of uninterrupted dominance of neo-liberal thinking in international economics (though not always in actual policies!), we are back to a trend in political economy that mirrors the early 30es. Market democracies pay a price for their openness – and for their responsiveness to the’ preferences of voters. Corporatist or authoritarian states have an edge in performance. Small states suffer more than big states ( a powerful realist argument, in fact, for regional integration in some cases – there may be insurance in numbers). Although he never lays out completely the argument, the idea put forth by DanyRodrick that you can’t have simultaneously global integration, national sovereignty and political democracy is a tempting one, which may hold valid for smaller or isolated states. South Korea – comparatively small…- has had to run twice for international credit and feels compelled to adopt monetary policies that could lead to international protectionism. Greece is squashed by competing demands made on its economy (spend less and grow more in order to pay back sums increased by large interest fees). As this outline is being written, it is also clear that “the market” is testing every conceivable weakness in the European institutional set-up.
Thus, the economics vs. politics debate is being played out in both directions: integration and disintegration.
The current play on European weakness is based on the political fragility of European decision-making – a situation, where, according to Ivan Krastev, at the national level there are “politics without policies”, while at the EU level it is instead “policies without politics”. It is on the risks inherent to this discontinuity that negative market sentiment is based. Yet this sentiment ignores some economic fundamentals. Europe as such is less indebted publicly than either the United States or of course Japan, and about as much as China if one takes into account the rising tide of local public debt in the PRC. Private savings are high – ironically, they have always been higher in the Mediterranean economies hit by the crisis in public confidence, and this reflects of course that individual decision-makers have always been more rational than economists think, and have behaved with caution. Of all major regions, Europe is the most open in terms of market access, the most open to equity investment (foreigners own a bigger chunk of European equities than anywhere else) and even to foreign lending (a larger percentage of national and European public bonds is bought by non-EU lenders than is the case for the US or Japan). And finally, the Eurozone is the only major region that has not had a quantitative easing policy, inflating away debt: for each euro put by the central bank in credit to banks or bond purchases, the ECB has retired a corresponding monetary unit, therefore not enlarging the monetary base. Compare that with US Federal quantitative easing policy, or with the Bank of England policy (it has bought 32 % of the UK national debt and pays for it by printing currency), or with Japan’s printing press solution to its national debt in the 1990s, or to China’s infinite monetary creation in the form of credit.
Perhaps by virtue, perhaps because it knows its comparatively weak base of political support, Europe has behaved both more open-handedly and more conservatively than any other major region. Of all regions, Europe now has the most contractionary fiscal policy – and recession will soon outstrip public debt as the main fear factor.
This only makes the costs of a lack of sufficiently demonstrated political unity more apparent. Political revolts are conceivable, and would threaten policies. They are a sobering lesson to those who envisage loose forms of economic integration. Europe’s policies are taking an emergency turn towards a discussion of true federalism, but are European politics prepared for it?
3) Can there be a “fortress Asia”?
Only two years ago, the main story about global geoeconomic trends was the decoupling of emerging economies from developed economies and the potential rise of an emerging country coalition. Deep disagreement(s between China, India and Brazil, to name a few, on monetary and financial issues, energy trends, and their mutual industrial and technological competition make this alliance much less likely today, without even going into more geopolitical issues.
This scenario is now being replaced by a more regional scenario – where East Asia refocuses around China and pulls ahead of the rest. The bulk of China’s trade and monetary policies concern the region. The global financial crisis results in increased global net lending to Asia – reversing a trend that had appeared after the 1997 Asian financial crisis. Not even China’s irritating geopolitical stance in the region has changed that.
Yet formal or institutional integration seems blocked. Bond markets have appeared but are not very significant. The East Asian Summit is another big, unwieldy international forum. The CMIM or Chiangmai Initiative Multilateralization has never been put to a reality test. In effect, Japan’s recent central bank intervention to stem the rise of the yen follows in the steps of what South Korea has been doing for a year, and points to the risk of a global mercantilist slide.
Both China, Japan and Korea have stretched domestic credit to its absolute limit, and could not respond to a global double dip with the kind of stimulus response they practiced in late 2008. Dumping currency reserves instead would be a frightening jump into the unknown – and serves to highlight that there is strictly no intra-Asian alternative, no prospect for a currency union – perhaps even less appetite for it than previously, given the European demonstration of what a monetary union really entails.
We therefore believe that East Asia needs, much like the rest of the world, the contemporary equivalent of a successful London Conference. Successful, because the original 1933 event turned into a disaster when it simply showcased international disagreements on monetary exchange rates. At the time, the United States were pursuing a mercantilist monetary policy; today the main interrogation point is obviously going to be China.
b yFrançois Godement Draft, not for quotation or citation
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