“New Normal”: The Return of Power Symmetry in Global Affairs

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Reportedly, at the 2010 “World Economic Forum” in Davos, the informal motto is “new normal”. However, this catchword is not supposed to mean that there is a return to the “normality” of the “anything goes” decade prior to the financial crisis. Of course, many financial actors in the USA and Europe are indeed trying to go back to the paradigm of financial speculation with no regard for the real economy. However, I venture the forecast that this attempt will fail. Why? Because another “financial crisis” of the the type we have seen in 2007-08 would not only blow the financial system, but would demolish the whole Western societal “system.” And the political class does know that. Moreover, the Western finance class is the prime “loser” of the new power symmetry in world politics.

By Michael Liebig


“The Normative Power of the Factual”

The damage done by the Anglo-American school of finance is simply too big for this practice to continue. Self-referential banking bears the blame for the biggest accumulation of government debt ever under peacetime conditions. The public debt must be paid off – and this will involve austerity measures at the expense of the general population. Already now, social strains due to the crisis are generating enormous political pressure on governments, notably in the USA. The devastating January 19th election results for the Democrats in Massachusetts are symptomatic. When, in addition, the impact of austerity measures will be broadly felt, the political pressure will further increase – both in the USA and Europe. As WEF founder Klaus Schwab put it in Davos, “we run the risk that 2010 becomes the year of the social crisis following the financial crisis of 2008 and the economic crisis of 2009.” As a consequence, governments will be forced to pursue seriously not only the regulation of the finance sector, but involve banks in covering the costs of the damage caused by them – for example, by a financial transaction tax.

The social situation in America has deteriorated to a degree that the Obama administration has no choice but forcing the banks to contribute to budgetary consolidation, limit or prohibit speculative activities by proprietary trading and their involvement with hedge funds or private equity firms. After the crushing defeat of the Democrats in Massachusetts, Obama had to take an “anti-Wall Street” stance, not doing so, would mean committing political suicide. Obama had distance himself from his Treasury Secretary Timothy Geithner and his economic adviser Larry Summers, who have been giving a free reign to the big Wall Street banks and had thought that the giant US public debt could be dealt with by “controlled inflation“. Instead, Obama has turned to Paul Volcker who has been recommending a return to the principles of the 1933 Glass-Steagall Act, which separated deposit banks from capital market-based banks. In 1999, the Glass-Steagall Act had been abolished under then-Treasury Secretary Summers.

Volcker’s position on bank regulation is not an isolated one. The head of the Bank of England, Mervyn King, also recommends the separation of “the utility functions of a retail bank taking household deposits and running the payments system from the casino trading of a investment bank.” The head of the Swiss Central Bank, Philipp Hildebrand, has expressed similar views. On January 19, German Finance Minister Wolfgang Schäuble introduced the 2010 federal budget – with a deficit of 86 billion euro in the Bundestag. He said it could not be tolerated that “the finance markets forget their serving function for the real economy and again become self-referential.“ French President Sarkozy said in Davos: “They [the banks] have first of all the obligation to provide credit to enterprises, and not speculate with money”. With others in the G20, France will implement effective regulation of the finance sector internationally, Sarkozy said.

I do not think that these statements are merely cheap political rhetoric. For sure in Europe, the political class does know that the very foundations of society are threatened if they don’t put the bankers on a tight leash. And bankers have maneuvered themselves into the defensive – in the “West” and internationally. Of course, they will pull off stiff and bitter resistance against the bank regulation. In particular in the world centers of the investment banking – New York and London. But bank regulation has not only become “politically correct,” it simply follows Georg Jellinek’s dictum on “the normative power of the factual”.

“The Masters of Money have lost their allies”

Another factor is most relevant here: A serious rift is opening up within the “business class”. It is already quite visible in continental Europe. Business representatives tied to the real economy are moving away from the bankers.

The Robert Bosch Group is a world-leading technology enterprise with about 270,000 employees in 60 countries and a turnover of 38 billion euro in 2009. On January 27, Bosch CEO Franz Fehrenbach delivered a speech, in which he said:

“We must no longer uncritically acquiesce to the omnipotency of the big banks… By their irresponsible, partially criminal activities they almost brought down the global financial system… As one would expect, they haven’t learned their lesson… It’s beyond me that American banks have paid out $140 billion in boni… With such banks we [Bosch] won’t do business any longer“.

Admittedly, Bosch is no “normal“ corporation. 92% of the capital of Robert Bosch GmbH is held by Robert Bosch Stiftung GmbH – a charitable foundation. The majority of voting rights are held by Robert Bosch Industrietreuhand KG – a trusteeship. And Bosch disposes of a multi-billion cash reserve, so it’s not dependent on bank credits or bonds. But what Fehrenbach has pronounced loudly and clearly, is consensus in German industry and particularly mittelstand firms (SMEs).

As the Frankfurter Allgemeine Zeitung put it in an editorial: “The Masters of Money have lost their allies.”

The “New Symmetry” in World Affairs

Moreover, the American and European finance class are in the strategic defensive internationally. Not only has their position of power atrophied within the euroatlantic space, the other and much more important cause for the loss of power of the “western” finance class, is the shift in the global correlation of forces in favor of Asia and Latin America. In these sectors of the world economy, the decoupling of the finance sector from the real economy had never reached the dimensions typical for America and Britain (and to a lesser extent continental Europe). Where such decoupling tendencies existed, they were driven back after the “Asia Crisis” of 1997. Thus, the growing economic and political power of China, India or Brazil has led to a “new symmetry” in the global correlation of power. The new power position of the “South” is reducing the relative weight of the “western” finance class dramatically. Again, the normative power of the actual manifests itself.

Therefore, it is not by chance that German Finance Minister Schäuble – just like Sarkozy – is pointing to the G20 when it comes to financial regulation: “Shortsighted and short-term thinking cannot be tolerated by the world community any more. We should not allow that unregulated markets threaten our social values, the legitimization of our economic system and the livelihood of future generations. The G20 process offers the possibility to discuss the central economic-political and financial-political questions involving both industrial countries and threshold countries and reach a stable, socially balanced and sustainable development of the world economy. The G20 could be the institutional core from which a sustainable world economic order of the 21st century emerge.“

The new powers of the “South” were never “allies” of the trans-Atlantic finance sector – in contrast to the majority of western industrial elites. The “South” was the victim and the opponent of the western financial system, but lacked the power to assert its interests. No more. Now, the rising powers of Asia and Latin America do possess the means to assert their interests. Against the rising powers of the “South,” the “West” simply cannot ram through its objectives any more – neither economically nor politically nor militarily.

This is the real “new normal“: The return of power symmetry in global affairs. Even if no one in his right mind would wish back the times of the Cold War, then a certain symmetry shaped international politics. Leaving aside moral or normative considerations, when the Soviet leadership said “Njet,” a fact of life was established the “West” had to reckon with. The relative power symmetry in “East-West” also significantly influenced the strategic stance of western élites in economic and social policy.

Power symmetry works as a very effective constraint for unilateral modes of conduct, it is an efficient catalyzer of multilateral modes of conduct. I would think that (relative) power symmetry is certainly a “normalcy” to be preferred to the extreme power asymmetry between 1990 and 2005.

However, the 1945-90 “East-West” relationship was merely an episodic phenomenon in comparison to the extreme and historically far more important power asymmetry between the “North” and the “South” in the colonial and post-colonial era. More or less with the beginning of the 21st century, and accelerated by the financial crisis originating in the USA, the secular power asymmetry between the “North” and the “South” has ended. It is quite a new experience for the “West” – and first of all the USA – to be confronted with a reality in which the “others” in the “South” can say “no”, when they see her interests threatened.

The new power symmetry reduces or prevents the unilateral enforcement of interests by political, economic and military means. Power symmetry has also a very important normative dimension: It reduces the ability to represent particular values – of course, based on particular interests – as “universal” values. This was shown at the Copenhagen climate conference in December 2009. And this is equally evident in the question of the global financial and economic architecture.

A “Realist-Atlanticist” View

The German political scientist Prof. Christian Hacke may be called a traditional “Atlantiker”, he likes America and doesn’t like Russia and China – but he is a “realist”. In the January 25th edition of the political magazin ApuZ, a bi-weekly publication sponsored by the German government, Hacke published an essay titled Obama’s Policy towards Russia and China. This paper gives a useful insight into the perception of the new global symmetry by the conservative-centrist German foreign policy establishment.

Hacke writes that “a complete reversal in the so far reliable determining factors of world politics“ has occurred: the USA, sofar “the lone global troubleshooter,” have become “the problem case number one“ in international affairs. He wonders whether Obama “has accepted the transition into a multipolar world system or intends to facilitate the return to the unipolar moment of American domination“?

Hacke notes that as a consequence of the “new economic and foreign policy weakness” of the USA, “the power divide between the USA and Russia has declined“, while the geostrategic rivalries between the two powers have increased in spite of apparent diplomatic friendliness.

The reversal of the balance of power is much more evident in the case of China: “The global financial and economic crisis has shown that America has become the largest debtor nation, while China is the world’s biggest creditor nation. America’s decades-long foundation of world leadership has melted away. Now China has taken America’s place – at least in financial terms. This extraordinary reversal in the bilateral relationship is not only impacting Washington, but may change the whole world economic order. The only reassuring aspect is that for the time being the mutual interdependency in economic and financial terms [between the USA and China] is constraining the duel in terms of power politics“

Hacke writes: “Due to their economic strength, the USA were able to play the role of the world hegemon for a long time. Now it seems that Chinese state capitalism may triumph over the American, liberal version of capitalism. China has not only weathered the storm of the financial crisis much better [than the USA], but has seated the USA in the dock – as the party responsible for the crisis… In financial and monetary affairs, the USA depends on China’s good will… The November 2009 APEC-Summit has demonstrated that, in the eyes of many Asians, the American economic model has lost all attractiveness and is viewed as a failure“.

Hacke compares the USA and China with “two wrestlers clenching each other”, but “one knee of the USA is already touching the floor“. Hacke is not ruling out that America might “fail in Asia“, because of China’s “effective, yet subtle efforts to undermine Obama’s attempt to rebuild America’s strength,“ and because “many Asians see China as successfully representing the very concepts, which had made the USA so attractive for a long time“.

Hacke’s conclusion is: “One is increasingly getting the impression that Obama’s foreign policy is resembling a perpetuum mobile which exclusively moves itself,“ instead of impacting the other actors in world affairs. Thus, “a new concert of world powers” will likely emerge, in which the USA will play a “much more moderate role,” along with China, Russia, India, Brazil – and the European Union, which however is no world power in the traditional sense. For the time being, the rivalries within the “new concert of world powers,” remain subdued, being “discreetly fought out on international economic conferences, climate summits and oil fields.“

Indeed, the “new normalcy“ in world affairs won’t be an easy-going picnic on a sunny summer day. There will be rainy, stormy and icy times. In western mainstream media, one can currently observe that such meteorological metaphors are quite en vogue when it comes to their descriptions of China’s foreign policy stance.

By the way, here in Germany we have a “normal“ winter this year. December and January were icy – even the Rhine valley has been covered with snow for several weeks. Not only stalwarts of industry-induced “climate change” have claimed that this winter is “abnormal”. But the meteorologists have assured us, it’s indeed a perfectly “normal” winter.

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