THE GREATEST THREAT IS THE DESTRUCTION OF GLOBAL TIES THAT BIND / THE FINANCIAL TIMES COMMENT & ANALYSIS

Last updated: August 18, 2014 4:56 pm

The greatest threat is the destruction of global ties that bind

By John Plender

Tensions are testing the infrastructure of globalisation and damaging economic recovery

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The geopolitical ructions of recent weeks pose a new level of threat to the infrastructure of globalisation. Conflicts, actual and potential, in Ukraine, the Middle East and elsewhere are also now a real risk to economic recovery.

The shooting down of the Malaysia Airlines Flight MH17 last month was a symbol of globalisation in enforced retreat. There could be no more obvious indication that global commerce is under attack than this revelation that civilian air traffic is vulnerable. The multiplication of economic sanctions following Moscow’s actions in Ukraine pushes Russia closer to autarky. Meantime, the low-key US response to these challenges weakens stability and predictability, the underpinnings of economic interdependence. If confidence in the infrastructure of globalisation wanes, the free flow of capital, goods and services across boundaries will be impaired.

These geopolitical frictions come against the background of a retreat into parochialism precipitated by the financial crisis. The collapse of Lehman Brothers demonstrated that there was no mechanism for cross-border unwinding, or resolution, of international financial institutions. Despite efforts to enhance international regulation, the reality is that national governments have rushed to protect their own banks.

In the eurozone the banking system has become increasingly fragmented. Hopes of a move to full banking union are long gone, with bank resolution continuing to be conducted at a national level. The new parochialism is reflected in the way European governments have been encouraging their banks to shrink their balance sheets while simultaneously demanding that they lend more to domestic small business. There is a growing policy debate around the world on the case for controls on capital flows.

As for trade and investment, the financial crisis forced a rethink. Many companies decided their supply chains were overextended and returned to home markets. 

Regional frictions are also prompting second thoughts about the location of investments, notably in the light of attacks on Japanese businesses in China and regulatory hostility to foreign business more generally. 

One question for globalisation is whether there is a tipping point at which an erosion of confidence causes people to stop flying, shun the shops and decide not to invest in new plant and machinery – the latter being crucial to sustaining the recovery. If that happens the outcome would, in the economic jargon, be a series of negative demand shocks. The global economy is in poor shape to cope with that.

Another concerns the political underpinning of globalisation. At the high points in the 19th century and in the period before the 2007 credit crunch, free trade was supported by hegemonic powers, respectively Britain and the US. 

In today’s more multipolar world the US suffers from overstretch after its military adventures in Iraq and Afghanistan and the American people have little appetite for interventionist foreign policy. While events in Iraq have pushed President Barack Obama into considering modest action against the Islamic State of Iraq and the Levant (known as Isis), his focus continues to be on bringing troops back, minimising foreign entanglements and nation-building at home. Understandable though this is, it leads to uncertainty that potentially magnifies the cost of regional conflict.

The lesson for non-Americans and especially for Europeans is clear. Free-riding on the US military budget can no longer be taken for granted. Europe will have to devote more of its own resources to addressing a newly assertive Russia, as well as sorting out its over-dependence on Russian energy. Policy makers will have to meet these challenges from a position of high public sector debt.

The wider lesson, according to Michael Spence, a winner of the Nobel Prize for economics, is that the main current threats to prosperity – those that urgently need effective international co-operation – are the spillover effects of regional tensions, conflict and competing claims to spheres of influence. The most powerful impediment to growth, he adds, is a loss of confidence in the systems that made rising global interdependence possible. 

It is a large claim. But there is no question that geopolitics is, at the very least, taking us into dangerous economic territory.


Copyright The Financial Times Limited 2014.