Winning Greek battles, losing world wars

The Greek debt deal reveals deep euro recklessness, the US Republican race hangs over world trade, and the search for a World Bank president opens international divides – this is the global economy under threat.

FT.com

No one should be fooled that three tortuous processes edging to conclusion will provide solutions to the pressing problems of governing the global economy. The Greek sovereign debt swap shows the eurozone still to be the prisoner of its own misguided ideas; the US Republican primary race underlines the threat to world trade of America’s poisonous domestic politics; the appointment of a World Bank president reveals the inflated rhetoric of emerging market countries about taking their rightful place in the world.

Whatever comes out of Greece this month, one thing should be clear. Since the eurozone crisis began, the two years of space bought with rescue loans from eurozone governments and the International Monetary Fund have not resulted in a policy infrastructure that will prevent a repeat. The mainstay of the new framework is a fiscal pact that enshrines a misdiagnosis – that the crisis was all to do with profligate governments, not reckless lending and credit bubbles.

The rest of the world has mainly stood and watched the eurozone crisis unfold in frustration. In particular, the US’s muted role is in sharp contrast to its activism in the Asian crisis in 1997-1998. Then, in contrast to current attitudes in Europe, it stamped on the idea that a regional Asian monetary fund should be leading the rescue.

The US administration has no shortage of private opinions about the eurozone. But political discord in the US, and particularly a belligerent attitude in Congress about the US allowing itself to be walked over by other countries, has contributed to its playing a much smaller role.

The IMF is America’s traditional instrument of influence. But the administration has been constrained by fierce congressional opposition to financing eurozone bailouts. Not only has the US been the only big economy to rule out participating in a new financing round to increase firepower at the IMF, but the administration has not yet dared submit a financing commitment to the fund agreed in 2010.

This brings us to Mitt Romney. In one of his varied policy positions, apparently designed to slough off his global businessman image and appeal to the American heartland, the Republican frontrunner has promised to escalate confrontation with Beijing about its manipulations of trade and the exchange rate.

Now, foaming talk about trade during election campaigns generally amounts to little when in office. (Remember Barack Obama’s promise to renegotiate Nafta?) Still, when it comes to protectionist populism, the presidency is supposed to act as a restraining force against Congress. So far, Republicans in the House of Representatives have courageously held their position of declining to pass a law allowing the US to impose currency tariffs on China. Their task is not made easier by their party’s likely presidential candidate backing such moves on the campaign trail.

Congressional fear and resentment of the likes of China have also influenced the third process – appointing a World Bank president. The job has traditionally been in the gift of the US, and the White House has made sufficiently clear it expects another American to be appointed that credible non-US candidates have so far been scared off.

Yet while the US lock on the bank’s presidency is a show of international strength, it is also a sign of domestic weakness. The White House has been forced to quash any idea of accepting a non-American president, even as part of an international bargain where other countries give up their holds on other institutions, lest Congress accuse it of going soft.

In any case, the obvious source for a rival candidate, the big emerging market countries, have yet to come anywhere near matching rhetoric to action when it comes to global economic governance. Brazil and China have made grand claims about an open, merit-based appointment process at the World Bank. But so far there are no more than murmurs about finding a unifying candidate from an emerging market.

The rhetoric of emerging-market solidarity masks deep rivalries, which often outweigh suspicion of the US. In this world, the US is likely to retain the World Bank presidency not by being the country everyone admires or fears most but the one that everyone dislikes least.

Governance by default is not a good prospect for running the global economy. Global crises may have eased but they will recur. On current form, the world will find itself scrambling for coherent leadership in the next crisis - just as in this one.

Alan Beattie is the FT’s international economy editor. His new book is ‘Who’s In Charge Here?’

Copyright The Financial Times Limited 2012.