Finance: Harsh truths

Since the end of the Cold War, the hard power of the US and the soft outreach of the EU have been underwritten by a crucial set of advantages. A perceived absolute financial security, thriving economies and large amounts of cash have allowed governments to indulge in military adventures in the Middle East, incorporating Eastern Europe into the Union or funding vast aid projects across the developing world without worrying about costs. This allowed the West unprecedented power-projection.

Crucially, a deep faith in the "Washington Consensus" - a combination of free markets and trust in western-inspired democratic reforms as the key to progress - enabled the US and EU to surge ahead from the positions of relative weakness and economic stress they found themselves in during the late 1970s and early 1980s. The old economic order underwrote western strength.

Yet the nationalization of key American banks, and former US Federal Reserve chairman Alan Greenspan admitting there was a "flaw" in the way he had designed America's financial architecture, just goes to show that the era of Margaret Thatcher and Ronald Reagan truly has come to an end.

Undermining western power projection      

The economic crisis has undermined these fundamental supports of western power projection.

Professor Anatol Lieven of the New America Foundation and Kings College London believes that the new economic pressures will limit US and UK ambitions.

"The new constraints on western financial resources, coming on top of the overstretch of US and British military power, mean that many ambitious projects cannot now seriously be contemplated. Among these are the further expansion of NATO, and any further large-scale military interventions," he told ISN Security Watch.

Bombing Iran is now simply unaffordable, financially as well as strategically. These constraints may force EU countries to scale down their commitments in Afghanistan and place further domestic opposition in the way of further deployments such as those President-elect Barack Obama hopes to see in the near future.

The UK, which is highly reliant on the financial services industry, will find its ability to act abroad curtailed along with its influence in Europe. French President Nicholas Sarkozy has taken up Tony Blair's previous leading role in European politics, and as the UK economy suffers relatively more than that of France, Paris will see its influence rise within the EU along with its old agenda. 

The British government has begun to speak of a "deep" recession. It will jeopardize its electoral viability if it is perceived to put foreign power politics before the people. Gordon Brown's Britain has been adrift in foreign affairs. Despite London's prompt reaction to the crisis, this trend is only going to deepen as the UK finds it harder to finance its attempts to wield influence on the global stage.

A new world?   

The West's power projection may in the short to medium terms be severely weakened, but how much has geopolitics actually shifted?

Adventurous projects that might come under fire include the massive commitments made to Georgia and the broader behind-the-scenes ideas about EU pacts and deals aimed at dragging Ukraine and the Caucasus away from a resurgent Russia.

However, Giorgi Kandelaki, deputy chairman of the Georgian Foreign Relations Committee, dismisses such suggestions. Instead, he argues in an interview with ISN Security Watch that "the donor conference where pledges of aid to Georgia were made actually took place in the midst of the crisis. In fact, Georgia's friends donated US$1 billion over the estimate. This indicates that the profound value of successful, reforming Georgia is understood by free nations."

Harvard Professor Niall Ferguson, whose revisionist interpretation of the 20th century has caused as much celebrity as criticism in recent years, tells ISN Security Watch that he sees America as down but not out. 

"What is clear from the ongoing financial crisis is that it represents a great setback for the US as the model of financial markets that it has championed has been discredited. However, it is clear that this crisis is causing economic damage elsewhere in the world - in Europe, Japan and the emerging markets - while the US is still seen as safe for investors," he said.

Ferguson does not believe that the financial crisis represents a great shift in global power dynamics.

"The Russians have to be careful as they have experienced a sudden outflow of foreign capital. The Chinese too will have to be greatly circumspect as they would have more to lose than anyone else if there was a collapse in the dollar. In relative terms, the US may emerge from this crisis less weakened than everyone else," he said. 

But in the East…

Ferguson's suggestion that the rising powers of China and Russia will find the coming months deeply stressful is particularly true regarding Moscow's ambitions. The collapse in the price of oil and the vast capital outflows from Vladimir Putin's new Russia have suddenly sucked from the Kremlin's coffers the means to finance expeditions into the Caucasus and the rest of the former USSR for the time being. 

The sudden cooling off in rhetoric and tensions over the Crimea and Russia's desire to have a sphere of privileged interests acknowledge in its former territory has been the most dramatic effect of the financial crisis so far. Moscow's long-term reaction to these economic shocks cannot be predicted. However, if Putin and his elite have learned that the new Russia cannot rely on oil alone and needs the West for crucial investment, then a warming of relations cannot be ruled out. However, with the Anglo-American model discredited, the Kremlin's fascination with China's political stability and economic success will most likely only deepen.

The ongoing financial crisis has shown the leaders of the US and the EU that China's financial power has not grown uniquely on paper.

At the University of Oxford, lecturer in Chinese history Dr Matthew D Johnson believes that "if China comes out of this crisis relatively unscathed then it will further validate the idea that Beijing possesses an alternative development plan. This will produce an assumption that China's leaders possess an alternative model that does not produce 'Latin Americanization' or a dependence on the United States.

"The consensus now is that totally free markets are not what China needs, and the phrases chosen by China's leadership such as 'scientific development' emphasize a state role. The open economies of South America are seen as having produced to a certain degree their political instability," he told ISN Security Watch.

Fellow Oxford China expert Dr James Reilly argues that it is very unlikely that Beijing will come to the aid of the western economies.

"The G-20 meeting is coming and China is in no mood to bail out the United States," he told ISN Security Watch. "The US$680 billion financial stimulus package is in some ways designed to short cut the West's demands on China for money. This is saying loud and clear that holding up China is China's contribution to the world economy. I expect at the G-20 meeting that China will hide behind the developing countries, attempt to force open markets and try and be as small as it possibly can be."

Whatever China's desires, it has been economic meltdown and not Olympic acrobatics that has placed Beijing squarely at the center of world attention. The Communist Party is deeply concerned that its growth could slow significantly and economic problems could lead to social unrest.

In many ways this is the worst moment for China to enter the spotlight. With its increased role in global financial institutions and Beijing being pushed by western leaders to play a key role in re-designing the financial order, China's leaders will have to tread carefully not to anger popular opinion by appearing to give in, in any way,  to foreign pressure.

Managing change

Bill Emmott, former editor of the Economist and author of Rivals: How The Struggle Between China, India and Japan Will Shape Our Next Decade, told ISN Security Watch how he believed the UK should respond to the shift in economic power.

"I am not actually sure what London's foreign policy towards the Asian giants is right now. Yet the right foreign policy approach to the emergence of economic powers is to strengthen engagement and deal with the states that actually exists - not those you would like to see in their place. The shift to the 'blind-eye policy' on human rights is actually the right one as it allows us to deal with China and seek to embarrass them in organizations comparable to say the Helsinki Process that existed with the Soviet Union. The UK should support the best and most peaceful future for Asia [and embrace] the embryonic organizations such as the East Asia forum that have the possibility to bring the powers closer together."

The financial crisis has forced the pace of history by pressuring western leaders to realize that their economies are no longer vastly stronger than those of East Asia or even Russia.

The economic shock is on the brink of bringing many of yesterday's foreign policy adventures to a point of complete reassessment. Yet it prefigures a deeper geopolitical shift: the rise of China. Europe and America will hang together this time - and it is going to be up to Obama to take the West into the new world.