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The day the dollar didn’t die

A world economic crisis both blames and waits for US leadership. Pramit Pal Chaudhuri elaborates.

india Updated: Apr 02, 2009 15:47 IST
Pramit Pal Chaudhuri

Recently, a lobbyist who had served as an economic advisor to Barack Obama asked, “Is everyone blaming us Americans for the world’s economic mess?” Based on recent trips to Europe and East Asia, I answered, “Yes. But everyone also believes only you Americans can clean up the mess.”

The Europeans had initially crowed about Wall Street’s crash. They had neither the credit card-happy ways of the US nor the export-dependency of China. The American Century was over, the Rise of Asia stopped in its tracks, the Return of Europe was imminent. Then they opened their account books. Europeans found their banking sector was the most exposed to foreign debt gone bad. First, there was the debt next door. East Europeans had borrowed $ 1.6 trillion — almost all from their richer western cousins. Second, Europe’s banks had lent more to weaker economies than anyone else. Of nearly $ 4.5 trillion of bank loans pending with emerging economies, three-quarters is European.

Professor Nouriel Robini claims one euro-currency country will default on its sovereign debt. Most eyes are on Austria — whose exposure to East European debt is equal to 75 per cent of its GDP. Greece and Ireland are also in the running. Europeans also found the crisis bringing out the worst in their union. As a former French finance minister said recently: “We created a single currency, but lacked coordinated economic policies. Now we are caught in a storm and it has shown we need to do more.” In other words, the European Union created a euro and, to manage it, a European Central Bank. The next step should have been a finance ministry or treasury. It wasn’t taken.

So who will backstop the euro? The answer is Europe’s biggest economy: Germany. It is less clear whether job-shaky German taxpayers want to pay for the financially footloose ways of Greeks or Hungarians. Berlin’s initial declaration that it would back the ‘Eurozone’ promptly ran afoul of a central bank ban on bilateral bailouts. The French ex-minister grumbled, “Treaty obligations have to be eased. This is wartime.” But it’s also a German election year. The recent EU decision to endow the International Monetary Fund with $75 billion was a way to route German money to East Europe through the back door.

The euro is still the world’s most circulated currency. “The EU is under stress, but the euro is not at risk,” said an IMF official. “But how the euro works has to change.” Which is why Europeans are right now all a twitter about the G-20 summit. It will be the first multilateral foray by Barack Obama and the Old Continent is waiting to see what he brings.

In contrast to Europe, the world’s second-largest national economy, Japan, was fully resigned to going belly-up when Lehman Brothers went under. Japan has seen the simultaneous collapse of its three largest export markets and on most months, it is the fastest shrinking economy in the rich world.

The Japanese mildly point out that their banks were sound and their current account positive. “Our banks never made sub-prime loans,” said one industrialist. But if the US over-consumed, Japan under-consumed. The latter’s basic economic model is largely the same as it has been since the 1950s: export. This was fine during the recent boom years. But trade is drying up. This is more or less the experience all across East and Southeast Asia.

In penance for World War II, Tokyo hitches its policy wagon to that of the US. Nonetheless, Japan is experiencing a degree of political incoherence that makes New Delhi look purposeful. The present prime minister Taro Aso has an approval rating of 11 per cent and has to call elections by September. If he falls, Japan will have gone through an amazing five prime ministers in five years.

Aso played another card: Barack Obama. The Japanese PM flew to Washington in late February to be the first head of government to have a White House photo-op with the new US president. Problem: the summit was transparently one of a politician on the ropes asking a favour from a politician in the clouds.

The Japanese still remember the ‘lost decade’ — the ten-year long recession that followed the real estate bubble burst of the late 90s. Trying to spend its way out of that downturn has left the country with a debt mountain and almost wiped out its historical current account surplus. Which is why Japan, not unlike Europe, is looking to the US to turn the world around.

The US is still the indispensable power. Europe is the richest but most confused of the world’s power centres. Japan remains in wait-for-Washington mode. China’s attitude is the shrewdest. Beijing talks bigger than it does. It plays to the gallery by calling for a dollar replacement, but declines to make the renminbi convertible and thus a contender. Its own T-bill purchases are the primary reason the dollar’s value has held steady during the crisis. Beijing’s gambit seems to be to make the US take it more seriously. Its message: consider us as a global co-pilot. As a ruling party member said at the Aspen conference, “A G-2 world, led by the US and China, is a reality in all but name.”

Washington, even fumbling and stumbling, is still the main game in town.