The transformation of the world.
In the key years of 1989-1992, it was Europe, not the U.S., which had the distinction of being both source and origin of the process which came to be called “globalization”—understood driven as technologically conditioned links between local and global networks. At a stroke, German unity dismantled the cold war structure of two Germanies, the two Europes, their two alliances and the two great powers. The collapse of this intricate structure inherited from the cold war, immediately substituted Berlin for Paris as the geographic centre of a wider Europe, launched the countries of central and south-eastern Europe on transitions out of the communist party-states, precipitated the disintegration of Yugoslavia into war, followed by the implosion of the Soviet Union and Russia’s independence. All countries previously embedded in, or attached to the communist system had no option but to become incorporated quickly into the interdependent global system. In 1991, India launched an ambitious liberalization policy. The following year, in February 1992, the ageing chief man of China, Deng Xiao Ping, declared famously that China was open for business.
Return to pre-1914?
As the dust lifted slowly from the wreckage of the Soviet Union’s collapse, and the cold war drifted into history, the contours of the global system appeared in sharp outline. The US stood without equal, in a world of unprecedented inequalities of power and wealth. Capitalism’s predominance in the 1990s left the world looking two ways: back to pre-1914, and forward to the twenty-first century. Pre-1914 seemed in many respects a golden age of civilization, cut short and wrenched from its path by war and revolution. Was the world heading forward to a renewal of the golden age, or towards the disasters which overcame it in the past?
One major difference to the pre-1914 world was the number of states in the global polity. In 1914, the world counted about 30 states. Liberal political values, proclaimed by President Woodrow Wilson on the US entry to war in 1917, introduced national self-determination as a central principle of world politics, and heralding the break up of the European multi-national empires, followed later by the trend to de-colonisation after 1945. Fifty one states signed the United Nations Charter at San Francisco, their number multiplying to 140 by the mid-1970s, and rising to near 200 distinct political territories after 1990. This fragmentation of the world polity goes along with diversity among states in terms of their geography, cultural affiliations or relative wealth and size. States remain the pillars of the global system, but they are not the sole authorities in the world. They exist alongside one another as units in a system from which they cannot escape, and they co-exist with other organisations, notably business enterprises which compete and prosper in a world market.
A second difference to pre-1914 is the development of a global institutional framework, whose reference point is the UN Charter, as the source of international law and of international norms of conduct in the world society of states. The aim was, and is, gradually to transform the international system, so as to bring the ‘anarchic society’ of states more under a common law, similar to domestic law in individual states. The prime regulatory sites of these global institutions remain the western powers, despite the rapid emergence of non-western powers. Indeed, one of the prime arguments for the European Union is that it alone has the size, and potential, compared to the giants of the emerging world order, to sit at the top table of global affairs. The EU has a High Representative, but France and the UK, are both permanent members of the UN Security Council; Germany aspires to that rank, as do Japan and India, both of whose claims are denied by China. Rank continues to matter, as it did prior to 1914, in international diplomacy.
A third difference to the pre- 1914 world is the emergence of non-European states to the first rank. This process in fact is at least one hundred years old, and may be traced through four key dates: Japan’s defeat of Russia in the 1905 Russo-Japanese war; the fall of Singapore in 1942, heralding the end of the British empire; the independence of India and Pakistan in 1947; and the foundation of Communist China in 1949. By 2009, the Group of 20 as the main economic council of wealthy nations replaced the Group of 7 leading economies- the United States, France, Germany, Japan, the United Kingdom, Canada, Italy-and Russia invited in 1997 as partial compensation for the enlargement of NATO to include the countries of central Europe. As a Pricewaterhouse Coopers study indicated, the G-7 would be eclipsed in economic size by the world’s largest emerging markets (E-7) within two decades, led by China. The combined GDP of E-7 (China, India, Brazil, Russia, Mexico, Indonesia and Turkey) were projected to match the G-7 around 2019.
Fourth, the global market has been re-created, but it is a very different global market to pre 1914. For one, the major corporations prior to 1914 were raw material suppliers; after 1990, global energy and raw material corporations still featured, but international investment strategies were conducted largely by multinational corporations engaged in industrial or service activities. Their number rose from about 30,000 in 1990, to over 82, 000 in 2008. They employed 80 million workers, and accounted for over 60% world trade. With the expansion of international production, has come the deepening of interdependence in the world economy. Indeed, the fastest growth in the world economy has been in financial markets: Gross world income, at about $12 trillion in purchasing power in 1980, rose to $72 trillion by 2010. Global financial market turnover rose much faster, reaching about $2614 trillion by 2008, and shrinking by about 24% in 2009 as a result of the crash. Growth recovered but slower than previously, as illustrated in the Graph below, which shows estimated global financial assets as a multiple of global gdp.
These four features of the post 1990 world complement one another. A diversity of states in a non-homogeneous world are penetrated and shaped by global markets, operating powerfully to create a more homogeneous world civilisation. Aspirations to create a system of global governance out of the world’s existing institutional framework are the counterpart to a world of relentless competition between states, corporations or currencies. It is the impact of the world’s driving forces,–notably exponential technological development, the scope of the global market, the clash of ideologies, politics and demographics-on this global system after the end of the cold war that creates the peculiarities of the world’s present transformation.
Europe and globalization.
How do Europeans conceive of their region in such a world? The predominant view in Brussels is of the EU as a post modern governance structure beyond nationalism. The vision for the world as for Europe is of a radiant future for mankind. The world will be increasingly wealthy and inclusive as global civil society develops a public law which overrides state sovereignties. Problems of adaptation to the new technologies, the uses to which they may be put, and to imbalances in world labour or financial markets will be facilitated by the power of the forces impelling the world towards unity. Wealth creation, the assumption is, will act as a great dissolvent on the tensions inherent to mankind’s progress to a higher civilisation.
In this view, the EU is in the avant garde of a humanity converging on western political norms, on western economic policy, and on a market-driven process of world integration. Accountability of regulators and transparency of markets are only credible under democratically elected governments. These are the EU’s member states, represented in the EU’s combined legislature and executive, the Council of Ministers. Governments are constrained by binding rules, and policy is farmed out to independent expert institutions, such as the Commission, the ECB, and the ECJ. Relative prices for goods and services within national economies are tied into the EU and the world price system, where the daily turnover in financial markets excedes trade in goods and services by 100 to 1. Size, it is argued is vital, and a post-modern polity such as the EU, -with its 550 million citizens, its large internal market and combined international negotiating clout-is well placed to seize opportunities as the world feels its way to the development of a global governance architecture. What the EU cannot afford to do is to allow the parochial concerns of its component nation states to take priority over the interest of the whole.
A very different narrative holds that the global system is dynamic, and that a highly complex region such as Europe has to be flexible to prosper in such a context. One size fits all solutions, notably a single currency and an EU open borders policy, do not answer to the realities of Europe, where member states are the sole legitimate repositories of legitimacy. States have very different adaptive capabilities due to discrete, historic circumstances. It follows that there is not one, but many types of capitalism. Markets are embedded in social and political institutions, and do not exist independently of the rules and institutions, which secrete their own incentives for agents in markets and depend for their continuation on particular forms of policy processes.  They generate typical strategies, routine approaches to problems and shared decision rules that create predictable patterns in the way governments and companies go about their business in a particular national political economy. The global ‘competition system’ which results is thus a negotiated construct, which reflects the institutional arrangements-national, regional or global- from which they emerged.
In this perspective, too, a diverse Europe needs to share common institutions to regulate multiple relationships between member states. Its states and peoples experience the challenges of living in a global system, but they have different abilities to respond to them. These derive from their legacies, and the specialisms that will have built up over time. Most importantly, they require currency arrangements that enable them to respond at the rhythm of their own political and business cycles to moves in commodity prices, the eruption of new competitors onto world markets or the swings of volatile financial markets. As Pierre Hassner has written, it is possible to imagine a coincidence between such arrangements and the sense of belonging, but non-coincidence is just as likely. The two dimensions(the sense of identity, the scope of the arrangement) do not coincide for politics, markets, currency, defence or culture. The EU, Hassner warned, could become a scapegoat, or seek to redeem itself by trying to reproduce a mythical unity of defence or money and economy at the level of a continent.
It is this interaction between existing loyalties or aspiration to a future substitute, with the great transformation in European and world affairs, which forms the substance of Europe’s travails. The Maastricht Treaty was negotiated by the member states while Europe and the world figuratively changed shape. In method and concept, the design was conservative of Europe’s society. But the ambitions to move to unity were constantly undermined by internal differences between the governments and peoples, and by the need to improvise as one new surprise followed on another. Europeans were not alone in their failure to anticipate future events.
The collapse of the USSR came as a surprise; the same could be said of the terror attacks of 9.11 on the United States; it was not expected that China’s entry to the WTO would soon have the US absorb 70% of world savings and 70% of the global trade surplus, confirming its position as the world’s consumer of last resort; warnings were sounded by Martin Wolfe of the Financial Times, or Nuriel Roubini of the NYU Stern School, about the lax monetary policy by the Federal Reserve, but the 2008 crash came as a bolt from the blue, as did numerous previous financial crises. One of the prime casualties of the crash was the reputation of experts, notably economists. The profession had pontificated with confidence about the causes and remedies for the East Asia crash of 1997-98, but a decade later was “at sea without an anchor”.
This was particularly bad news for the EU, which was and is constructed on the principle that élites know best. The EU is designed as an apolitical space where technocrats make policy for the many. It has to be seen to be successful if it is to retain credibility. Congratulating itself on its success turned out not to be enough, when the broader European public began to question key decisions made in the EU’s name.
Not surprisingly, when the surprises came of the 2008 financial crash, and the 2010 Greek emergency, the EU’s response was to figuratively circle the wagons under German leadership. Better to unite around a possible future identity than risk the fragmentation of Europe into competing nation states-the source, its supporters believed, of the two great wars of the early part of the twentieth century. Only thus would it be possible to withstand the challenges presented to Europe in the fast changing world of the twenty first century. In the rush to circle the wagons, there was only place for the predominant view in Brussels to prevail. This in no way altered the realities of non-coincidence between European identities and European political arrangements.
Europe in the world: 25 years on.
Six features of global politics impinge on Europea quarter of a century after the great events of 1989-1992. In this chapter, we discuss the US, which remains the sole world power, and continues to impinge on Europe’s component nations in multiple ways, as does the rise of Asia. In the next chapter, we discuss Russia’s political alienation from its major markets in Europe, and its fear and temptation of overdependence on China ; the world’s continued dependence on fossil fuels from the Gulf, and the rise of Islamic fundamentalism; the demographic shrinkage of an ageing Europe, and the prospect of mass immigration from Africa, the Mid East, and beyond; and the temporary emergence of Europe as the world’s prime emporium.
The theme of the two chapters is the tension of a shrinking Europe living in an expanding world of nation states, while all the while seeking to dis-establish the European nation states which experience global developments differentially.
The US emerged from the struggle with the USSR as the world’s sole great power.  It still occupied that position a quarter of a century later. America’s primacy, both military and diplomatic, was, and is, underpinned at home by a growing population, a settled political system, federal law supremacy, a large internal market, a galaxy of corporations, a rich research base, a strong educational infrastructure with some serious weaknesses in primary and secondary schooling; an enviable geography; since the early 2000s, the US has become net self-sufficient in energy while remaining a prime supplier of agricultural products to world markets. Abroad, it has an indisputable lead in “hard power” capabilities on land, sea, air and space; it runs the world’s key currency; is home to the world’s largest and most liquid capital market; with the whole backed by enviable soft power capabilities, based on the attractiveness of American culture, the ubiquity of the English language and the exemplary nature of its liberal political system.
US influence on Europe is commensurate to its position in world affairs, and may be traced through its centrality to European defense, investment, finance, and energy markets.
Twenty five years on from the end of the cold war, Europe is more than ever dependent on the US for its security. The hardware of Europe’s security is the 28 country NATO alliance, set up initially in 1950. At its core is the “5 eyes” intelligence sharing in the Anglophone world, whose membership includes the US, Canada, New Zealand, Australia and the UK. In the years 1997-2009, NATO membership was extended to include many of the countries of the former Soviet bloc, despite strong opposition to the idea in Washington DC on the grounds that NATO expansion was both expensive and unnecessary given the lack of an external threat from Russia.  Despite Russian hostility to the moves, European members continued to disinvest in military capabilities. In 2000, US spending accounted for 50% of NATO budgets, a figure which rose to 70% by 2015. Only the UK, France and Greece among European members committed to the NATO target of 2% gdp on defence. Germany’s pacifism was evident in the meager 1.2% gdp spent on defence; the UK talked tough, but its army by 2015 was down to its smallest size since the Napoleonic wars; neither France nor the UK could launch airstrikes on Libya in 2012 without US support.
The Atlantic alliance is the global homeland of cross-frontier investments. Developed country corporations accounted by 2015 for two thirds or more of the global stock of inward and outward investment. North America held the largest share of EU-28 FDI stocks abroad at 40.2 %, and near 44% of all EU-28 inward stocks.  Europe is overwhelmingly the world’s prime recipient of inward investment, and by far the largest source of foreign direct investment in the world—with a stock of historic cost based foreign assets about twice that of the US. The total stock of US investment in Spain alone is greater than the combined position of the US in China and India together, and the EU investment stock in China is barely 5% that in the US.
One of the main conduits for US influence on Europe comes through financial markets. President Nixon’s decision of August 1971, for instance, to close the gold window and effectively to move the world on to a dollar standard led to a depreciation of the dollar’s value on world markets, and a determination by OPEC countries to recuperate the value of their dollar holdings by a fourfold rise in oil prices. Germany’s decision in March 1973 to float the DM against the dollar created the region’s key currency relationship, which the European Monetary System, and then the Euro, -on French and Italian insistence- were designed to counter. Throughout these decades, the booms and busts of the US-centred global financial markets had a direct impact on Europe. London became the world’s prime financial centre, disputing the title with New York and Hong Kong. German confidence in Anglo-American financial methods was severely dented by the 2001 dotcom bust. It was dented again by the fallout from the bankruptcy of Lehmann Brothers in September 2008. As can be seen from the Graph below, the German government’s reponse to the crash of 2008-10 differed markedly both from the US, and the other three large western European EU member states.
Graph: General government debt: total %gdp.
For over three decades from the 1970s on, the US became more dependent on oil imports from abroad. This trend began to move into, reverse in 2005. In that year, the Energy Policy Act set new directions, emphasizing greater security of supply and finding solutions largely through technology. Canada is by far the largest oil supplier to the US, followed by Saudi Arabia as a distant second. In 2016, 25% of oil consumed by the US was imported, representing the lowest level since 1991. As a major nuclear energy power, the US derives 20% of its electricity from nuclear sources. But the major reason for the resurgence of domestic energy supplies in the US is due to the growth in local, oil, gas and shale resources. The US is heading to replace Saudi Arabia as the world’s prime oil producer, while investing heavily in fuel efficiency.
Finally, there has been a permanent litany since at least the early 1960s about the decline of the US. This should be taken with a large pinch of salt. The prime source of the US trade deficit is its own corporations selling into the US domestic market, rather than producing there; US foreign debt has risen since 2008, but the US pays its debts in its own currency, the privilege of the key currency country. As Saudi Arabia’s protector, the US has its finger on the oil well of the world, and is prominent or dominates the global value chain from energy to food through to the internet. There the US dominance is massive. On defense, the US outspends the next 6 spenders combined by a distance.
The ascent of Asia.
Twenty-five years on, though, world has changed shape. Asia- meaning China, India, Japan, South Korea, Association of South East Asian Nations (ASEAN) countries- in 1990 represented 23% of global gdp (in US$s PPP) with per capita income two thirds of the world average. By 2014, Asia’s share of global gdp had risen to 38.8%, with per capita income just short of 90% of the world average. By 2025, Asia is heading towards accounting for 45% of global gdp. Asia thus has become the key world market place, with growth rates in the intervening years 3 times that of Europe and North America. Nowhere else in the world has the middle class grown faster. With the downturn in economic activity among developed countries after 2008, China became the prime locomotive of the Asian economy, and in 2010, overtook Japan as the world’s second largest economy. In 2014, China overtook the US, at least in $PPP measures. By 2016, China’s economy was over eight times the size of Russia’s and over five times that of India.
Comparative growth of world and Eurozone economies
Asia’s rapid emergence in the first years of this century is closely associated with entry of China to world markets, with its membership in the World Trade Organisation as of 2001. China’s exports have risen in volume while their relative prices have fallen, entailing adjustment costs for workers, capital and management in China and around the world. The resulting changes in relative prices of world imports and exports have altered countries’ terms of trade, while within countries some workers have gained and others have lost. Countries with an acquired advantage in skilled work, such as Germany, have benefitted, while countries with low skilled labour—typically in southern Europe and Mexico—have suffered.
China, furthermore, has been a major stimulant to world trade. China’s imports have been growing twice as fast as developing country imports for the last decade, and three times faster than industrial country imports. US exports to China grew ten percent faster to China than to the rest of the world. China is opening its markets faster than any country or group of countries of similar size have ever done. It has become a regional manufacturing base for the production of consumer goods, and a growing importer of intermediary goods as its trade barriers fall. As a result, greater specialisation has emerged among Asian countries, with China being the central link between Asian trade partners and industrial countries markets. The same position in Europe has been occupied by Germany.
More intense competition from China kept prices down, and initially helped western central bank’s anti-inflationary policies. President Bush’s two wars in Iraq and Afghanistan were financed by a surge in government debt, as Japan and China became the prime suppliers of capital onto world markets. Irrigated by the Asian savings surplus and also by US and EU easy money policies, banks out of London busily sold structured products, including US mortgage business, to the more sleepy local banks in Germany and in the wider European market. Though not in the Euro, the UK became home to global Euro business, ranking as the prime global financial market place.
China’s entry to global markets stoked a boom and bust in global commodity markets, prompted also by financial market speculation. China acted as an engine on growth for its Asian, Latin American and African suppliers. In agriculture, China’s low tariff rates, modest farm subsidies, and widening quotas benefitted exporters from the Americas, the EU and Australia, as well as from rice suppliers, like Thailand and Vietnam. China’s rapid growth provided major export opportunities to raw material suppliers, notably Australia, Brazil and South Africa, and to oil exporting countries. The upward curve on the IMF commodities index may be seen in the following graph. The commodity price index reached a peak mid-2008, and then collapsed as the world crash gathered momentum. (See Graph) The volatility fed differentially into European markets, benefitting farm exports like France at one moment, and reducing income from oil producing countries, such as the UK and Norway, at another.
International Monetary Fund, Global Price Index of All Commodities© [PALLFNFINDEXQ], retrieved from FRED, Federal Reserve Bank of St. Louis;
Since Maastricht was signed, the centre of gravity in the global energy system has shifted to Asia. The reason for this is China’s emergence as the world’s No 1 energy consumer. China accounts for 68% of world coal consumed; 17.7% of world oil and 4.7% of world natural gas. Beijing is expanding nuclear capacity from 16 to 41 reactors by 2020, and renewables are growing at a rate of 25% per annum. China’s energy imports are rising: coal imports represent 18% of the global total, while oil dependency is 55% of domestic consumption. Given these figures, it is scarcely surprising that China emits 25% of global greenhouse gases. Japan is even more dependent on imports of primary energy, 96% of which comes from imports. Oil accounts for 50% of Japan’s primary energy supply, with about 90% coming from the Gulf and the Mid East. The other strand of Japan’s energy policy was to invest heavily in the deployment of 54 nuclear reactors, by 2013. But in 2011, the country experienced the Fukushima Daiichi nuclear disaster. Chancellor Merkel’s immediate response to the fall out from Fukushima was to decide to mothball Germany’s nuclear programme.
In summary, twenty five years on, Europe in a world transformed seeks to avoid 1914 by moving half heartedly to a USE, while all the time global developments impinge differentially on its member states. China proves a boon to German exports, but Chinese exports run riot through southern European lower value added businesses. Germany’s response to the 2008 crash is to restrict domestic consumption, resulting in Europe’s prolonged depression, while the rest of the world grows. The simple point is that Germany is on top in Europe, and Europe is in deep trouble.
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