There are once again murmurings of a possible global economic turbulence in the air. Whether these forebodings will transpire is a matter for economists to debate. But it is worth asking if there were to be another financial crisis in the near future, would political configurations in the world have the wherewithal to respond effectively. After the 2008 crisis, the global system mounted a response to contain the immediate crisis. It was by no means adequate to deal with the deep structural issues ailing the global economy. But there was, nonetheless, a coordinated response of some kind. How have global political conditions changed? What might this mean for responses to another crisis?
Global crisis are preceded and followed by a kind of political optical illusion. In 2008, just before the crisis, there was, in most circles, a sense of exuberant complacency. The liberal international order was ascendant, the global economy was a non-zero sum game. China would be integrated into the global order easily, financial globalisation was a force for good and the sheer scale of innovation would mitigate whatever social and economic inequalities existed.
But even after the crisis, there was an optical illusion. In America and Europe, centrist leaders like Barack Obama and Angela Merkel held sway, nationalism and anti-protectionist sentiment did not rise and the world economy slowly inched back to a somewhat even keel. But the somewhat placid electoral transitions in the aftermath of the 2008 crisis masked the deep undercurrents bubbling below. Those undercurrents are now politically ascendant. We should worry whether these currents will add fuel to the economic turbulence rather than mitigate them.
The optical illusion of 2008 was caused in part by complacency. In 2018, there is a danger that the optical illusion is caused by a politics of distraction. For example, the trade war between China and the US is a significant shift in global politics with far ranging ramifications. But such a seismic shift in the architecture of the global economic order is overshadowed by the distractions of daily politics that it is barely debated.
There are reasons to be pessimistic about the world’s capacity to politically manage another crisis. The crisis of representative democracy has, in some ways, become more complicated. Some of this is for the good. There is a deep churning in American politics, with lots of new entrants, especially on the Left. But paradoxically, this deepening can under some circumstances make forging an economic consensus difficult.
For the foreseeable future this crisis will manifest itself in three ways. First, political polarisation between “Left” and “Right” is likely to increase making domestic political consensus on any policy more difficult. Even if the new wave of Left democrats do well in congressional elections, forging a new political consensus is going to be difficult. Germany seems to be entering a new post-Merkel era of factionalism and polarisation. Britain’s factional politics now has a monumental pettiness to it, such that it cannot handle Brexit, let alone a deeper crisis. Post 2008, the last of the old elites — and Obama’s worldview may represent the best of the old guard, rather than being the harbinger of the new — could muster enough political legitimacy to respond. These centrist political elites no longer command allegiance. What will replace these elites is not a new workable consensus, but a greater pull from both Left and Right that could tear up the very fabric of domestic decision-making. So the question is: Will the representative order muster enough consensus and legitimacy to be able respond well?
The second abiding crisis of democracy is the rise of executive power. This is a long historical process. But one of the most astonishing thing about Donald Trump’s presidency is it makes you realise just how monarchical the oldest democracy in the world is. As Paul Krugman noted, what is amazing about Trump’s approach to trade is not the substance, it is the fact that he can unilaterally upend treaties, impose tariffs as if they should be entirely at the discretionary whim of one person. Even if you profoundly disagreed with America’s approach to trade, what gave it the credibility was a sense of process. But once trade becomes a weapon that can be so easily brandished, it is doubtful any future President will give up the power. The credibility of American institutions — the importance of treaties, credibility of the Fed, some possible congressional oversight — was a force in securing economic stability. As this credibility erodes, so will the faith in its capacity to anchor any global solutions.
Global cooperation is a vital element in managing global economic interdependence. But global cooperation is exactly what has been domestically de-legitimised in almost all democracies. This is manifest not just in the suspicion of supra-national institutions. It is most powerfully manifest in the “Me First” sentiment that is enveloping decision-making in most countries. All countries privilege their own interests. But most of the global negotiations leave you with a sense that forging even the crisis-driven consensus that was possible in G-20 in the aftermath of the financial crisis, is going to be difficult. This in part because the ideological underpinnings of the current order, on the Left and the Right, have no strategy to reconcile the demands of genuine global cooperation with domestic political legitimacy. The Right will play the nationalist card. But even the Left in advanced democracies will find it hard to square this circle. This is one reason there has probably been less focus on what Trump might do to the international economic order.
Managing turbulence in a global economic order requires something like a global political steering committee. The now moribund G-20 briefly acted as that in the financial crisis. But with the will to global cooperation gone in advanced liberal democracies, it is not clear who will manage a potential crisis. Emerging markets have their own vulnerabilities. China could be an important player. It has the financial resources. But two things are not clear: Its own internal political dynamics, and whether the demands of internal political legitimacy will make it part of the problem rather than the solution. Even if it manages its domestic transition to slower growth, it is doubtful whether it has the global political legitimacy to act as leader.
We can hope a serious economic crisis does not come. But we should worry that the political underpinnings of global economic cooperation have eroded. Steering through the next round of turbulence will be harder.
