Not since 1648 with the signing of the Westphalian treaties, which cemented the concept of the independent nation state in international affairs, has the concept of sovereignty been so threatened during a period of peace. Globalization, with its dictate of free flow of capital has allowed markets to break through the borders that define countries; allowing financial forces to metastasize beyond the power of any individual nation to control them.
Through the 2007/2008 financial crisis there were two leading financial stalwarts, JP Morgan and Barclays; both judged by national regulators as secure. JP Morgan now has the so-called "whale problem" that may result in a $7.5 billion loss. And Barclays has admitted fixing LIBOR; the underlying interest rate that much of the world's business community uses as a base for borrowing and lending.
Both these situations lead directly to the geo-economic tail and dog issues of our time. Who in an age of globalization has the real power to regulate the marketplace? And at what level are individual nations overwhelmed by the new dominant power of globalized markets? Markets have taken over globalization, while countries are still dealing in parochial politics.
The two key concepts that historically derived from the Westphalia treaties were that other nations do not have the right to interfere in another nation's domestic business and the right of sovereignty of the nation state (eventually being interpreted as self-determination) over empire. Global market forces have now challenged both concepts; markets regularly interfere in a country's domestic business, and openly claim extra-territorial rights.
The current battleground of the power of markets over traditional sovereignty is the Euro Zone. There, a purposely-weak structure was established so that countries could form a monetary union without giving up sovereignty. The market place however is now forcing these countries to relinquish sovereignty in order to prevent economic ruin.
The economic solution to the Eurozone's problem is relatively easy. The difficult problem is that political cultures have not caught up with the more limited concepts of sovereignty needed to combat the power of globalized markets.
How do you tell a voter in Bavaria that she needs to pay taxes to support Greece? How do you tell a national government that the power to regulate its own banking system is no longer solely in its own purview?
While the European Union is being forced to face the problem head on, the United States is in a state of denial.
America is no longer captain of its own economic boat. International trade is now over 30% of the U.S. economy. American Tech companies that are represented in the S&P (some would say America's future) now draw 54% of their revenue from outside of the United States. These figures tell only a small part of the story. Over 21% of U.S. corporate profits come from abroad. In addition there is the global integration of the U.S. finance industry as well as foreign direct investment in the United States and American firms investing overseas. These facts did not just develop over night. They are not new. The only newness is that the economic crisis has doubled down on the risk of the interconnectivity of the global market.
America's denial is compounded by its election. In order to appeal to his conservative constituents' concept of American Exceptionalism, Governor Romney ignores the obvious, that globalization in a very stealth-like manner has reduced America's freedom of action to solve its own problems. President Obama has touched quietly on the subject several times, especially as it relates to the Euro crisis, but this is not an easy truth to admit during an election.
The financial crisis in Europe and the slower growth in China are dramatically harming the United States economy, with little that Washington can do about it.
Since democratic institutions do not exist to protect America from the various forces caused by global market integration and since America's political leadership won't even state publicly that there is a problem, the country is relying on the non-elective arm of the government, the Federal Reserve, to deal with the problem. As examples the Fed's decision this past winter to cut the rate foreign central banks pay to borrow U.S. dollars nearly in half. That rate cut helped enable the European Central Bank to create emergency funding for cash-starved European banks, preventing what could have been a worldwide financial meltdown.
Relying on the Fed to safeguard the United States from a global economic crisis during an election year is politically convenient. But it is harmful to our concept of democracy. The constitution does not give the Fed responsibility for foreign policy and the Fed does not have a congressional mandate to act beyond our countries borders.
We are operating without a set of rules to deal with the global economic crisis. Rules, that would broaden the concept of sovereignty to allow trans border governance over markets. Rules however, that cannot even be thought of until elected leaders are willing to lead beyond the fears of their constituents.