Nationalism Is Back! Adieu, Davos Man?

Not that I have a reliably functioning Zeitgeist meter, but it does seem as though a consensus is emerging that the economic crisis is an international problem being addressed with national remedies. And just in time for Davos! The heaving heart of international-solution mongering! But will a global solution be found?

I tend to doubt it, at least in the short term, because all the trend lines (except a certain amount of elite altruism) are pointing in the other direction, toward the nation-state. First, and most obviously, the fiscal stimuli being applied are almost all national in origin and application. (Even IMF bailouts are of individual countries and aimed at the national economy; and such bailouts are financed as much by small groups of interested nations as by the IMF's own capital.) Industrial and financial rescues? Same thing.

Second, there is this extraordinary and ongoing "re-nationalization" of money itself. Governments that are bailing out "their" banks expect (and citizens expect) those rescued banks to concentrate their lending within the "home" nation. This means that the capital mobility that has been key to globalization - to making finance available wherever on the globe it might be put to best use - is in danger of ending. A related sub-phenomenon is that capital is being withdrawn from poorer countries back to rich ones, as a flight to safety but also as a political-economic response to the re-emergence of the nation-state as a dominant economic player. Won't this have to fuel nationalism in the poorer countries, as their investment-starved economies decline and their currencies weaken? The repatriation (to use a loaded term) of capital will be experienced as developed-world protectionism; it's already being called "capital protectionism" or "financial protectionism." It seems inevitable that the response to it will be protectionist as well.

Third, economies are being reconceptualized as "national" - that is, what was once simply an industry is now rebranded as a vital asset of the national patrimony. This is hardly surprising since, in a crisis, the last thing you want to be is "non-essential." As a portfolio manager put it to the Wall Street Journal last week, after explaining that Russia has a list of 295 companies that are considered "strategic": "If you're not on that list, you are screwed." (And as a newsman, let me just say that President Sarkozy is absolutely right that newspapers are a strategic industry... )

Finally, investors are also "nationalizing" certain assets. National bond issues inside the eurozone are being valued in very different, increasingly divergent ways. The bonds have become more national and less euro, because the role of the individual nation-state is seen as affecting value more than it used to. It's sort of a backhanded recognition of the power and responsibility of individual states. Similarly, banks are being valued by investors based essentially on investors' judgments about, not the banks, but the governments behind them.

I want to pause and apologize for putting so many words in quotes/inverted commas. But the terms themselves are under pressure. The meaning of "nationalize," in particular, seems to change daily!

There is some poetic justice in this retreat from the heights of globalization to the defensible borders of nation-states. The crisis can reasonably be blamed on imbalances among national currencies and national economies; that is, the international crisis has national origins. A must-read article laying this out appeared in last week's Economist. I won't repeat the analysis here. I will note, however, that the article was, so to speak, long on description and short on answers.

The main answer usually offered is that the surplus countries (China, Japan, Germany, the Gulf states) need to provide the demand that can no longer come from an over-leveraged U.S. But how, and in what self-interest? Most of the surplus states are just not doing all that well in this recession. (Chinese households, like American ones, are saving more this year than last.) Things could be much worse for them - and indeed the policy of accumulating large foreign currency reserves to protect against a domestic currency collapse in hard times seems, for now, to be vindicated. But the petrostates are, understandably, now in a collective freak-out; the Germans can't quite believe how insufficiently insulating their rectitude is in a crunch; and all of the Asian surplus economies have been hit, in just the past few months, by shocking drops in growth. These countries are not feeling flush. They are not feeling like, say, bailing out the United States, Britain and an assortment of other developed countries. The sovereign wealth funds - themselves the result of surpluses - tried that on a smallish scale last year, and watched their money disappear. It was not an appealing precedent.

Perhaps matters will sort themselves out. China is stimulating demand, and will attempt to stimulate more. And let us acknowledge that the U.S. economy is deleveraging and engaging in a hefty amount of "creative destruction". At least I hope it is creative.

I have hopes for the Obama team, although I found the Tim Geithner "manipulating currency" kerfuffle pretty alarming - because it looks like it was just a mistake. That's a heck of an issue to make a mistake about. The Chinese reaction has been pretty quick, at Davos and afterward in Berlin. China reacted the way a nation reacts: somewhat pettily. There was an opportunity there to exercise the sort of statesmanship that the world needs from China. Instead, we got (mostly) defensiveness. The type of international coordinating efforts that many people see as the only alternative to nationalization in the broad sense are not being embraced by China. True, they're not being aggressively advanced by others, either, including, so far, the U.S, which was tellingly absent from Davos. If Davos this year is, as some have suggested, a rehearsal for the Group of 20 meeting in April - the current great hope of international-coordination advocates - then it appears to have been a failure.

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Not to end on a familiar point, but I continue to wonder about regionalism. The EU will likely tighten up its rules so the euro doesn't split up into national-euros (as the bond markets are currently indicating). Meanwhile I'm starting to hear talk of the dollar as an American currency rather than a global one. And did you notice that it was none other than Zhang Jianhua characterizing Henry Paulson's remarks (on Chinese savings rates) as "extremely ridiculous and irresponsible" and partaking of "gangster logic." Zhang, the head of the research bureau at the People's Bank of China, is the same man who spoke at the end of last year about how China's currency should be used more and more as a regional settlement currency in Asia. In comments reported in the central bank's Financial News, he emphasized that the yuan should play an ever larger role in an emerging multi-currency international monetary system. China will start two trials this year of using the yuan for settling import and export trades. It certainly could be - these are not well charted waters - that global imbalances cannot be lastingly addressed without the dethroning of the dollar and some more modest, more regional, perhaps more stable form of globalization. That's the way the credit markets (without much choice) are drifting. Well, it's better than nationalism, isn't it?

Comments

[mommadona]

"Third, economies are being reconceptualized as "national" - that is, what was once simply an industry is now rebranded as a vital asset of the national patrimony.­"

Hellllooooo?
RE conceptualized????

This concept - this has brought US to the place we are today.....

"National" interests.

For the last 100 years, CORPORATE interests are the only interests for this federal government
You know - that little military/industrial complex thingie.

#1 - corporations are NOT 'individuals' and laws should be changed to reflect that. They've gotten away with this 'professional victim' thing way too long.

#2 - Time to DEFINE our true 'national interests'.

No more serving as private security forces/military for CORPORATE interests.
No more serving as private security forces/military for Fundamentalist Christian NGOs to "spread that word".

#3 - Think globally, act locally = that means BUY LOCALLY...­.you betcha.