National Bank of Greece ADR (fka NBGGY)

[Jester_Vandalay]

2011 Do Not Bet on More of the Same

The three major economic blocs of the world economy face an uncertain future in 2011. The United States, the European Union and China began the recession in very different economic form, enacted different polices to cope with the downturn and have experienced marked variation in recovery.

China Portugal Germany European Union GDP Consumer Addiction The future of all three is equally dependent on the facts of economic recovery and the still potent political remains of the financial and economic collapse of 2008 and 2009. Behind the economic surface is the profound divergence in national credit and the overextension of debt in much of the developed world. The United States and Europe have become dependent on the grace of the world's credit markets. They are losing sovereignty to their lenders, the coming year will make the costs of that governing failure increasingly evident.

Throughout history economic tribulation has often preceded political upheaval. Here is the wildcard in the world's immediate economic future. In the United States the recession and the Washington's inability to procure relief overthrew unified Democratic control of the government. Could not the Greek or the Portuguese, or any of a half dozen other polities elect governments that repudiate the EMU economic straightjacket? What is the limit of German forbearance for its feckless union partners? The danger is not limited to the debtors. If Chinese economic growth falters, if inflation escapes control how long before the multitudes are on the streets of China's cities. Beijing may not fear Western political pressure, its own people are another story.

The EMU is the most straightforward case of this nexus of history and political economy. The monetary union is a project of the 20th century. Its goal was to make another European war impossible. In that it has succeeded. Europe is at peace, its people engaged in the pursuits of life and culture. Its defense budgets are miniscule and the terrors of war are a memory of the passing generation. But the ultimate goal of the theorists was and remains political unification. Monetary union was but one step to that end.

The structure of the European Monetary Union is ill-suited to be the focus of the unification forces pressing the continent's national governments to an ever closer union. It has neither the political ability to compel national capitals to practice budgetary intelligence nor the fiscal control to deny them deficit license. EMU designers hoped that the monetary union would raise all members to the probity level of the German nation. Instead national and political cultures are unchanged. The virtues and foibles of nation states as expressions of their people have not vanished in the utopia fantasies of Brussels bureaucrats.

The endgame for the EMU is simple. Either Germany underwrites all the debts of the union or a long list, perhaps a third of its nations default. It is a near economic certainty that Greece, Portugal, Spain, Ireland, Italy and others will not grow fast enough to pay their debts. The burden on their national account is increasing faster than GDP expansion. The unpalatable choices open to the union and the simmering discontent of its peoples will frame the economic, fiscal events of the coming year.


China's rulers are students of their own history. Mao's dictum that 'revolution springs from the barrel of a gun', is a comment on China's history of violent dynastic change. The cadres in Beijing depend for their legitimacy on dynamic economic growth. Were China a democracy the opposition's campaign slogan would surely be 'Jobs, Jobs and Jobs mean a Strong China'. When China's political and economic interaction with the rest of the world is interpreted through this lens its policies are coherent, sensible and necessary. Greece, Italy and Britain may tolerate and excuse general strikes, student riots, anarchists and a colorful array of political expression. The imperial cadres of Beijing are not so modern.

China's dependence on the global economy is profound but it is the same as its trading partners. All of the world's governments have, to a great degree, staked their economic future on fostering a recovery. This is natural and proper. What other path could they follow? Unfortunately most have done so without correcting the ills that produced the financial collapse and recession. Europe and the United States continue to issue debt at record rates, bankrupt firms are supported, banks are coddled, debtors protected, lenders punished and consumers are encouraged to extend themselves once again in a frenzy of unaffordable purchases.

China's position as the world's chief creditor, only she has the money to lend to the indebted, has given Beijing dominance over the terms of world trade. Twenty years of protest and pressure from the West have produced a pittance of accommodation. While it may be true that China rulers ultimately have as much or more to lose from a failure of global trade, that weakness never plays out in negotiation with the West. The addiction of the developed countries to debt, both sovereign and consumer, is a much closer fact than the next potential depression. China has been most astute in using the realities of its place in the global economy to its advantage. Its trading partners, led by the United States have largely been failures because they have not recognized the financial source of their own weakness.

The financial collapse of two years ago was the culmination of economic, political and financial trends that stretch back a generation. The reconstitution of the world's economic and financial system will not resemble the past. Power flows from economic strength, it will soon flow to the gun as well.

2011