Can Anyone Hold the Global Economy Together? – The New York Times

In the last few weeks, the world economy has seen worrying turmoil. Whether or not a recession is imminent, there has certainly been a collapse of confidence.

What has investors so rattled? There are long-term factors in play, like demographic trends and a slowdown in technological change. But what seems finally to have dawned on the markets is that globalization is no longer supported by the combination of investor-friendly economic policy and congenial politics they have long taken for granted.

In the Trump administration, the nationalist theatrics of economic policy have reached new heights. The White House has responded to the wave of recession talk by pillorying the Federal Reserve Board and threatening more tariffs against China.

So incoherent is the Trump administration’s economic policy that no lesser a figure than Bill Dudley, a former president of the Federal Reserve Bank of New York, has said that America’s central bank should treat the prospect of President Trump’s re-election as a threat to the United States and the world economy. Mr. Dudley argued that the Federal Reserve chair, Jerome Powell, should refuse to cushion the effects of Mr. Trump’s protectionism through further interest rate cuts. If the president’s bluster sets off a recession, so be it. At least the Fed would not help usher in a second Trump term.

To be fair, the Fed distanced itself from Mr. Dudley’s suggestion. But he was merely stating what is painfully obvious. The Trump administration — and the Republican Party — threatens the institutions of economic policymaking in the United States. Historically, it’s been radical governments in Europe and Latin America that elicited a hard line from conservative central bankers. It’s extraordinary that this possibility is now being canvassed in what remains the heart of global capitalism.

The world economy needs leadership from Europe: No one has more to lose from a collapse of multilateralism. The eurozone is perched on the edge of a recession — a hard Brexit will make matters worse — but a sharp slowdown in Germany means that for once the interests of North and South are actually aligned. The eurozone needs investment. But it has its own deep political dysfunction to deal with.

Even today, when bond markets will pay the German government to borrow, it is not clear whether Chancellor Angela Merkel’s ailing coalition government can agree on an expansive fiscal program. It would need the Bundestag to declare an economic crisis to release it from the strictures of its austere fiscal policy.

The fact that the world has not yet tipped into recession must in large part be credited to China. This is not to impute superhuman powers or monolithic unity to Beijing. The Chinese government has its hands full managing a nasty combination of slowing growth and a dangerous credit boom. China’s shadow banking sector is a worry, as are the country’s growth-addicted regional governments. China’s corporations piled up cheap dollar debt and are now subject to the erratic upward trajectory of the dollar. And behind the scenes, there are persistent rumors of tension between President Xi Jinping’s clique and that of Premier Li Keqiang.

And yet, in handling both its internal and external problems, China, unlike the United States, at least appears to have a playbook. It is not only synchronizing fiscal and monetary policy but is also using banking regulation and foreign exchange controls to contain the risk of capital flight. Once criticized for resisting the upward pressure on the value of its currency, Beijing is now expected by Washington to pull every lever to stop the yuan from devaluing. And even setting aside the contradictory noises from the Trump administration, there are few in the West who would want to see China liberalize its balance of payments and risk the kind of capital flight that rocked global financial markets in 2015 and 2016.

Tightening economic controls is the opposite of how Western pundits once imagined China’s integration into the world economy. But it is a tool kit that served both Beijing and the rest of the world well by preventing a further downturn. Though the West still pays lip service to the cause of “market reform,” it has come to depend on Beijing’s maintaining its grip. But there’s an unavoidable question: What are the political consequences of a growing reliance on Beijing’s control over the Chinese economy?

The question could be dodged when it was assumed China would converge with the West. Now both parties in Congress pose it in geopolitical terms — key Democrats have pivoted to viewing China’s economic growth as a threat to American security. The repression in Xinjiang poses the question as a human rights issue; the turmoil in Hong Kong raises the stakes. The world watches with bated breath to see whether Beijing will use force to stamp out Hong Kong’s remaining autonomy.

Even if a bloody showdown is avoided, the outlook is disconcerting. Beijing has made clear with its bullying of the management of Cathay Pacific that Hong Kong-based multinationals are no longer exempt from Chinese pressure. Large corporations that chose to locate in Chinese territory and profit from China’s growth will be expected to play by the Communist Party’s rules.

The prospect of a world economy divided among a sclerotic Europe, a nationalist United States and an authoritarian China is a gloomy one.

Adam Tooze (@adam_tooze) is a professor of history at Columbia University and the author, most recently, of “Crashed: How a Decade of Financial Crises Changed the World.”

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