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Northern Rock’s rescue part of geopolitical sea change

The world is holding its breath, still trying to grasp the potential enormity of what is unfolding. Economic downturns and stock market crashes are hardly unfamiliar, of course, even if a decade or so seems a long time ago for Western consumers habituated to rising house prices and non-stop shopping. But this crisis threatens to be rather different. Already it has forced the government to engage in what has been a heresy for almost three decades: nationalisation. Major crises such as the Northern Rock debacle in the United Kingdom are not matters of punctuation or pauses for reflection, but defining historical moments, marking the end of one era and the beginning of another. The 1970s was a classic case, as huge oil price hikes fed an inflationary spiral that brought both the long boom and the post-war welfare consensus to an end, and led to the rise of neoliberalism and deregulation.

This crisis threatens to be even more fundamental. While the 1973 gyrations were the result of a temporary shift of power from the industrial world to the Organisation of the Petroleum Exporting Countries (OPEC), the underlying cause this time is permanent and far-reaching — a fundamental shift in power from the developed world to the developing world, and above all China and India. We have not witnessed anything like this since the inception of the West as an industrial powerhouse in the 19th century.

The economic and political consequences will be of such a scale that they are impossible to comprehend. The present crisis has been long in the making, even if it has been obscured by the United States spending over a decade in denial.

There are two conclusions that we can draw from the economic crisis that began last August and might, in some form or another, last for a prolonged period. First, it heralds a major reduction in the global economic and political influence of the U.S., rather in the manner that the 1931 crisis announced the final and belated end of Britain’s global economic supremacy. Fundamental systemic crises are often associated with the decline of the dominant imperial power and its increasing inability to sustain the system over which it had previously presided.

The present crisis, at root, is a consequence of the economic decline of the U.S. and its increasing weakness at the apex of an international financial system of which it was the architect and chief beneficiary. This is most clearly expressed in the U.S.’ chronic balance of payments deficit and its long-term dependence on East Asian inward capital flows to shore up the value of the dollar. Perhaps the present turmoil will ease, but in truth the old arrangements are now coming apart and, in anything other than the short term, seem patently unsustainable. We are entering a period of protracted instability as the old order breaks down, the U.S. seeks to resist change and the world embarks on a conflictual and painful passage towards a new economic order.

The second conclusion is that the political consequences of this shift will be enormous. The inter-war crisis led to the Second World War and the birth of Keynesianism. The less significant OPEC crisis of the 1970s destroyed the social-democratic consensus and led to the triumph of neoliberalism. And this time? One thing seems certain: the neoliberal orthodoxy will be undermined.

When the free market and deregulation are the means by which the Western world extends its global economic power over the developing world, then they are deemed highly virtuous, but it is a different matter when they become the instrument by which developing countries can extend their influence over Western economies. Similarly, during a recession the state is likely to be called into active service on a far more regular basis as Western governments seek to deal with the mushrooming effects of market failure. It is not an accident that developing countries — virtually the whole of East Asia, for example — view the role of the state in a far more interventionist way than does the Anglo-Saxon world. Laissez-faire and free markets are the favoured means of the powerful and privileged. The decline of the Western world could well usher in a significant change in this mindset.

How will the U.K.’s own political elite respond to these changes? At best, very belatedly. Thatcherism, after all, was native to this country, a response to the 1970s crisis, and it has subsequently shaped the outlook of the governing elite to a greater extent than anywhere else apart from the U.S. To this day that elite remains shackled by its logic and assumptions. A classic illustration of this has been the timidity and cowardice of the government in the face of Northern Rock — the first domestic political challenge of the new global crisis.

The political terrain is shifting. Attitudes towards the U.S. are a case in point. The move towards neoliberalism in Britain was intimately bound up with the embrace of the U.S. as the country to be aped and copied. The American model was celebrated by Thatcherites and New Labour alike, California worshipped as the model of the future, “Anglo-Saxon” embalmed as the fitting metaphor for the shared Anglo-American legacy, Europe denigrated and the rest of the world ignored. How perceptions of the U.S. have changed: a country living beyond its means, dependent on large helpings of Asian credit, characterised by huge inequalities, its great financial institutions guilty of huge folly, forced to rely for their salvation on the sovereign wealth funds of China and elsewhere. And, remember, we are only at the very beginning of the biggest geopolitical shift since the dawn of the industrial era.

(Martin Jacques is visiting research fellow at the Asia research centre, London School of Economics.)

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