The Geopolitical Ramifications of the Credit Crunch

The events of the past months have turned out to be much more than a mere crunch. Going far beyond the liquidity crisis that has wreaked havoc in the financial markets, the financial crash has set in motion forces that will change and transform our world.

Within a few months, America – and by extension Europe – have lost their claim to superiority and superior knowledge in the world economy. Although it is premature to declare the end of the ‘Pax Americana’ – or, as some have, to hail the beginning of an ‘Asian Century’ – this financial crisis will mark a turning point in history and perhaps nowhere more so than in America itself. It is foreseeable that America will turn away from the last decades’ market fundamentalism and ‘trickle down’ economics, shifting ever-so slightly toward the European welfare model. Given the dire state of the economy and an increasingly anxious public, major changes will have to be made.

It is less clear how this transformation will impact America’s foreign relations. It is unlikely to draw the US into isolation, not least because America is neck-deep in Iraq and Afghanistan, but also because the Obama administration will, if it holds its promise, embrace a broadly constructive international agenda aimed at reclaiming America’s moral and practical gravitas.

However, president Obama will face an emboldened new world that is unlikely to accept anything less than an implicit renegotiation of the global social contract. China in particular will see its status and de facto power increase significantly if it weathers the financial storm better than the West, as it now looks to do. Even in the face of a global downturn it is entirely foreseeable that China will maintain strong growth rates – at 8 percent or more as it focuses its efforts on creating new growth patterns based on strong domestic consumption. The recent changes in land ownership laws, as well as improved trade links to Taiwan, exemplify this shift.

With its massive foreign reserves China may also have to step in to save regional victims of the crash. In the meantime, Japan is proving increasingly eager to use its similarly impressive reserves to act decisively in the international scene. Both nations, however, face equally daunting challenges and it would be naïve not to acknowledge these. China will continue to battle for unity, stability and against immense socio-economic pressures. Japan will struggle to avert another economic downturn. Yet, China in particular will likely come out of the crisis having made relative gains geopolitically and in its perceived, as well as actionable power – regionally and globally.

The crunch will have set in motion forces that will change relative power constellations around the world. America may not lose its central position in the world but it will certainly have to make space for giants like China.