Why Bush is sunk without Europe
Even while George Bush growls out his bellicose
message, his country has never been in such an
enfeebled state
observer.co.uk
Will Hutton
Sunday January 26, 2003
The Observer
WHEN THE STOCK market falls for a record 10 consecutive
days, as it just has done, you take notice. Falls like these are
usually the portent of something bad, even calamitous, ahead.
The worry is obvious; Bush's intentions on Iraq could have
potentially disastrous economic repercussions.
The US's economic position is far too vulnerable to allow it to go
war without cast-iron multilateral support that could underpin it
economically as well as diplomatically and militarily. The
multi-lateralism Bush scorns is, in truth, an economic
necessity. America may be a superpower that spends more on
defence than the next nine countries combined and is preparing
to increase defence spending this year by an enormous $48
billion, equivalent to Britain's entire defence budget, but it is a
strategic position built on economic sand.
On latest estimates, its net liabilities to the rest the world are
more than $2.7 trillion, nearly 30 per cent of GDP, a scale of
indebtedness associated with basket-case economies in Latin
America.
Its industrial base is so uncompetitive that it consistently
imports more than it exports; its current-account deficit, the gap
between all its current foreign earnings and foreign spending, is
now a stunning 5 per cent of GDP, continuing a trend that has
lasted for more than 25 years and which is the cause of all that
foreign debt. As a national community, it has virtually ceased to
save so that government and individuals alike live on credit.
To finance the current-account deficit, a reflection of the lack of
saving, the US relies on foreigners supplying it with the foreign
currency it can't earn itself. The Old Europe that Donald
Rumsfeld mocked last week has been helping to prop up the US
economy, buying shares and bonds on Wall Street, taking over
American companies and investing in real estate, compensating
for the saving that the Americans aren't doing themselves.
BUT IF FOREIGNERS got windy about the prospects for share
and property prices and stopped buying, or began to withdraw
some of the trillions they have invested in the US economy, then
the dollar would collapse. Already, it has fallen nearly 10 per
cent against the euro over the last six weeks, but that could just
be the beginning. Economists at the Federal Reserve have
estimated that the dollar needs to fall by 30 per cent to bring the
flow of imports and exports into balance, but in today's markets
such a fall doesn't happen gradually. It happens precipitately.
If America and Britain spurn a second UN Resolution and go to
war with the active opposition of key members of the Security
Council like France and Russia, be sure the flow of dollars into
the US will slow down dramatically, and be sure there will be a
stampede of foreigners trying to sell.
Shares on Wall Street that
Bush is so anxious to prop up are still massively overvalued.
Against this background, there could be a devastating sell-off,
with all the depressing knock-on consequences for American
consumer confidence and business investment.
What the markets were signalling last week was that this is
sufficiently within the bounds of possibility that it was worth
taking precautionary action, hence the selling. If the war was
over in a few weeks, the risks would be containable, and there
will be some shares well worth buying at today's prices. But if
the war was prolonged or the subsequent peace unstable, then
the pressure on the dollar and Wall Street could become very
severe indeed, reinforcing the depressive influences on an
economy where the underlying imbalances are so extraordinary.
Bush would have to restore financial confidence, but the avenues
open to him - cutting spending or forgoing his cherished tax cuts
- would make the economy worse before it got better. He might
even have to turn to his despised European allies to ask for a
multibillion euro support package for the dollar, because they
hold the only currency capable of shouldering the burden.
American pressure on the Europeans to stimulate their
economies to compensate for the weakness of the US would
become enormous.
The derided Europeans will want to do something to help, not
least in their own self-interest, but the appropriate mechanisms
and instruments have been allowed to rust. The Bush
administration doesn't believe in economic co-ordination nor in
trying to order markets. Suggestions that Europe and the US
should target the dollar-euro rate within a pre-announced range,
limit foreign exchange speculation through taxing short-term
speculative positions highly or even co-ordinate their economic
policies are derided.
The US approach has been unilateralist here as everywhere
else: it does what it likes as it likes, a policy that is now
showing its limits. Bush needs badly to change course, which
Tony Blair should be urging on him.
The UN process needs to
be respected and reinforced, not least to reassure the markets,
and better systems of economic governance need to be put in
place. The US's military capacity may allow unilateralism; its
soft economic underbelly, we are discovering, does not.
Britain will share in any world economic weakness, aided and
abetted by our own particular problems. The plight of
manufacturing is acute; capacity utilisation is the lowest for 20
years, as our lack of an exchange-rate policy, impossible
without euro membership, crucifies our industrial heartlands.
We have also allowed our corporate, individual and even the
Government's fortunes to become interdependent with those of
the stock market. Pension funds are showing billion-pound
deficits as shares slump, so that companies face colossal and
confidence-sapping liabilities.
THE GOVERNMENT'S own finances are also returning to earth
as the bubble deflates. The European Central Bank has
estimated that if share prices and house prices returned to their
1997 levels, the Government's budget deficit would rise by £25bn
on top of its already weakening position. Share prices are
already below those levels, and while house prices seem
underpinned by low interest rates, last week the Financial
Services Authority warned that 20 per cent of households are
encountering difficulties servicing their mountainous debts.
Britain needs to avoid a financial calamity as badly as Bush.Yet
the two belligerents are squaring up to Saddam not only as if
they were politically and diplomatically secure, which they are
not, but economically secure, which they are also not. The
markets last week were warning us of the risks.
Even at this late hour, it is not too late to change course. Mr
Blair must convince President Bush to kill his unilateralism and
frame his actions multilaterally. Unless he gets that
commitment, he should refuse British support. Too much is at
stake for vainglorious posturing.
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