From the Cold War to Hot Finances

29 december 2011

The End of the World Order?

Dr Alessandro Politi is an independent strategic analyst, Rome, Italy.

Resume: Bush remembers the tragedy of Charles V of Habsburg and Philip II of Spain who strove to keep one world under one sensible hegemony and, despite defeating major adversaries, failed over the stubborn resistance of rebels and heretics then in Holland and yesterday in Iraq – debt and imperial overstretching as predicted by Paul Kennedy.

If one puts the question to younger people (i.e. born in the seventies and eighties of the past century) the end of the Cold War risks dangerously to mingle with the images of Star Wars: the Empire against the Republic, thanks to a vulgarized version of the events where the Soviet Union lost this conflict after the successful effort, led by the United States of America, in containing, weakening and then disintegrating the enemy bloc.

If one wants to understand the Cold War, it is necessary to start at least from the two world wars. World War I was the suicide of the traditional group of world and continental powers in favor of an emerging power, the U.S., and a new political reality, the Soviet Union. It was the last war fought by Europe and for Europe.

Between the two wars the political obtuseness of the major democratic powers and the rampaging anti-Communism in several democratic and European countries helped the rise of Nazi-Fascism with the clear aim of isolating the Soviet revolutionary state and (a tribute to the diplomatic folly of the same countries) nudged the two pariah states of the time (Germany and the Soviet Union) to establish a fruitful strategic collaboration that ignored the deep ideological divisions between Hitler and Stalin.

World War II completed the suicide of the four major European powers and confirmed the power of Washington and Moscow. The list of the winners and losers of that conflict, discernible by the most acute minds of the time and clearly visible with hindsight, was the following:

  • Two real winners: the United States and the Soviet Union
  • Two phoney winners: France and Great Britain
  • Two real losers: Germany and Japan
  • One half loser: Italy
  • One transforming winner: China (from the Kuomintang to the Chinese Communist Party).

Despite the myth that president Roosevelt had been duped by Stalin in Yalta and/or that Churchill had sold East Europe to the Soviets, the stark reality is that the Americans knew very well and had already calculated that the only ally that was not dependent on U.S. logistics and money had to be adequately compensated. And so it happened.

If Washington would have wished to avoid the Soviet influence in Central Europe, it would have accepted the plan of Churchill to land not in Normandy, but in Slovenia, seizing the Ljubljana Pass and pre-empting the Red Army East of the Carpathians, while cutting out Italy from the German ally.

Instead it razed down Dresden, Hiroshima and Nagasaki to warn that undue Soviet adventurism outside the established sphere could be blocked with devastating force. The Soviet Union, accepting the division of Europe proposed by the U.S., had fulfilled its long standing continental strategic objectives (essentially a buffer/springboard in the heart of Europe) at the cost of remaining bottled up in Europe for lack of strategic sea access.

When the West started the Cold War with the famous Fulton speech, it is interesting to observe that, despite the parades in Red Square and the formidable military maneuvers, there has never been a serious attempt to really invade Europe. Stalin and his successors scrupulously respected the Iron Curtain at the cost of letting butcher the Greek Communists (helped only by Tito for evident territorial ambitions) and of watching more attempted coups d’Оtat unfolding against the Italian Communists.

The preferred method to unhinge the almost air-tight containment in Europe was indirect superpower pressure (the Berlin blockade and SS-20 missiles two decades later) and political propaganda/subversion, knowing very well that the latter means was more a disturbance than a real lever. Compared with the ephemeral Nazi domination of Europe, the Soviet Union lacked a precious Atlantic base like Norway and France; nuclear attack and ballistic missiles submarines could only partially compensate the limited strategic value of Kronstadt and the White Sea, ex-Finnish ports. The Far East fleet’s sea lanes were equally vulnerable to interdiction through the control of Korean and even more Japanese ports (as the year 1905 had demonstrated with Port Arthur and Tsushima).

It took twenty years to overcome the continentalist mentality and to start competing globally with the U.S. through the creation of a true blue water interdiction navy. But when Admiral Gorshkov began to see the fruits of an exceptionally focused effort, the Soviet Union collapsed.

Leaving aside an ill-conceived triumphalism, the reasons of the Soviet bankruptcy were eminently internal:

  • Corruption had deeply infiltrated the Party and the state, at the point that already in some Central Asiatic republics it was necessary to dismiss their party presidents and to install in office the KGB presidents who were considered more reliable and honest;
  • The economy had become less and less capable in satisfying the wider needs of the population, increasingly inefficient in providing the required goods and the necessary technology for the national economy (military production excepted) and largely ossified in its internal exchanges. The state commanded the economy, but it was largely incapable to let it function;
  • The ideological appeal of Communism was constantly diminishing and political patronage of the apparatchiks had largely emptied the values that should have kept government and society abreast of change.

These ideal, social and moral weaknesses were largely unaccounted in the regular strategic evaluations that were drawn up yearly and this explains why the vast majority of specialists did not sense the coming of one of the most momentous geopolitical changes after 1945. One must also add that this disturbing habit of missing revolutions dates back at least to 1979 (the Khomeinist revolution in Iran) and persists until the more recent events of the Arab Spring.

The effects of the defeat in Afghanistan, the increased stress put by Reagan’s “Star Wars” missile defense bluff program and, especially, the covert assistance given by the State Department, CIA, NRO and NSA to Pope John Paul II and indirectly to the Solidarnosc movement in Poland, can be considered as important facilitators in precipitating the awareness within the Soviet elite (namely Secretary General Gorbachev) that the overall situation was unsustainable.

But the fall of the Berlin Wall (1989) and the dissolution of the Soviet Union (1991) were anticipated and prepared by a less visible event, the coming of economic deregulation (1981), launched by president Reagan and British Prime Minister Thatcher. It was the first time in contemporary times that the state abdicated its control over the economy in order to guarantee economic growth.

This has been a fundamental political and ideological change because, if the property of production means was different on both sides of the Wall (private in the West and public in the East), the state continued to be the supreme regulator of economic processes; witness not only the role of the Pentagon in the U.S. industrial base, but also the way states fashioned national capitalism in Western Europe, Japan, Australia or Turkey. In this sense the first breach in the Wall was opened by deregulation. If Reagan and Thatcher gave up political control to ensure continued growth, Gorbachev had to do the same, trying to ensure the survival of a society and an economy.

After this period, first the economy and then financial capitalism became a self-contained operating system and a total ideology completely enfranchised vis-И-vis politics. Remarkably, after 1989 bin Laden, a former businessman, started a deregulated terrorist venture (al Qa’eda) on a private financial basis, whereas in the past terrorism was a highly regulated state affair.

Instead of starting a clash of civilizations, 1981 was the beginning of the collapse of the Western civilization in terms of world order, intellectual framing of world politics and of global centers of gravity. At the same time, the void left by the death of major ideologies – not just totalitarian ones, but also democratic creeds, emptied by the dominance of money in political processes – was differently filled by various actors.

In the former West it was the pensОe economique unique (the one-sided economic thinking) and its eco-leftist counterpart; in many other countries it was nationalism instead of socialism or old Cold War alignments; and in a wide Afro-Asiatic area it was religion at the service of political goals.

At the same time, 1989 gave way to a gigantic shift of:

  • Migrations, from the South and the Former Soviet Union, because people were enjoying more freedom of circulation;
  • Information – the data glut and OSINT (Open Source Intelligence) start then;
  • Technology, from FSU to the West and from the West to emerging countries, because the old COCOM is replaced by the less stringent Wassenaar Agreement and economic competitiveness and profit prime over strategic technology control;
  • Investments, both financial and industrial.

In many cases the sovereignty of the Westphalian state, when it existed, started to crack under the pressure of globalization (both legal and illegal), of micro nationalisms and sectarian tensions, of governments encroaching on institutional and budgetary balances and freedoms and also due to sheer obsolescence (the nation-state is at least two centuries old).

The acute crises in 1991 (Yugoslavia, Kuwait-Second Gulf War) signaled contradictorily the return of war in Europe, an increased geopolitical freedom from the strictures of the Cold War and the progressive strategic and political disintegration of the West.

FROM A BIPOLAR WORLD TO A DYSFUNCTIONAL MULTIPOLARISM

To the “victory” over the Soviet Union and a changed situation, the United States answered under the presidents George Bush and Bill Clinton with a “consociative unipolarism,” meaning that the U.S. was the only remaining superpower with an effective leadership, but that this was balanced by the systematic research of international consensus in the management of crises.

At the same time, these presidents were very effective in shaping U.S. national interests because during this period they achieved the following objectives:

  • Retarding the political and strategic growth of the European Union;
  • Expelling European post-colonial interests from Africa;
  • Reinforcing the American role as controller in the Persian Gulf;
  • Flexibilizing the trans-Atlantic relationship by introducing coalition mechanisms and mentalities, while retaining the role of NATO;
  • Achieving a public budget surplus, despite direct and indirect involvement in several wars;
  • Consolidating the practice and the gains of financial capitalism, with the active bipartisan involvement of European institutions and national political leaders.

In the same years Africa and Latin America increasingly started to manage more or less successfully their own problems; Russia, after having concluded a rather orderly retreat from the Soviet Union to a neo-nationalist still multinational bastion – albeit at horrible costs – was trying to stabilize herself and ending a condition of strategic defensive, and India started its patchy political and economic development.

China was the country that learned most from Gorbachev’s failure because it succeeded, until now, to liberalize the economy, retain national-Communist political monopoly and avoid nationalist splits at any cost.

Ten years later, deregulated and privatized jihadi terrorism succeeded in shaking the image of U.S. hegemony by hitting the symbols of the WTC and the Pentagon. Could, with hindsight, President George Walker Bush have acted differently? No, regarding the war in Afghanistan; his predecessor could have responded with state assassination to the damaging of a destroyer, but after the killing of 2.700 people, a war was the only acceptable reaction for the American public opinion and frankly for any ordinary decision-maker.

Yes, with regards to the Global War on Terror, al Qa’eda could have been fought by a combination of intelligence, police, judicial and social measures in the same way as more or less state-sponsored terrorism had been confronted during the Cold War and is still being battled by India. On the one hand, a localized and victorious war would have been waged against the physical headquarters of al Qa’eda and, on the other, a global alliance against terrorism could have been forged allowing for much of the legal and illegal practices, but without the heavy footprint of military bases.

Examining Iraq, one would like to say that Bush could have decided differently but one must conclude that no. Yesterday opposing this aggression was considered tantamount to a betrayal of the sacred Western cause, today the failure is common sense, but it was all in vain.

The tragedy of coercive unilateralism (either with us or against us) lies in the political collective genius of the Bush presidency that allowed to transform in 48 hours a setback into a splendid opportunity to redraw the world map and ensure a new lease for at least another decade of undisputed supremacy.

The intellectual setup of the neocon elite was the bipartisan pretence to achieve a perennial global dominance, the firm conviction that, after the Soviet Union, China was the next dangerous competitor to be reduced and that war was the best way to achieve supremacy, even against eluding adversaries like terrorists and narcomafias.

Bush remembers the tragedy of Charles V of Habsburg and Philip II of Spain who strove to keep one world under one sensible hegemony and, despite defeating major adversaries, failed over the stubborn resistance of rebels and heretics then in Holland and yesterday in Iraq – debt and imperial overstretching as predicted by Paul Kennedy.

The combination of the Afghan campaign, GWOT and aggression to Iraq (the war by choice) allowed Bush to achieve three things: restoring the supremacy of politics over economics through the supreme decision of war and peace; rebalancing the presidential power vis-И-vis the judicial and the congressional ones (that were eroding the presidency since the Watergate scandal, 1974); reaffirming a strategic control over the Gulf, worn out by Iran and by Saudi increasing covert hostility during the decade of the successful containment of Saddam Hussein.

In the meantime, NATO was politically killed: after having invoked the war article (Art. 5 of the Washington Treaty) on the wake of 9/11, by October 12, 2001 the U.S. let know that nothing would happen at Alliance level in Afghanistan but only in a coalition framework, so successfully reintroduced ten years before. Since then NATO has become a technical logistic toolbox for different operations, more or less formally under its banner.

In 2004 the war in Iraq was lost by Bush and bin Laden through different paths and for the same reason, that is the loss of consensus and political initiative. The delaying of elections finally brought together Sunnis and Shi’as in a tactical alliance against the American occupation, while the indiscriminate bomb attacks and political openings by the government convinced Sunnis that the international brigades of al-Qa’eda were no more politically useful.

With the Iraqi defeat unipolarism was finished and five years of unbalanced multipolarism followed: there were still the traditional centers of power (P5 and G8), but new ones were strongly emerging (BRICS and other countries), in a context where old rules continued to be valid, but with significant exceptions, new ones were still not drawn and no clear alternative leader was emerging. There was no anarchy, but there was no firm structure of power either. The so-called G2 (a China-U.S. diarchy) was a daydream of the Cold War nostalgia.

By 2006 the first signs of the bursting of the U.S. housing bubble were visible to the economic analyst Nouriel Roubini and in the same year, starting from different premises, but taking into account structural imbalances between the Chinese and the U.S. economy, the author predicted in the 2006 Nomos & Khaos report that “It is highly likely that during 2007 the Pacific could be the epicenter of a financial typhoon generated by the weakness of the Chinese and U.S. economic systems, the interaction with the global financial markets, and the flaws in the governance of the economic policy of the Euro zone. The synergy among these factors will represent a much stronger challenge to the economic, social, and political stability models than the (comparatively modest) threat of jihadism. The basics of this crisis were already identifiable since September 2006.”

It meant symbolically that another World Trade Center tower had been struck by the deregulation wave. On a historical level it meant that 30 years after its beginning, the deregulation cycle had started its end, shattering all institutions created in Bretton Woods around the American political exceptionalism and the dollar seigniorage. Evidently, few wanted to accept the upsetting of consolidated arrangements and doctrines.

It is not by chance that since then Chinese leaders have resurrected Keynes’ idea of a composite world currency (the BANCOR), but in 1948 Keynes represented the losing British empire, while the dollar was the currency of the winning democratic thalassocracy.

By 2008 the economic crisis was an accepted matter of fact and international politics had also overcome the delusion of the stillborn UN reforms presented by the then Secretary General Kofi Annan in 2006. The G20 met for the first time in Washington (November 2008) and it appeared initially as an overdue extension of the G8 to a more realistic format. Yet it meant also the sidelining of the UN system, the end of the relevance of the G8 and more importantly the practical end of the notion of a world order.

A world order is possible when there are two or more major powers which: 1) share, if not the ideology than a common understanding, of the general rules that de jure and de facto govern overall relationships in the world; 2) are capable, if needed, to enforce the rules and to carry out their own interests; 3) define more or less directly a hierarchy of other governmental or non-governmental powers and rules. A world order, despite the special case of the Cold War, does not necessarily concern itself with stability, but can rest on a dynamic and unstable balance for very long periods.

Before the Spanish empire globalization (the first in her kind), there was no world order but the coexistence of regional orders and anarchies, with the end of the American globalization the conditions for another new world order simply do not exist. We have just a dysfunctional multipolarism.

 

LIVING WITH AN INTERNATIONAL REFERENCE SYSTEM

In fact, global interdependence has brought a different condition of the international reference system, where the political value of a specific public or private power floats like a currency and is defined not by a top-down order, but in the changing relationship with other actors.

There is still a former superpower with considerable military might but weakened by a failing economy and internal divisions, there are old, newly emerged and emerging powers, there is the new G20 political arrangement and a plethora of old institutions, but no one able and willing not only to impose common rules, but also to devise them, coagulating the necessary consensus.

A reference system has all the potential to be more effective in preventing failures and avoiding major crises thanks to a freer interaction, but presently it lacks the necessary structure and inner coherence to carry out its function. This is why we have multiple poles of power that work rather fuzzily together and we risk to muddle through a rather complex and complicated decade.

If we want to have a clear perception of what world we are in, we must start with acknowledging that economics has kidnapped politics. In short, there have been three world class models in managing the dangerous relationship between economics (especially the finance economy) and politics: Putin, Obama and Berlusconi.

The Putin model assumes state control of the economy to a greater or lesser extent. The question marks about this apparent success story regard the dependence on energy sales, corruption and serious mafia infiltrations – the three problems that severely limit the effective political control over legal and illegal economic circuits.

The Obama model, aimed explicitly at mediating between Main Street and Wall Street. At the end of his term one has to recognize that this innovative Christian Democrat-ish approach has failed for the good reasons that all the key people on his team come directly from the business circles that built up the crisis and that the twin deficits impact heavily even on the ultimate political decisions on war and peace.

The Berlusconi model has embodied the explicit economic supremacy over any other political or social interest. In the end, it has shown the shortcomings of economic dominance: high debt, weak to non-existent self-regulation, blatant corruption, entrenched mafias’ involvement, inbuilt decision-making paralysis outside short-term self-interest.

The crisis of the euro is just the last episode of a tug of war between very weak governments and insatiable markets where private and geo-economic interests are strongly intertwined.

Starting from the “markets,” the OECD has observed that in 2011 just 9 major economic actors control over 90 percent of the derivatives market (i.e. credit default swaps, collateralized debt obligations, exchange rate swaps). They are: J.P Morgan, Bank of America-Merrill Lynch, Citibank, Goldman Sachs, HSBC U.S.A., Deutsche Bank, UBS, Credit Suisse, BNP-Paribas. This is an oligopoly that makes the market today and breaks national financial reputations, economic fundamentals notwithstanding.

Over a year these entities have had the opportunity for extracting value in the eurozone, starting from the so called PIIGS (Portugal, Ireland, Italy, Greece, Spain) and a number of non-European economic and governmental actors have concluded that shorting the euro is convenient.

A sensible geo-economic interpretation of this euro mess is that those who are driven by U.S.-based financial interests – both in net importer countries and in net borrowers – want more money after the 2006 crisis losses, because they fear to forfeit the convenient platform of a rather dominant country whose dollar seigniorage is a force multiplier for their interests. They do not want an excessive depreciation of the dollar, but they definitely like the actual pressure on the euro. This might suit also U.S. political actors who want to gain time to manage their own national decline at the expense of the European Union, while the BRIC and other Arab financial interests can conveniently wait on the river’s bank.

It is economic warfare, but differently from the French or American traditional and reassuring definitions, it is waged by private actors in the open and the covert sphere (via the shadow finance system and fiscal paradises) and with high frequency trading robot software that mows down slower and smaller actors.

What scenarios can be sketched in the short and long term? Regarding the Euro there are two probable and one possible outcomes:

First, the PIIGS will be bled white, four to five countries will keep their AAA and grow, but the EU will stay together like Bosnia-Herzegovina today, without any political credibility and projection.

Second, the eurozone will split and so will political Europe. There will be an Asterix-like German village, an enclave in a partitioned Europe, the BRIC being among the more credible candidates in taking slices. It will not be the Berlin Wall, everything will be done softly, but countries will lose sovereignty even if retaining their political systems under a Hong Kong rule. True, in the next decade the BRIC will be unable to take global leadership, but in the meantime they are perfectly capable of taking advantage of the Western folly.

Third, the major governments stop quarrelling and apply all the measures necessary to stop this assault, including ECB lending, debt auditing, solidarity schemes among indebted countries, regrouping and protecting the industrial and economic assets of embattled countries and carrying out real political integration.

But it is in the long term that global scenarios can offer more complex perspectives:

  • The first concern must be the transition that the U.S. has to accomplish from the actual former superpower exceptional status towards a respected power among others. It would be wise to facilitate this move with soft power, eventually “pensioning off” the country, lest one would incur in a real war after the present economic war, whose outcome will in any case lay the groundwork for successive developments.
  • If this risk is avoided, one could imagine a multipolarism reorganized on the “two oceans – one heartland” basis, where the main actors in the Pacific and Atlantic jointly manage the order with those of Eurasia, i.e. Russia-EU-U.S. with China. It would be a combination of complementary strengths and – more important – weaknesses, but it requires a political imagination and courage that today the leading figures in several countries simply lack.
  • Another possibility is a balance of power in a multilateral framework of reassurance treaties; that is, where the future global institutions take on the role of warrantor and take over the role formerly belonging to the UN, avoiding unforeseeable armed confrontations.
  • Or a globalized regionalization with a network of regional organizations and summits replacing the UN, ensuring the respect for a series of shared protocols at local level, including that of denuclearization.

The last scenario implies that, in addition to the complete collapse of the former West and the BRIC remaining stunned by their internal problems and in their strategic growth, the world will increasingly fragment or defensively regroup around the most capable regional nuclei. A nightmare in terms of the diffusion of organized crime and armed anarchy and a chaotic period for politics and the economy.

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