The world economy is on a knife-edge. The anti-capitalist protesters gathering to protest at the world economic summit in Genoa are both right and wrong. Right in their anger but wrong in what they are protesting against.
For while capitalism during a boom certainly has its faults, a full-blown world recession would mean that most of the protesters would not be able to afford the fares to the summit. So as world leaders will tell us that all is for the best in this best of all possible worlds and the anti-capitalists will protest at unaccountable private corporate power, an avalanche is gathering pace that threatens to make both arguments redundant.
We have had a lucky 10 years, but our luck is running out. The mid Seventies, early Eighties and early Nineties were disfigured by nasty recessions. At various times in between, since we began the era of floating exchange rates and exponential growth of capital flows, there have been terrifying moments when it seemed that the world economic system was built on sand. But it has proved much more resilient than we had any reason to expect. There was a regional recession in Latin America for most of the 1980s and Asia did not look too bright after the financial crisis in 1997, but despite some bank collapses the industrialized West has carried on regardless. There may be interruptions but the basic movement is always upwards.
Except this time. Events that, until now, have occurred in a manageable sequence are happening simultaneously, when world institutions are at their feeblest and American economic leadership at its most empty-headed and self-seeking. Latin America and Asia, which have had their financial crises and economic slumps separately, are now having them together, just as Japan stagnates and the US has hit the buffers.
Throw in an oil shock (the price of oil has trebled over the last two years) and the global telecoms disaster and the picture is complete. The next 12 months will provide the greatest test the world economy has had since the 1974 oil crisis, as both the Bank of England and IMF have warned as seriously as they can, given the opaque economic jargon in which both feel compelled to speak.
The trouble is that for 30 years the US has worked tirelessly to create a world system that suits its interests but without simultaneously creating robust international institutions for its management. That would have demanded a surrender of sovereignty that the US simply could not and would not contemplate. The Clinton administration had the wit not just to carry on opening up the globe to US financial capital and corporate interests but to organize massive bail-outs when an individual country's difficulties menaced the functioning of the system. Mexico in 1994, Asia in 1997, Russia and Brazil in 1998 and, latterly, Argentina and Turkey have all been the recipients of large IMF and US Treasury support measures, with the IMF working to US instructions.
In essence, stricken governments have had to accept the necessary dollars to stave off speculative pressure, but at the price of massive austerity and promising to keep their economic and financial systems open to US multinationals and investment banks.
In 1972, Richard Nixon signaled American intent when he declared that the US needed 80 per cent of the industrialized West's trade surplus as a matter of right in order to finance its military ambitions and a trade deficit it was unwilling or unable to correct. The object of US financial diplomacy, he openly acknowledged, was to ensure that the dollar remained the overwhelmingly important unit of account for international business, even though the US only comprised one-fifth of world GDP. Hence a system of floating exchange rates based on the dollar. Thus the US could pay for its massive network of overseas base complexes and its phenomenal trade deficit in its own currency without any check; it could regard the rest of the world, as long as it opened up its trade and financial systems to US business, as the new American frontier.
For the last 30 years, the world has lived with this Faustian pact. The profits of US multinationals have risen at 10 per cent per annum, twice the rate of domestic profits growth, for most of this time. Massive inflows of European and Japanese savings have supported American living standards despite a trade deficit that is now 4 per cent of GDP. In return, the world has had the right freely to export to an American economy growing without constraint because that is how the system has been set up.
The system was already creaking in the last years of the Clinton presidency; Americans had ceased to save and the US economy's ability to meet its side of the bargain - underwriting the rest of the world's prosperity - was reaching its limits. Now the limit is reached. Worse, 30 years of deregulation and rolling back the welfare state have left the US with feeble automatic stabilizers. The US is about to plunge into recession, necessarily taking the rest of the world with it, and with no internationally agreed mechanisms to manage the consequences or get us out of the mess. The Bush administration has said it is against bailouts and economic co-operation as a matter of philosophic principle. The world stands on the abyss.
This should be the real object of the protesters' ire in Genoa. What should be happening is that a united Europe should be challenging the US and offering a new framework for the conduct of trade, finance and investment. We cannot allow the economic and social fate of continents to rest on the whims of the foreign exchange markets and what deal the US Treasury and IMF are prepared to countenance. The US economy is no longer big enough to justify our acceptance of American rule on US terms.
But Europe is not united and Bush has no intention or interest in engaging with the issue. As a result, the world's leaders will issue a final communiqué saying everything is all right because they cannot say anything else - and the anti-capitalist protesters will damn them all while having nothing to suggest as an alternative. Those who the gods wish to destroy they first make mad.
© Guardian Newspapers Limited 2001