Blip or Bust?

The slowing down of the German economy could provide the fast route to another global recession. 

Once thought of as the rock or glue holding the ever loose foundations of the European Union together; Germany’s economy is beginning to falter. Merkel and her economy defied trends in 2010 and 2011; recording growth rates of 4% and 3.3% in respective years. In comparison, the EU recorded growth rates of 2% and 1.6%. Of course, these EU rates also take into consideration German GDP growth; which is an outlier in this case. The point remains valid though, Germany almost single-handedly held the European Union together. Now, however, after narrowly recording growth rates to avoid a double dip recession; the German economy is shaking and due to this, the future of the EU and perhaps even the World looks bleak. 

Chancellor of Germany - Angela Merkel

In order to truly understand the importance of the German economy we must analyse the very nature of it. Firstly, Germany is considered an exporter. Essentially, exports are products which leave a country and generate revenue whilst imports are products which enter a country and are paid for. Germany’s current account; the difference between revenue gained through exports and revenue spent on imports, remains one of the World biggest at +7% of GDP. A positive current account is normally regarded as a sign of economic stability; Britain have a current account deficit of 4.4% of GDP, whilst the US’ deficit equals 2.3% of its GDP. In August 2014, however, Germany’s exports fell by 6%, a sign of things to come. It is interesting to analyse why this drop occurred. In 2013, 68% of German exports were delivered to European countries; whilst 57% of all goods were sent to EU members. Furthermore, the United States spent 89 billion euros on German products and China, 67 billion euros. Now, one explanation of why German exports have decreased is that their trading partners have slowing economies. In 2010 China’s GDP growth was recorded at 10%. However, this year, growth is expected to be around the 7% mark. Several members of the EU also have weakening economies; although France managed to narrowly avoid a recession, recording 0.3% growth. However, it is important to note that this was, in part, down to the increase in the public sector in France due to government expenditure increasing by 0.8%. It is therefore debatable how sustainable this growth is; as it is aggregate demand driven and not aggregate supply based. On the other hand, Italy, the third biggest economy in the EU slipped into its third recession since the beginning of the Financial Crisis. The EU, in general, performed marginally better than analysts expected, although the small growth of 0.2% during the months of July - September is hardly a figure worth getting excited about. Furthermore, the total EU GDP remains 2% smaller than it was in 2008, 6 years ago. This decline in the economic power of its trading partners is one major factor as to why the German economy has shrunk, and in particular why export revenue decreased dramatically in August. 

Wheelbarrows of Money - The hyperinflation of the 1920s

Crucially, however, there is more to Germany’s period of economic stagnation than merely poor GDP rates in trading partners. There is also a change of preference and political stability. The Crimean Crisis, firstly, drastically affected political stability in the region. Russia takes around 3% of German exports, but due to its recent political issues, the Russian economy has slowed. Following the issues in Crimea, the Russian currency, Ruble, depreciated dramatically. Essentially a depreciation can be defined as demand for a currency going down, normally investors seek currency in order to buy bonds or invest in that particular economy. However, clearly, investors seek political stability and therefore their confidence in Russia has declined in the last year. Russian GDP growth slowed, again, for the third quarter in a row. Basic economic theory suggests that as an economies GDP slows, and its people becoming relatively poorer, import expenditure tends to go down. In fact, Russia is on track to record its weakest economic growth rates since 2000 excluding 2009, when its economy contracted. Along with Russia’s slowing economy, the Chinese economy has also began to record slower growth rates. However, more importantly, the Chinese economy is beginning to enter a period of transition. Previously a capital purchasing economy due to its desires to boost production and productivity; China is shifting towards that off a consumption driven economy because its citizens are beginning to demand consumer based products. In 2011, total e-commerce revenue in China was 4.8 trillion Yuan, and on average its e-commerce market is growing by 20-25% each year. Clearly these statistics suggest a transition from Chinese economies purchasing machinery to Chinese consumers buying iPhones and televisions. This transition, however, is bad news for Germany because China purchases around 6% of German exports. Lastly, the United States is shifting their consumption patterns. Barack Obama’s policy of domestic energy sources has resulted in the US economy importing less capital products and instead focussing on sourcing energy from shale oil. 

Chinese e-Commerce booms

All this means one thing; Germany must adapt its domestic policies in order to kick start its economy once more. Economic policy in Germany during the last decade has included a vast amount of cut backs and ‘belt tightening’. This, to some degree, is due to the fear of inflation that has haunted the German conscious since the early 1920s where hyperinflation resulted in economic crisis. As a result of this, to some extent justified, paranoia, German policy makers aren't keen on pumping large amounts of money into the economic flow. Indeed, as a result of this, the German economy has been starved of much needed domestic investment. In fact German productivity has taken a hit; as public services such as transportation systems have deteriorated over the years. Merkel must either embrace a heavier fiscal stimulus package or loosen monetary policy. Quite simply, fiscal policy is any economic policy to do with government expenditure and tax revenue whilst monetary policy is the controlling of the money supply and interest rates. The recent decision of the European Central Bank to embrace a quantitative easing policy has resulted in German opposition. A perfect example of where politics and economics do not get along. Germanys fear of inflation means that they are leading the anti Q.E. band in the EU, fearful that inflation rates will increase if the money supply rises. However, it is clear that for the German economy to restart, a loosening of monetary policy and an embrace of QE is necessary. 

The Future of Power

Before considering the significance of power, and its future affects on International Relations one must understand a crucial premise. Power is multi dimensional; a 3D chess board, as American historian Joseph Nye describes it. The top board; or dimension, can be defined as power in relation to coercion; or military force. The ability to beat one into doing something you want them to do. Oxford historian A.J.P. Taylor defined power as the ‘ability to prevail in War’. In a sense this dimension can be defined as ‘sticks’. The ability to pay, or tempt, using money, is the next dimension. In a sense this is the capacity to pay another agent, or state, to do something you want them to do. Lastly, and most importantly when analysing power in relation to future international relations, there is the notion of Soft power. Essentially soft power can be defined as; the faculty to convince another agent to want to do something you need them to do. Soft Power, in a sense is a direct argument against the premise of A.J.P. Taylor; it is not whose army who wins that becomes powerful it is more whose story wins that becomes powerful. 

A.J.P. Taylor

In my opinion, there are two key transitions in power that need to be understood. Firstly, and far less importantly, power is travelling to the wings of the planet. Consider, the end of the Second World War; the collapse of Nazi Germany and the desolation of most of Central and Eastern Europe brought about a power vacuum. An arena for conflict and struggle to seize power; authority and, above all, influence. At the time, the World was, certainly in terms of the top chess board; coercion, a bipolar World. The USSR, a Communist regime, and the United States, the pioneer of Liberal Democracy, were at War for political domination. A conflict based on economic systems; free market v. centrally planned systems and political ideologies; pluralism v. elitism. Pluralism, the belief that a multi party system based on freedom of speech is more democratic, efficient and more fair. Elitism, as Plato believed, can be defined as a system where a single leader; or group-of-leaders, make all economic and political decisions; freedom of speech is not encouraged and a single party system is adopted. The collapse of the Soviet Union in 1991 resulted in the rise of a monopoly World. Historian Francis Fukuyama, wrote the End of History in 1992 with the sole premise being that the 20th century had ended in exactly the same way that the 20th century had commenced; a hegemony. Essentially, the defeat of two major ideological opponents to Western democracy; Hitlers rightwing Nazism and Stalin’s Left Wing Communism. Fukuyama believed that the World was now in for a prolonged period of one system; essentially the evolution of ideologies was over and the universalisation of liberal democracy had begun. However, this brings us onto the beginning of the first transition of power. The power vacuum in Europe and the defeat of the USSR saw power travel to the peripheries of the World. The United States would soon have to share its power with China. It is important to not overestimate the role of China in todays political order. Going back to the 3D chess board; illustrated earlier, the only board in which China perhaps contends with America is in relation to its economy. It is estimated that China’s gross domestic product; GDP will prevail that of the United States in around 2030. Nevertheless, it is clear that GDP is no satisfactory measure when analysing economic power. Indeed, GDP per capita, although certainly not without its limitations, gives a far more accurate picture. GDP per capita is total economic product divided by total population in order to give an aggregate level of income. On this measure; China, according to the World Bank in 2013 has a GDP per capita of $11,868 compared to the US’ $53,001. Of course, China’s economic trajectory is positive, growing at an average 10% since Deng’s Charimanship began in 1978. Indeed Chairman Deng brought 700 million Chinese out of poverty, over the $1.25 a day line, between 1978 and 2000. A remarkable feat for any politician. However, given these statistics there is a long way to go before China is on a level playing field with the economic might of the United States of America. 

Joseph Nye

The second shift in power we are witnessing is of far more significance and is, in some manner, more complex to understand. The argument is that power is leaving the hands of states such as the US, Britain, Japan, Germany, France, China etc. and arriving in the hands of transnational corporations and non state actors. Imagine international relations or international diplomacy as a stage where actors perform. This shift in power vertically is resulting one crucial thing; the stage is becoming crowded. This is for several reasons; but most importantly that barriers to entry are becoming lower and cheaper. In economics barriers to entry are defined as the restrictions for a firm to join a market. For instance, if an electricity firm wanted to begin to supply electricity to citizens in Britain they would have to pay a large sunk cost in order to even begin supplying, then would also need to handle legalities. These are barriers to entry. Another example is argued in the Mystery of Capital that it takes 15 years to create a business in Mexico due to the level of petty corruption. However, these barriers to entry are beginning to diminish. Notably, the price of computing and communication has decreased by 1000x since 1970. Put in perspective, if the cost of cars had decreased at the same rate than one could purchase a car for $5. As a result of communication and computing becoming cheaper more players; state and non state actors can join the stage. It was the privileged few who could communicate with Australia from Britain 100 years ago; now it is available to everyone who owns an iPhone; Skype and Viber or anyone who possesses a Facebook account; thats 1.23 billion people. This crowded stage has positives and negatives though. Consider, more people were killed by a non state attack, Al Qaeda, 9/11, than were killed by a state v state attack, Pearl Harbour 1941.This is due to a single issue; as power transfers upwards; towards the cloud, for instance and technology becomes cheaper, there is more opportunity for abuse in the systems. However, it is also harder to regulate. For example, the recent war on cyber crime; hacking for instance, is such a difficult issue due to the inexplicable fact that regulation of the internet is virtually impossible. Barriers to entry, not merely in terms of their economic cost, but also in terms of their availability have become significantly more accessible. However, there are positives for the stage becoming crowded. The United States, now the hegemony in World order, can harness this power transfer to gain further influence and this is where the notion of Soft Power becomes so crucial. Soft Power, defined previously as the ability to convince an agent to do something you want them to because they think they want to, is becoming more significant. The United States dominate in every aspect of soft power. When the Twin Towers fell on September 11th 2001, affiliates of Al Qaeda celebrated wearing GAP Jumpers and t-Shirts. In my travels to India and Nepal; countries with extreme examples of absolute poverty, there are users of iPhones, supporters of the New York Knicks and Bob Dylan fans. The American way of life is considered the pivotal, the ideal that everyone must aspire to achieve. In China, according to the Economist magazine last year, the emergence of e-commerce and the desire to own the latest smartphone released by Apple proves once again that it is the attraction of Silicon Valley not Shanghai or Beijing which dominates the conscious of the average Chinese citizen. Once again power is achieved by those whose story wins, not those who have successful armies in this day and age. 

Why is all this important? Why is all this worth reading? For one simple reason; one needs to recognise these power shifts in order to understand where next to go. Psychology must change if we, as a group of state, and non state actors, are going to tackle some of the deep-rooted issues of our time. Climate Change, the crisis in the Middle East, absolute poverty, to name a few, are only able to be dealt with if psychology is changed from zero sum to positive sum. The notion of zero sum is my gain is your loss; this is out of date. The level of interconnectivity in this new world order is such that my gain is now your gain and your loss is also my own. Until we embrace this; we are stuck. 

The Big Dilemma

On Thursday evening, Eastern Time, President Barack Obama announced his executive orders surrounding the issue of Immigration reform. According to Robert Longley, writing at usgovinfo.com, an executive order can be defined “as a directive issued to federal agencies, department heads, or other federal employees by the President of the United States under his statutory or constitutional powers”. Essentially, these orders are extremely important for two reasons; firstly, for a bill to pass through Congess it must achieve a majority in both chambers; the House of Representatives and the Senate. However, realistically, given the culture of Filibustering which has emerged due to the partizan nature of American Politics currently, a bill must achieve a 2/3rd majority in both chambers to achieve the ‘stop filibustering’ threshold. This emergence of filibustering, which is essentially when a Congressman, from either party, stands up and debates endlessly in order to stop a bill being voted on has resulted in both parties becoming very difficult to work with. The Hill, D.C, and America overall has become increasingly partizan over the last few decades, but especially since the Presidential Election in 2008 and then again in 2012. 

President Barack Obama 

Now that the context is understood, it is important to examine the importance and the potential impact of the executive orders President Obama announced. In my opinion, the most significant impact that the executive orders will have on the US political chess board is not actually to do with the level of immigrants, or indeed the process these immigrants must take to acquire work permits. Indeed, the importance lies with the reaction of the Republican Party. The midterm elections in 2014 proved several things. Firstly, that the stagnant economy, especially notable in the middle regions of America has caused a ‘bitterness’ towards President Obama and the Democrats. Low interest rates have caused the US stock exchange to pull upwards and more importantly high levels of quantitative easing (a process where the government buys corporate bonds in order to stimulate money supply for aggregate demand economic growth) has caused asset prices to increase. The latter of these two impacts is far more damaging for the Democrats. The middle class population that President Obama pledged to fight for - are becoming relatively poorer as a result of his economic policies. It is worth noting however that it is not a unique policy. Japan, an economy which experimented extensively with quantitative easing and low interest rates recently slipped into recession. In fact, it could very much be argued that an introduction of quantitative easing is needed in Germany, but given their psychological issues with inflation (rightly) Q.E for the time being is off the table. Therefore, it is not the fault of Barack Obama that the economy in America has stagnated. Indeed, although not technically in a recession, 80% of Americans still ‘feel’ as if they are living in a recession. Secondly, the midterm elections rubber stamped the premise that demographics are becoming increasingly important. Statistics surrounding the 2014 election are fascinating and also explain how crucial the Republican Party’s reaction to immigration orders will be. The GOP (Republicans), typically, attract a large proportion of the ‘anglo’ vote in the US. Indeed the ‘anglo’ vote in Iowa constitutes 89% of the voting population, in West Virginia the anglo vote is 93%, in Colorado, 80% of voters are white and in Kentucky a mere 11% are non white voters. The Republican party were successful in all of these states in the mid term elections. This is not either a new trend or a surprising fact. As I said, the traditional values of the Republican Party, pro free markets, anti-choice, pro-guns etc. sit well with the anglo voters. Likewise, the Hisapnic, or Latino voters tend to vote Democrat. In the 2012 election, it could be argued that Florida, the most significant of the swing states, purely in terms of its 29 electoral college votes, swung Democrat because of its large hispanic population. Indeed in 2012 President Obama won 93% of the African American vote and 71% of the hispanic vote, compared to Mitt Romneys’s 59% White vote. 

House Speaker Boehner (R)

The above statistics are crucial in understanding the importance of immigration reform. Now, the Republicans are stuck. The 2016 Presidential Election and the door to the White House is not far away, and the Republicans must appease the ethnic vote in the US in order to boost their chances of a win. The puzzle for the Republicans is this though. By embracing President Obama’s Immigration orders; they are abandoning their traditional values. It is worth noting that a Democrat led Senate passed Obama’s immigration bill last year, but a Republican House of Representatives, led by speaker John Boehner (not a joke) refused to debate the bill. For anyone who doesn't know how bills are passed; the debate process comes first. The chances of the Republicans embracing Obamas orders are slim; Boehner announced today that he believed Obama acted like a ‘king or emperor’. Whilst, Mitt Romney warned that Obama was ‘poking the eyes of Republican leaders’. However, the consequences of not supporting immigration reform are devastating. The latin vote is not going away and if anything is becoming even more important. In 2006 the hispanic vote constituted for 8.6% of the eligible voting population, in 2010 it was worth 10.1% and in 2014 it contributed to 11% of the electorate. With the Republican Party as fragmented as ever, the Tea Party continuing to assert influence and the population of moderate Republicans dying out - the need to attract hispanic voters is as important as ever, and possibly the difference between a successful 2016 campaign and a defeat. The early signs do suggest a change in Republican attitudes since 2012. In Texas, 44% of the Hispanic vote went with Republican congressmen, and in Florida a Republican governor was elected, Rick Scott. It will be fascinating to see how the Republicans respond to Obamas orders and whether or not they choose to back the President or risk losing the hispanic population, and as a result, the Presidential Election in 2016.

Capitol Hill