The spectre of sovereign debt The global financial crisis that gripped the world in the aftermath of the collapse of Lehman Brothers in September 2008 has had many far reaching consequences. One of the most important legacies is the huge amount of sovereign debt racked up by many governments. Often issued in the form of bonds, government borrowing has expanded massively to pay for the bailout of financial systems in countries like the US, the UK and Ireland. The national debt of the UK, for instance, is currently running at 60 per cent of British GDP, and may reach as high as 100 per cent by 2012. But far from repaying the debt, Gordon Brown’s Government is currently running a £178 billion (AU$315 billion) deficit.
But it is smaller countries that are in real trouble. One of the most conspicuous is Iceland, which saw its three biggest banks collapse in late 2008. The nation of Iceland is essentially insolvent: in addition to a US$10 billion bailout from the International Monetary Fund, it also owes the British and Dutch governments billions more since those governments stepped in to guarantee the deposits of their citizens during the collapse of Icelandic bank, Icesave. Last week, the President of Iceland, Olafur Ragnar Grimsson, vetoed a government bill to repay the debt, saying he would put the matter to a referendum. The small island nation faces a permanent drop in living standards as it struggles to repay debts well in excess of the total size of its economy.
Other small nations are in similar debt trouble, notably Latvia, Ireland and Greece. For example, Greece is running a deficit of around 12 per cent of its GDP and its debt is forecast to reach 130 per cent of GDP by 2011. After a recent debt downgrade, the nation was gripped by civil unrest and strikes.
Sovereign debt matters because countries have to allot increasing amounts of their budgets to repay it. The UK’s debt repayments, for instance, are rapidly approaching the size of Britain’s defence budget. The alternative — default — is an even worse outcome, often leading to a catastrophic currency devaluation and galloping inflation (as occurred in Argentina in 2002). Many financial analysts and economists fear that a default on national debt by Greece, Dubai or another indebted country could cause a new wave of financial turmoil.
The failure of Copenhagen The chaotic UN climate talks in Copenhagen in December last year have revealed to all that the current framework of international negotiations for carbon emissions reductions is hopelessly compromised.
As a result, we are likely to see a period of destabilisation in global climate politics as it becomes clear that the current approach is not working. In a recent article in Foreign Policy magazine, Ted Nordhaus and Michael Shellenberger argue that "the collapse of the Copenhagen talks marks not just the end of the United Nations as the primary venue for global climate negotiations but also the abandonment of binding emissions-reduction targets and timetables as the primary vehicle for achieving emissions reductions". Nordhaus and Shellenberger think that while green groups and politicians will continue to "toss around" targets for emissions cuts, "the real international action on climate change and energy will involve bilateral and multilateral negotiations to develop and deploy clean energy technologies".
One consequence of this "climate realpolitik" is likely to be a radicalisation of those with the most to lose, including poorer countries and activist green groups in rich countries, as they realise that the UNFCCC process is simply unable to deliver meaningful action on curbing global carbon emissions. Much will depend on whether Barack Obama’s Administration can shepherd the Waxman-Markey emissions trading scheme through the US Senate — an increasingly unlikely prospect. Another looming possibility is carbon tariff and trade wars between blocs of countries committed to reducing their emissions and those who aren’t. Whatever happens, it seems as though Copenhagen will be the last giant climate conference of its kind.
The limits of military force If there is one prediction we can be fairly safe in making, it is that the security situation in Afghanistan will still be critical at the end of 2010. The war in Afghanistan has been deteriorating for several years now, and despite the announcement that the United States will increase its troop numbers in the country in 2010 in an attempt to replicate the success of the 2006 Iraq "surge", the likelihood is that the nation will still face a deadly and destabilising Taliban insurgency for years, perhaps decades, to come. Meanwhile, a new front in the "long war" appears to be opening in the lawless badlands of Yemen.
While the US continues to refine its counter-insurgency tactics in Afghanistan, the failure of international forces to establish security there reveals one of the central trends of the next decade: the limits of military force. While the application of force continues to be a corner-stone of international strategy and relations, governments and militaries are increasingly learning the hard way that smart bombs and special forces cannot, by themselves, restore order in a troubled country or win friends among a hostile population. Indeed, one of the fastest adapters to the new reality has been the US military itself, as it has embarked on a crash-course in counter-insurgency under scholar-warrior David Petraeus and his senior advisers like David Kilcullen and John Nagl.
The "AfPak" situation raises another big question, so far unanswered with any real cogency: just what does the US and its allies like Australia hope to achieve in Afghanistan? Nation building? The defeat of the Taliban? Stopping al Qaeda from re-establishing itself? Or all of the above? As Eliot Cohen wrote recently in the Washington Post, "what is a strategy anyway, in a war without fronts, one that might drag on for decades and that shades off into banditry at one end and terrorism at another?".
The rise of China You don’t have to be a geopolitical analyst to recognise this trend. According to the Global Language Monitor, the spectacular economic growth of China was the single biggest media story of the noughties, gaining more media coverage than either the Iraq War or the 9/11 terrorist attacks. So central have Chinese investment and manufacturers become to the global economy — especially in exports to rich countries like the US — that influential historian Niall Ferguson has dubbed the system "Chimerica" in reference to the fundamental linkages between the world’s two largest economies.
The importance of China in the global economy is of course well known to Australian policy-makers. Treasury Secretary Ken Henry gave an optimistic speech last year in which he predicted that China’s demand for raw materials would fuel Australian economic growth all the way to 2050. "While the global financial crisis has taken some of the heat out of our export prices, we should get used to the idea that we could have structurally higher terms of trade for some time, possibly for several decades," Henry said in his speech. Reserve Bank Governor Glenn Stevens apparently agrees. After raising interest rates in October, he cited strong growth in China as a key factor in Australia’s improving economic fortunes.
But if China’s economy is becoming increasingly important to Australia’s, then the emerging giant’s political development has equal importance. The world’s China watchers seem to be divided between the optimists, who believe China can safely navigate a transition from authoritarian one-party state to a more pluralistic and liberal society, and the pessimists, who predict that the Middle Kingdom’s many internal contradictions will eventually lead to serious political disruptions. After all, political stability is only one of the problems facing Beijing’s leadership. Another is China’s looming and inter-connected environmental crises.
Australia has a keen national interest in a stable and prosperous China, but we also seem ambivalent about the inevitable geopolitical consequences of China’s rise. There is still considerable public concern about Chinese companies buying out Australian ones as several recent decisions by the Foreign Investment Review Board have highlighted.
And at the same time as Australia enjoys a Mandarin-speaking prime minister, our national security bureaucracy appears to believe China will become more militarily assertive in coming decades and that Australia should launch an ambitious arms build-up to prepare for this. This position is in fact Australia’s enshrined defence policy as laid out in last year’s White Paper. As I argued at the time of the White Paper’s release, seeing China as a military threat to Australia is speculative at best. Whatever happens here, the rise of China will continue to be the biggest global story of the 21st century.
The decline of America? If China’s path to global superpower now seems assured, the future of the United States is far less predictable. Gripped by a devastating recession, drowning in public debt and embroiled in expensive foreign wars, the United States is currently facing some of its most serious challenges since the Cold War.
The US recession is of course the dominant event in America’s political and economic situation. Beginning as a severe downturn in the housing sector in the wake of an unsustainable bubble in US housing prices, the recession spread to Wall Street and sparked off the global financial crisis in September 2008. Despite massive federal government bailouts to banks, mortgage and auto companies and a US$787 billion stimulus package, the recession ravaged whole sectors of the American economy as unemployment shot above 10 per cent. While many merchant banks have since returned to profitability, many US cities and regions are still deep in the grip of severe economic contraction, and in many industries, economic restructuring means that some of the job losses will be permanent.
The economic crisis has been exacerbated by America’s increasingly dysfunctional political system. Many US states, including the largest state, California, are deep in debt and seem incapable of addressing their long-term structural budget deficits. The same is true for the federal budget which is US$1.4 trillion in the red and likely to require long-term budget reforms (like lower spending or equally unpalatable tax hikes) if the US Government is to continue to pay for expensive social security entitlements without serious debt issues.
In foreign policy, the US also faces ongoing drains on its resources, including two military entanglements in Iraq and Afghanistan. Although the Iraq War is winding down, the US still maintains huge bases and tens of thousands of troops in the country, while in Afghanistan troop numbers are actually being increased. The longer term issue for the US is how to deal with Islamic terrorism, a threat which is both real and heavily politicised, but which traditional military strategies and force structures are ill-equipped to combat. And, for a range of domestic political reasons, the US is likely to continue to spend heavily on defence.
Making all this more difficult is the polarisation of the American political system. Partly, this is a facet of the country’s famously robust and argumentative democratic culture, as Alexis de Tocqueville observed in the 1830s. But other aspects are structural. For instance, the boundaries of US House of Representative seats are systematically gerrymandered by politically appointed state committees. Meanwhile, the Senate is also biased by the fact that small states have the same number of senators as large ones, meaning that senators from small states like Maine or Nebraska are elected by a tiny handful of voters.
In addition, the adoption of US Senate rules has imposed a "permanent filibuster" on US legislation passing through the upper house, requiring a "super-majority" of 60 senators to pass contentious legislation like the Democrat’s healthcare reforms. And, of course, the role of money in politics is ever-present. The result is the US Congress is a highly skewed institution that tends to reward incumbency and makes it hard for elected majorities to implement their legislative programs. It’s not an ideal environment for dealing with America’s many pressing problems.
On the other hand, the US continues to enjoy many massive advantages. It is a socially dynamic society that welcomes many immigrants and still offers its disadvantaged citizens many opportunities to improve their lives (even if US inequality remains very high). The US is still an intellectual and scientific powerhouse, boasting the world’s best higher education and scientific research institutions. Its philanthropists and venture capitalists remain the envy of the rich world. And America will recover from this recession with a massive "reserve army" of well educated and under-utilised workers who can be rapidly employed in new and productive occupations. It would be unwise to count America out any time soon.