Leading article: China in the financial driving seat

Share
Related Topics

The downgrading of the US by Standard & Poor's from its triple-A status to a mere AA+ is generally agreed to be more symbolic than practical. The case for not getting too alarmed is strong.

The US still has the highest status from other agencies, notably Moody's. The risk of the country failing to pay its debts is small. The calculation on which the downgrade was made was, says the US Treasury, based on a flawed statistical analysis.

And while we're about it, the standing of the ratings agencies in general has never recovered from their disastrous misjudgements before the credit crunch.

All this true, but the basis on which the downgrade was made is hard to argue with. As Standard & Poor's observed, it "reflects our view that the effectiveness, stability and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges". Given the unimpressive way in which Republicans and Democrats handled the negotiations over the budget deficit, it is hard to argue with that judgement. Most observers would conclude that the country has for some time been living beyond its means, not least because of the costs of two ruinously expensive wars, a factor invariably downplayed by the neocons.

Things hardly look more cheerful in the eurozone, where market turmoil has, ironically, been aggravated by the holidays. Most fund managers are on vacation, leaving nervy subordinates to mind the shop. The downward movement in the markets undoubtedly has been aggravated by reliance on pre-programmed computers. But we cannot put the blame for febrile markets entirely on human investors subcontracting their judgement to systems. The absence of any strong political leadership last week made a bad situation worse.

In Britain, David Cameron, Nick Clegg and George Osborne were away, leaving Vince Cable and William Hague to calm investors. Christine Lagarde, new head of the IMF, is distracted by corruption allegations. The reassuring leadership provided during the last crisis by the partnership between Dominique Strauss-Kahn at the IMF and Gordon Brown in Britain has not been replicated by their successors, notwithstanding their resort to high-level conference calls from their holiday destinations this weekend.

Underlying the day-to-day jumpiness of the markets, there are far more intractable factors at play. The most basic of them is the shift of economic and financial power from west to east, notably from the US to China. That shift has political implications. The reaction of China, the largest holder of US debt, to the downgrading was for the official Xinhua news agency to call for the US to "address its structural debt problems and ensure the safety of China's dollar assets. International supervision over the issue of US dollars should be introduced and a new, stable and secured global reserve currency may also be an option". And what might that be? The yuan is the obvious currency the Chinese have in mind, although the reality is that yuan bonds will not be taking the place of dollar bonds any time soon.

In other words, China, as America's biggest creditor, wants the US to get a firmer grip on the deficit, and it doesn't seem to care whether it does so by increasing taxes and cutting defence, which the Republicans dislike, or decreasing welfare, which the Democrats object to. We have seen last week just how highly charged deficit reduction is in domestic political terms. The notion that this fraught issue may be determined, at one level or another, by China is something for politicians to ponder.

In fact, something like this dilution of domestic political sovereignty is already happening in the eurozone, where the bailouts and debt restructuring for troubled states have come at a price: increased fiscal austerity for the bailed-out nations. This is what institutions such as the European Central Bank and the IMF require in return for their support.

Tetchy Eurosceptics would put this more crudely: German financiers, who fund the lion's share of the eurozone bailouts, are effectively dictating other nations' retirement age, welfare benefits and pensions. This, it could be argued, is the logic of a common currency, but it has important repercussions in terms of sovereignty.

If we think the present crisis will blow over after the holidays, leaving us to resume business as usual in September, we may be in for some unpleasant surprises.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

Recruitment Genius: Telesales & Customer Service Executives - Outbound & Inbound

£7 - £9 per hour: Recruitment Genius: Are you outgoing? Do you want to work in...

Recruitment Genius: National Account Manager / Key Account Sales

£30000 - £35000 per annum: Recruitment Genius: An opportunity has arisen for a...

Recruitment Genius: Operations Manager

£30000 - £35000 per annum: Recruitment Genius: An exciting opportunity to join...

Recruitment Genius: Recruitment Consultant

£30000 - £35000 per annum: Recruitment Genius: We have an excellent role for a...

Day In a Page

Read Next
 

Letter from the Political Editor: Mr. Cameron is beginning to earn small victories in Europe

Andrew Grice
Pakistani volunteers carry a student injured in the shootout at a school under attack by Taliban gunmen, at a local hospital in Peshawar  

The Only Way is Ethics: The paper’s readers and users of our website want different things

Will Gore
The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

The 12 ways of Christmas

We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
Birdwatching men have a lot in common with their feathered friends, new study shows

The male exhibits strange behaviour

A new study shows that birdwatching men have a lot in common with their feathered friends...
Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

Famous diaries: Christmas week in history

Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
From noble to narky, the fall of the open letter

From noble to narky, the fall of the open letter

The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

A Christmas ghost story by Alison Moore

The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'
Marian Keyes: The author on her pre-approved Christmas, true love's parking implications and living in the moment

Marian Keyes

The author on her pre-approved Christmas, true love's parking implications and living in the moment
Bill Granger recipes: Our chef creates an Italian-inspired fish feast for Christmas Eve

Bill Granger's Christmas Eve fish feast

Bill's Italian friends introduced him to the Roman Catholic custom of a lavish fish supper on Christmas Eve. Here, he gives the tradition his own spin…
Liverpool vs Arsenal: Brendan Rodgers is fighting for his reputation

Rodgers fights for his reputation

Liverpool manager tries to stay on his feet despite waves of criticism
Amir Khan: 'The Taliban can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'

Amir Khan attacks the Taliban

'They can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'
Michael Calvin: Sepp Blatter is my man of the year in sport. Bring on 2015, quick

Michael Calvin's Last Word

Sepp Blatter is my man of the year in sport. Bring on 2015, quick