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: In House Counsel - Contracts

Negotiable: Recruitment Genius: This leading supplier of compliance software a...

Recruitment Genius: Associate System Engineer

£24000 - £30000 per annum: Recruitment Genius: The Associate System Engineer r...

Recruitment Genius: Executive Assistant

Negotiable: Recruitment Genius: An Executive Assistant is required to join a l...

Ashdown Group: Marketing Manager - B2B, Corporate - City, London

£45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, glo...

Day In a Page

Read Next
Zoe Sugg, aka Zoella, with her boyfriend, fellow vlogger Alfie Deyes  

If children are obese then blame food manufacturers, not Zoella

Jane Merrick
Amos Yee arrives with his father at the State courts in Singapore on March 31  

Singapore's arrest of a 16-year-old YouTuber is all you need to know about Lee Kuan Yew's legacy

Noah Sin
General Election 2015: The masterminds behind the scenes

The masterminds behind the election

How do you get your party leader to embrace a message and then stick to it? By employing these people
Machine Gun America: The amusement park where teenagers go to shoot a huge range of automatic weapons

Machine Gun America

The amusement park where teenagers go to shoot a huge range of automatic weapons
The ethics of pet food: Why are we are so selective in how we show animals our love?

The ethics of pet food

Why are we are so selective in how we show animals our love?
How Tansy Davies turned 9/11 into her opera 'Between Worlds'

How a composer turned 9/11 into her opera 'Between Worlds'

Tansy Davies makes her operatic debut with a work about the attack on the Twin Towers. Despite the topic, she says it is a life-affirming piece
11 best bedside tables

11 best bedside tables

It could be the first thing you see in the morning, so make it work for you. We find night stands, tables and cabinets to wake up to
Italy vs England player ratings: Did Andros Townsend's goal see him beat Harry Kane and Wayne Rooney to top marks?

Italy vs England player ratings

Did Townsend's goal see him beat Kane and Rooney to top marks?
Danny Higginbotham: An underdog's tale of making the most of it

An underdog's tale of making the most of it

Danny Higginbotham on being let go by Manchester United, annoying Gordon Strachan, utilising his talents to the full at Stoke and plunging into the world of analysis
Audley Harrison's abusers forget the debt he's due, but Errol Christie will always remember what he owes the police

Steve Bunce: Inside Boxing

Audley Harrison's abusers forget the debt he's due, but Errol Christie will always remember what he owes the police
No postcode? No vote

Floating voters

How living on a houseboat meant I didn't officially 'exist'
Louis Theroux's affable Englishman routine begins to wear thin

By Reason of Insanity

Louis Theroux's affable Englishman routine begins to wear thin
Power dressing is back – but no shoulderpads!

Power dressing is back

But banish all thoughts of Eighties shoulderpads
Spanish stone-age cave paintings 'under threat' after being re-opened to the public

Spanish stone-age cave paintings in Altamira 'under threat'

Caves were re-opened to the public
'I was the bookies’ favourite to be first to leave the Cabinet'

Vince Cable interview

'I was the bookies’ favourite to be first to leave the Cabinet'
Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat