The world economy is fragmenting into regional blocs. Trade, which was once globalised and free, is being weaponised for geopolitical gain. The west faces terminal decline unless its central banks and treasuries coordinate to deliver more equal incomes and faster growth. The end of dollar dominance is in sight.
It used to be that only Marxists said stuff like this: today it’s the White House and the European Central Bank. Last month, in landmark speeches on economic policy, the ECB’s Christine Lagarde and US national security adviser Jake Sullivan each spelled out what might be called the new Washington Consensus: free-market economics has ruined us.
By opening western economies to free trade, without regard for the loss of jobs, we unleashed decades of rising inequality. But the well-off could live with that, so long as a rules-based global system delivered friction-free luxury for them. Now, however, it has begun to deliver huge geopolitical insecurity. And so a major rethink is going on.
Let’s reiterate the most recent cause-and-effect cycle. Russia invaded Ukraine; the US seized half of Russia’s foreign exchange reserve, which was held in dollars; Russia strangled Europe’s gas supply, causing a global spike in the price of gas, petrol and food.
Inflation surged to double-digits, causing central banks to hike interest rates, while governments pressed down on public sector wages, and corporations hiked profit margins. The banking system, which had been reforged in an era of zero interest rates after 2008, has begun to break at its weakest links: Silicon Valley Bank, Credit Suisse and now First Republic.
The background is the rise of China, using state-subsidised industries, commercial espionage and a totally unfree workforce. In the neoliberal era this was hailed as a great idea, which would bring cheap toys for western children and flatten the bargaining power of workers here. Now, according to both Lagarde and Sullivan, it spells doom.
On April 17, Lagarde warned her counterparts to expect only further supply shocks, the fragmentation of central banking along geopolitical lines and the eventual end of the dollar and Euro duopoly. She called for central banks, treasuries and industrial ministries to work together to rebuild western supply chains to avoid dependence on China, and to restore the industrial capacity they so enthusiastically offshored.
On April 27, Sullivan gave the most cogent defence yet of Biden’s new economic strategy. It is built around state-led and state-funded investment in semiconductors, green energy and new raw material supply chains. It includes targeted restrictions on technology exports to China. And it means moving away from free trade agreements designed to rip away protections for domestic industries and jobs, towards policies designed to foster growth at home. “The era of after-the-fact policy patches and vague promises of redistribution is over,” he said.
In a flurry of speeches, western politicians have made it clear their aim is not to “decouple” economically from China, but, as EC president Ursula von der Leyen put it recently “diversifying and de-risking”.
In truth, however, this looks like a delaying tactic. Western leaders still haven’t got their heads around the fact that China will rise to co-equal status with the US, and will demand the end of dollar hegemony – an outcome it is preparing by distributing loans across the global south, and getting its ideologists to predict doom for the dollar at every opportunity.
The west’s leaders know that, should China choose to attack Taiwan tomorrow, any serious economic sanctions, let alone military aid, could trigger the shutdown of vital Chinese raw material supplies, crippling the manufacturers of wind turbines, electronic vehicles and modern weapons. So, de-risking and diversifying are just euphemisms for saying “we won’t overtly decouple first”.
But the western policy response is only halfway there. Lagarde insists that, while finance ministries pour billions into state funding for semiconductors and renewable energy, the central banks should hold down inflation by crushing wage demands. When the Bank of England’s Huw Pill told British workers they must take pay cuts because “we’re all suffering”, he was simply repeating the new liberal orthodoxy.
No matter that the inflation spike has been a bonanza for profiteers and oil giants, or that the taxpayer is shouldering the risks of investment for private semiconductor and renewables firms. The first commandment is that real wages cannot rise.
And that’s where the New Washington Consensus needs to break. If they were serious about mending the social fabric, the new converts to industrial strategy would state a very simple objective: that the wage share of GDP should rise and the profit share should fall.
There are many channels for achieving this: not just wage rises but increased welfare payments, free or cheap universal services, the closure of tax loopholes, and public investment in skills as well as silicon.
Until we hear politicians like Lagarde and Sullivan embrace these solutions, we’re stuck with only half a strategy in response to deglobalisation. A rising tide raises all boats, but unless monetary and fiscal policy are coordinated to raise the share of income going to the working population, the boats that rise fastest will be the ones that did so under neoliberalism – those of the rich, the privately educated and the upper middle class.
