The New “Triangle” World Order – and how US, EU and China must work together to keep the global economy going

Posted on | maart 2, 2011 | No Comments

It has to be, without a doubt, that the fall of the Berlin Wall and the subsequent collapse of communism constituted the single most transformative event of the past 40 years. Since man walked the surface of the Moon, the collapse of communism signified the predominance of ‘one’ over the ‘other.’ A New World Order was beginning, in which the US stood preeminent – the single economic and military superpower. However, this very victory led (inevitable some would say) to the end of American hegemony over the world.

No, it was not the events of September 11th, 2001 and the subsequent ill-advised and ill-executed wars of Iraq and Afghanistan that revealed the true nature of ‘the emperor new clothes.’ Rather, it was a financial crisis which originated in the US and caused a GLOBAL recession that exposed both the weaknesses of free markets and the vulnerabilities of the American financial system (the pride of capitalism as we know it). The financial crisis exposed the interconnectedness of this new (post soviet) world – a world that the US cannot control (nor fix) on its own. This New World Order is a ‘triangle’ one in which the US, the EU and China will share both the blame for any problems and provide the solutions for future crisis.

When I say China I mean Eastern and Southeastern Asia. Japan, South Korea, Taiwan, Singapore, Indonesia, and the rest of Indochina, together with China form a closely integrated market with overlapping investments, supply chains and trade dependencies – an informal precursor of the EU. I identify China as the ‘central’ piece of this economic juggernaut, and believe that for the near future China’s economic performance will dictate growth in the rest of the region.

As we know by now, the global recession was caused by a housing bubble in the US, fueled by the greed of the financial sector flush with foreign money. EU banks and other global investor’s poured money into the US housing market through their investments on Wall Street banks. US banks were able to loan money for houses due to low interest rates. Interest rates stay low because of foreign purchases of US government debt (US Treasury Securities), by China, Japan and the petrol-producing nations. Low interest rates fueled consumption of cheep goods from China and further outsourcing of US manufacturing. The global shift of manufacturing to China and the surrounding region further exacerbated the global trade imbalance with the US.

The greatest economy in the world was expected to fully accommodate global trading needs, and be both a safe destination for their hard-earned savings and a reliable consumer for their goods. Guess what? The emperor thought that he was fully covered!

The economies of the US, the EU and China, are interconnected in a way that their respective growth and prosperity are directly linked to each-others success. Global cooperation will be mandatory for future growth, and failure by either one of the big three (US, EU and China) to understand the symbiotic nature of the global economy and focus only on their domestic problems will be detrimental to the global recovery.

China, and the rest of the region, relies heavily on exporting to the US and EU for economic growth. As the US and EU consumption drops, so will the region’s economic prosperity. China needs to increase domestic consumption to deal with future sluggishness of the US and EU economies. Furthermore, China (like other developing countries) has been investing its hard earned money from exporting in US government debt. As of December 2010, China and the other regional economies held $2.3 trillion of U.S. government debt out of a total $4.3 trillion held by all foreigners. Such an exposure demands diversification.

Therefore, China needs a functioning EU market with a stable and reliable currency, to be both an alternative to the US market for its exports and to operate an alternative reserve currency. China should be helping to stabilize the sovereign debt crisis in the EU. On the other hand, the US (and to a certain degree the EU as well) need not only cut government debt, but also save more and invest domestically. The US needs to do what it does best, which is innovate! The US must put into productive use its own savings and that of other countries by creating the next technological evolution – which will lead to the next economic breakthrough, and the creation of new industries and new products.

Finally, the EU needs to stay the course and pursue further integration, both economic and political. The ‘United States of Europe’ must be a reliable market domestically with a reserve currency internationally, but also a partner for global stability and security. Further successful EU integration can inevitably produce a global power capable of checking Russian ambition in the region, alleviate poverty and civil unrest in Africa and the Middle East, and champion environmental protection and human rights around the world.

The next five years will be very critical to the global economy and world prosperity. Will China’s rise damage recovery efforts in the West, or will slower demand in the West doom China’s efforts to grow? Or will the big three see that only through cooperation they can grow the ‘global economic pie’ and help everyone prosper? So far, the indications are not very promising for global cooperation. Stay tuned…

AUTHOR: Nasos Mihalakas
E-MAIL: nasos.mihalakas [at]


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