Transcription
What's happening is a return to regionalism, right? Some people can argue we never really had pure economic globalization because countries tend to trade mainly with countries they trade with for good economic reasons. The gravity equation is very powerful. Do most of your trade with countries close to you because distance is costly. That's been well understood for a long time.
But I think it's going to be more complicated than regions. The world doesn't divide comfortably into regions. We impose the logic of regions upon it, but it isn't really true. So, for example, if you look at Southeast Asia and East Asia, these countries trade massively with China and massively with America. Which region are they in? Indo-Pacific. Well, if you include Indo-Pacific, it includes the US and it includes China, it's two-thirds of the world. So that's not a region, that's the world.
This is the global gambit. On that, because I think I know what you're going to say, which is the euro. Yeah. But just on this, we've got Macron in the UK as at the time of recording. He's always been a big fan of Eurobonds, but for the European Union to do this, there has to be some form of fiscal integration. There has to be, correct, a United States of Europe, quote unquote, right? So I was hoping you could work that into when. Well, that was what I was going to say. Well, there you go.
So, well, and then there's gold. Well, the euro, then there's gold. Gold is not a currency. This is a profound mistake. My previous guest would have disagreed. Gold is not a currency. It's a store of value. Interesting. There are reasons we went to paper currency and then electronic currency. You can't pay stuff with gold. It's technically unworkable in a modern economy. You go around trying to buy things with gold or go into the markets and say, "Okay, I'm going to deliver you n-zillion tons of gold at the end of this transaction." You would have to do it in some sort of electronic form of gold. And the electronic form of gold is essentially a currency. And once you've got this electronic form of gold, somebody somewhere is going to think, well, might be quite a good idea to change the price and then you've got a dead gold standard. And that's what happened, by the way, in the history of the evolution of money. Paper money became unshackled from the gold to which it had been linked. That's actually a very complicated story, but that's basically the story.
So gold can't be used as a means of payment directly. That makes it very different from money. It can be a store of value and as a unit of account, its problem has been historically that it's too variable in price. A currency which is reasonably shackled to the prices of goods and services in an economy, because that's what you try to do with it, a fiat money that does that is just much more usable in terms of the unit of account than an ounce of gold. We're not going to trade the world in ounces of gold. So gold can be the base of a monetary system, but only if fiat money is tied to it one-to-one, and nobody has got governments to tie their currencies to gold. In my view, the gold standard was dead by the end of the First World War. It was killed by the Americans in 1971, but the Americans weren't actually on the gold standard since the First World War. It's an illusion to think they were, but that takes you a long way away from it. Gold is not going to be a currency. Not in the modern world. It's not usable. It's a barbarous relic, to quote somebody.
The euro, you're feeling now, the euro. The euro has the advantage of doing there are financial markets. It can be traded. But the Eurozone has two fundamental disadvantages, as you rightly said. It doesn't have a political entity behind it, an integrated political entity, and it doesn't have a fiscal system behind it. And because of those things, it's less secure than the United States. It can disappear. It's perfectly possible to imagine a world, much more likely than with the US, in which the currencies of the EU, the countries of the EU, break up. The EU dissolves over some period of time because the politics goes against it. If we get a whole slew of right-wing populist governments in Europe, in Germany, in France, in Italy, are you really confident that the Eurozone treaty will hold? I mean, there can be a lot of trouble. We've had one huge Eurozone financial crisis, which was solved with great difficulty. It's perfectly possible, easy to imagine others. And you know that the US is not going to be dissolved. So there's a political question, and there's an expression of that, the obvious fact that the fiscal authorities, always crucial for a currency union, are national. They're not EU or Eurozone-wide. So inevitably, and finally, because of these reasons, the whole structure is less secure than the US.
So for the euro to become a replacement for the dollar in any plausible way, it's already got about 20% of world reserves, and the US has close to 60%. So it's already doing quite well. But for it to replace the dollar, the Eurozone would have to become a credible political entity, as you say, certainly with a substantial fiscal capacity, Eurobonds, integrated financial markets, truly integrated financial markets, and none of that is going to happen in the near future. So I think, to paraphrase a famous remark made about democracy, the dollar is the worst of all possible alternatives except for all the others. And so the dollar, more likely than the dollar will be replaced by something else, this is the key point, is that this world economy that we're now looking at, which is the product of globalization of trading goods and services and of financial markets, this is the world economy we had created. This is disintegrating, right? That's obvious. It's disintegrating for economic and political reasons. So a more likely future than that the dollar is replaced by something else is that the global financial system fragments. So we will have a Eurozone area. It will be more self-sufficient trade and finance. We will have an American area. We'll have a Chinese area. They will overlap. And the world will be very complicated and messy, and the currency, the currency areas will overlap. But we won't have a hegemony at all.
Interesting. I think what's happening is a return to regionalism, right? Some people can argue we never really had pure economic globalization because countries tend to trade mainly with countries they trade with for good economic reasons. The gravity equation is very powerful. You do most of your trade with countries close to you because distance is costly. That's been well understood for a long time.
But I think it's going to be more complicated than regions. This is the world doesn't divide comfortably into regions. There, there we impose the logic of regions upon it, but it isn't really true. So, for example, I'll give you a few examples. Quite if you look at Southeast Asia and East Asia, these countries trade massively with China and massively with America. Which region are they in? Indo-Pacific. Well, if you include Indo-Pacific, it includes the US and it includes China, it's two-thirds of the world. So that's not a region. That's the world. The countries of Southeast Asia more broadly will not accept living in a purely Chinese sphere of influence. They will want the Americans involved as a balancing factor. That certainly applies to Japan, Korea, actually Indonesia, and certainly India. So that's not a region.
If you look at South America, you find quite a lot of countries, because they're commodity exporters, trade more with China than they do with the US because they're not really complementary with the US. They're more of competitors. You know, Brazil exports soybeans, America exports similar stuff. The regions, if you look at Europe, if you look at it geographically, the Middle East is in the European region, but the Europeans haven't dominated that region since the Second World War because they don't have the military power to do so. So I think regionalism is one of those sort of very neat fantasies, but the world as it is, culturally, economically, politically, doesn't fall neatly into regions. And that's why we've had world wars. And that's why China and the US are not regional powers. They're global powers. And that's why they conflict with one another. And they're not, you know, there are some people who sort of fantasize about going home. But it's pretty obvious, looking even how Trump, who really is a nationalist, behaves. He doesn't behave as if the only part of the world that matters is the Americas because he knows that America has interests, economic so forth, vastly greater in that huge part of American corporate profits come from regions of the world which aren't the Americas. And the Americas for America is a backwater. South America gives them almost nothing compared to what they would lose if the rest of the world all fell under the Chinese sphere. So I think we should forget regionalism. It's a fantasy.
But what then, and I guess I'll make this the last question, right? Is what then is globalization? Because in my lifetime, sovereign debt crisis of the early 2010s, Brexit, 2008 financial crisis, the wars in the Middle East over ISIS, Trump's first term. All of this has been an illustration of a rejection of the prevailing Western-led order of, you know, hyper-globalism and this idea of homogenization, no borders. That's quite clearly being rejected now. You can argue whether in this regionalistic type or got tendencies, but we're shifting towards much more of a fragmented world. I think one paper in the Munich Security Conference called it a multiplex world, not multipolar. Now, someone who's studied great power politics, you know, people can argue that the Chinese want to replace the United States as the hegemon or simply just counterbalance. What do you see being sort of the most likely short to medium-term international order, quote unquote?
Well, let me further. I think most of what you say, though I recognize the rhetoric is sort of a straw man, because the global order that the global. I wrote a book about globalization back in the early 2000s. The idea that what we were creating was a borderless world was a complete illusion. Very few people said it either. But anyway, because this is the biggest point I made in my book, integration into the world economy was a policy choice. Crucial. And then people made a lot of countries made this choice to integrate because they had come to the view this would help them become more prosperous. But the entire order, the old globalization order, rested on the only sources of order in the system, which were states. There never was or could be a global political system. And so the globalized, the order of inter, the system of economic integration was the policy choice of states, which provided all the legal and institutional, military and other powers required to provide security to the actors in this system. And they did that because they came to the view, in different ways, that this was going to help them prosper. And that was very much the ideology. So to me, globalization was a policy choice. And I've known this is in my book. There have been periods in the past when the policy choice was made in different ways to integrate by powerful countries, and then to disintegrate. After the global financial crisis, in particular, and other shocks, decisions were made to disintegrate by the same actors that made the decisions to integrate, namely states. And that's partly because the outcome of globalization was more destabilizing than they thought it would be, particularly in finance. It was partly because it brought about changes in relative economic power that some of them really disliked, most notably the enormous impact of the rise of China, which wouldn't have happened without globalization. And the result of this is that states, obviously domestic politics plays a crucial role in this, have increasingly decided they want less of this globalization than they thought 10 or 20 years ago because it doesn't work for them. This is particularly, and I think mainly, true for the West because they have found, to their surprise, again a theme of subsequent books of mine, that globalization has created very large opportunities for countries to catch up on them. It's accelerated the possibility, and that means declining relative position. And since the position in the world of the Western countries, US and Europe, was freakish historically, freakish, absolutely extraordinary, roughly, you know, US and its allies contain roughly 12% of humanity, and at its peak, they had, depends on how you measure it, 70% or so of the world economy. That wasn't going to last, in my view, was never going to last. But the decline was going to be felt to be very painful, and they didn't like it, and they continue to dislike it, and they will go on disliking it, and they might blow up the world in order to prevent it, the decline. But it's going to go on. It's absolutely certainly going to go on unless there's World War II. By the middle of this century, there will be three great powers, and I would guess the US will be the third. Well, the other two, China, India. And China and India. Well, India. India is going to be very unequal though. Oh, well, that's yeah. India is very unequal, so is China, but it's going to have 1.8 billion people, and it doesn't have to be rich at an individual level to be one of the largest economies in the world. If it has a GDP per head, well, let me give you my famous, the GDP per head of China is the same as Portugal's. Then China's economy will be as big as the US and Europe together. And in India, it's the same. Do you really think the Indians are incapable of becoming as prosperous as the Portuguese? I would have thought it's eminently possible. They're very bright people. Just look at who runs most of the biggest tech companies in the world. So I mean, like this idea that somehow the Chinese can't catch up on Americans and Europeans is absolutely ridiculous. These are people who don't know China or the Chinese. There was the so now the Europeans and the Americans are very frightened that these people are really able to learn and they are catching up. So they want to close down. The Chinese don't. Now, there's another set of problems there, so far really to the Indians. But the point I would make is that the perspective you put forward is very much a Western perspective on what happened, and is also an illusion about what happened in the West, in my view. That states are and always will be the basis of political and legal order in our world. You're a transformationalist. I don't know what that means, but the school of thought in econ in globalization. I mean, yeah, but the I've been very suspicious of international relations theory about economics because basically none of them understand economics. But the point is, anyway, that as a matter of political reality, it wasn't some ideological commitment to some world where everybody was going to love one another that was involved. Countries chose these policies because they thought they would be good for them. The Reaganites and the Thatcherites went for free trade and free markets because they were seen as the same thing. Now, that's a perfectly good argument that they shouldn't be seen as the same thing. That's a whole set of other issues I can't go into now. It's a long history in economics of the relationship between the national economy and trade integration of the world. But that was the decision. And after a number of painful experiences to do with the financial sector, not trade, and to do with de-industrialization, which is mostly not trade, in my view, but had something to do with trade, there's been a political reaction. And the biggest political reaction I think has actually been against the movement of people, which is nothing to do with directly with trade, but is part of these globalized worlds. So we're having a nationalist backlash, and the nationalist backlash is a change in the policy of states and an assertion of an attempted assertion of national identity against any other supranational identity. Though throughout this entire period, all power systems were national. The least true of that was Europe. And the reason the Europeans went so far against national power politics was obviously what happened in the first half of the 20th century and the perception, correct perception, that the European states on their own were too small to provide themselves with economic and political security. So they had to unify to some degree. So this simple story you're telling about globalization, the reaction in it, is not one I agree with.
But where I do agree is we're clearly moving through a period of greater protectionism, nationalism, autarky altogether. And the French, goes back to the French 17th-century idea that the state controls the economy. The state controls and shapes the economy. It's clearly part of what's going on in America, and in different guises, it was also true under Biden. And in that world, you will expect to see disintegration of the things that have connected countries. Now, how far that will go, the last time we really did this was the 30s, and it was a mess. Can we contain it? Well, that brings us back to Trump. The problem with who's clearly the most important person now involved in disintegrating the system, far and away, is that his policies are utterly incoherent and unworkable. So, and everybody else in the world is trying to work out, well, if this is what the US wants to do, where does it end? What do we do to respond? And if the US is behaving like this on trade, what do we do about the currency? All the things you mentioned. And I would say what we are now is in a simply in an era of chaotic fragmentation. It won't be stable, and what follows that, it's I think completely unpredictable.
Looks like you've got your work cut out. Yeah. Well, my, I will be soon no longer on the scene. So somebody else will have to work out what has to happen. Okay. Thank you very much. Yeah, I think you've got your time. We have. Thank you. [Music]