The French Riviera in November conjures up images of ageing playboys eking out the last rays of autumn sunshine on the Croisette over a pastis. So it may be fitting that Nicolas Sarkozy has chosen Cannes as the venue for this week’s G20 summit, where the fading power of Europe’s old world economies will be thrown into sharp relief by the nouveau riche arrivistes from China, India and Brazil.
Sarkozy’s humiliating call to Beijing last week, asking if the Chinese would care to invest in the European financial stability facility, the huge euro bailout fund, was portrayed within China as grovelling. Guido Mantegna, Brazil’s finance minister, rapidly issued a statement saying his country had no intention of taking part.
Silvio Berlusconi was also forced to bear his share of the humiliation, writing a letter to his eurozone neighbours promising to buck up his economic act, in return for a share of the aid package.
For Europeans, last week’s events were a stark reminder that through a combination of their own economic mismanagement and the irresistible rise of a new generation of financial powers, the old continent’s pre-eminence is a thing of the past.
Jonathan Loynes, chief European economist at the consultancy Capital Economics, says: “Clearly, the fact that Europe needs this money is a further demonstration of how its economic health has deteriorated, at least in the short term.”
Charles Dumas, of Lombard Street Research, says: “The optimistic view for growth in Europe is 0%; the pessimistic scenario is depression.”
That message will be rammed home to Angela Merkel and her colleagues as the Europeans rub shoulders with India, China and the other G20 nations in the south of France.
Before the world financial crisis, these setpiece and usually self-congratulatory summits were still held among the G8 countries — the traditional lineup of the US, Germany, Japan, France, Britain, Canada and Italy, plus Russia, added to the list in 1997 to cement the fact that the post-communist empire had come in from the cold. But even before mis-sold mortgages and reckless bankers triggered arguably the worst global financial crisis in living memory, it had become clear that this group was no longer a fair representation of the world economy.
Goldman Sachs economist Jim O’Neill coined the phrase “Brics” in 2001, to describe Brazil, Russia, India and China, a disparate group of nations that he predicted would soon wield greater power on the world economic stage.
In the ensuing decade, more economies have joined the list of promising upstarts, including African states such as Nigeria and Egypt, and Asian big beasts such as Indonesia. The credit crunch, which could weigh on economic growth in Europe and the US for several years, will only accelerate the great catch-up.
The World in 2050
In a major report earlier this year, The World in 2050, economists at PricewaterhouseCoopers predicted that, judged by purchasing power parity — which allows for the fact that a dollar goes much further in Shanghai than in New York — China was already the world’s second-largest economy. By 2050, it reckons that the US will have slipped to number three, with India, Brazil, Mexico and Indonesia all in the top 10.
Economists call this “convergence”. Technological advances may arise first in Silicon Valley or the German Mittelstand, but in a globalised economy, they can rapidly be appropriated by firms and families thousands of kilometres away, helping to drive up economic growth. Nothing about convergence is automatic: politics matters too. China’s rise from closed communist state to workshop of the 21st-century world accelerated after it joined the World Trade Organisation in December 2001.
With easier access to the West’s consumer markets, China ruthlessly pursued an export-led growth model, racking up vast trade surpluses with the US and Europe, and spending much of the money on buying dollars, and other foreign currency denominated assets, to keep the yuan cheap, and its goods competitive. The 10% a year growth rates it has posted are a result of deliberate policy as well as its sheer size.
Many China-watchers are concerned that the country could be destined for an economic “hard landing” over the next 12 months, as rapid increases in property prices swing into reverse. But Gerard Lyons, chief economist of Standard Chartered, who travels to China frequently, insists any downturn will only be a temporary setback. He believes the world economy is in the middle of its third powerful “super-cycle”. The first was at the end of the 19th century, when Britain emerged as a mighty economic power; the second in the postwar years, when Japan rose to prominence, worrying the new hegemonic power, the US; and the third today, as China, India and several other developing economies take their place as major powers .
Triumph of the East
Lest the exhausted Europeans gathering in Cannes feel too overshadowed, though, there are two caveats to the triumph of the East. The first is that while the massive populations of China, India and Indonesia will help to catapult them into the big league over the coming years, it will be much longer before living standards catch up. The average income in China is just 15% of the US level today, and even by 2050 it is still expected to be more than 50% lower than America’s.
Headline numbers don’t capture inequality either: comparatively rich countries measured by GDP alone can still contain pitifully poor populations, if a kleptocratic elite is appropriating the spoils, or an ineffectual bureaucracy fails to create the social safety nets the public need.
Finally, the world’s leaders should console themselves with the fact that if they get things right, we should all be winners. Richard Snook, of PwC, says: “It’s fair to say that over the next five or six years things are going to be pretty difficult. But over the next 40 years, we are expecting the standard of living to improve a lot.”
But he insists the convergence of China and the rest should be good news, because it creates large and growing markets which the old powers should be able to take advantage of. “This is not a ‘decline of the west’ story: we’re still expecting the European and the US economies to expand by two and a half or three times by 2050,” he says.
Lyons agrees. “I don’t think the West should be pessimistic,” he says. “We need to be realistic about the near-term: the debt and the need to deleverage point to a difficult couple of years. But the west still has the ability to do well.” – guardian.co.uk