For the G-20, order is restored with America's leadership
As the Group of 20 prepares for its economic summit this weekend in Toronto, the mood is one that would have surprised many observers a year ago: The United States is once again in the driver's seat on global economic policy, with China emerging as a potent partner.
A year ago, China was wondering whether it had made the wrong bet in relying on the United States to manage the global economic system. The financial meltdown of 2008 was so disastrous that the Chinese feared the U.S.-built financial architecture was, quite literally, out of control.
Restoring confidence in the soundness of the global economy -- especially among policymakers in Beijing -- has been among the Obama administration's most important tests over the past year, beyond containing oil spills or even fighting the Taliban. And to a greater degree than skeptics thought possible, the U.S. rescue operation has been successful. "It worked," trumpeted President Obama in the opening paragraph of his June 16 letter to fellow G-20 summiteers.
The strongest endorsement of this line came from China, in its decision last weekend to allow more flexibility for its currency, the renminbi. China had been reluctant to take this step because it wasn't sure how long the financial fires would burn.
China's foreign-exchange decision should be read as a statement that global markets have stabilized, U.S. officials argue. Yes, it's only a partial currency float, and the benefits for the United States will be offset by the sharp fall of the euro in recent weeks, which could make Germany the new trade menace, replacing China as the creator of destabilizing surpluses. But it's a start.
The Chinese appear to have accepted U.S. arguments that their export-led economy is not stable over the long run. The new watchword for the Chinese is "balanced growth," according to U.S. officials. To boost domestic demand and rely less on exports, Beijing launched a massive economic stimulus program in late 2008. Now comes the decision to partially free their currency from its peg to the dollar, which over time will make Chinese exports more costly and imports cheaper -- and thereby reduce China's huge trade surpluses.
What's encouraging is that China seems ready for a broader partnership with Washington on economic and political issues. That's the message of China's decision this month to back a new round of United Nations economic sanctions against Iran. Beijing concluded that it wasn't in China's interest to stand apart from the global consensus against Iran's obtaining nuclear weapons. China sees itself increasingly as a stakeholder in global security, U.S. officials believe.
One important Obama channel to Beijing has been Henry Kissinger, the former secretary of state who has close relations with the Chinese leadership. As it happens, Treasury Secretary Tim Geithner once worked for Kissinger and stays in touch with him. So when the Chinese seek an explanation of U.S. strategy, Kissinger can tell them authoritatively that the United States wants China as a partner in building the global economic and security framework over the next decade. This is a bargain that a wary Beijing may finally be ready to make.
The European debt crisis that exploded in May was a reminder of how fragile the financial system remains. Europeans had been guilty of schadenfreude a year ago, chiding the United States for its errant ways in the subprime crisis -- and overlooking their own financial weaknesses.
The European Union now has a trillion-dollar bailout program to rescue Greece, Spain and other debt-burdened nations. And it has followed the United States in conducting stress tests on its major banks, so that investors will have greater confidence that their money is safe. In recent days, Europeans, embracing these U.S.-style policies, have seemed to be turning a corner.
It was popular a year ago to speak of the post-American era and of the collapse of the "Washington consensus" about free markets and globalization. But over the past year, the world has rallied behind resilient U.S. financial institutions and the American approach to economic management. Much of the necessary repair work has been done, with one nagging exception -- the lack of a credible long-term plan to control the deficit. Hopefully, that's coming.
Obama gets little credit for economic success at home, where the unemployment rate remains shockingly high. But if you listen carefully in Toronto, you will hear a few sighs of relief, including among some important Chinese leaders.