WORLD VIEW:THE ECONOMIC crisis must be serious when public figures voice fears that until now have dared not speak their names. Only last month bankers, politicians and economists referred to a possible economic downturn and shunned the use of the "R" word. When it was accepted that a recession was inevitable, there was profound reluctance to use the "D" words. This week Bank of England governor Mervyn King warned of the danger of deflation. Others even allude to the ultimate spectre of a possible depression, writes John Palmer
The summit meeting in Washington which began last night with leaders of the 20 most important world economies will not miraculously reverse the financial tsunami. They may agree principles to guide governments and the IMF as they co-ordinate international action to limit the severity of the crisis. But they will also discuss plans for a new global regulatory order including a strengthened IMF designed to hold banks and states accountable for their actions.
In retrospect this may be seen as the moment when the neo-liberal model of modern capitalism pioneered by Ronald Reagan, Margaret Thatcher and George W Bush was laid to rest and new paths to more effective international governance of capitalism were explored. At the series of summits now planned over the coming year, detailed agreement on these controls and on how to manage the transition to a more sustainable mode of economic development will be hammered out.
The political kaleidoscope throughout the western world has been thrown into confusion by the dramatic nationalisation of banks and other financial institutions in the US and Europe. US president-elect Barack Obama is even coming under pressure to part nationalise the US motor industry as General Motors, and maybe Chrysler and Ford, edge dangerously close to bankruptcy. Impeccably orthodox conservatives are calling not for a "smaller state" but a much bigger state. The result is likely to be a form of state capitalism rather than socialism - but little wonder the political left has been stunned by the speed of events.
These abrupt policy changes have little to do with ideology. Unlike previous post-war crises, no one really knows how deep or long lasting this one will be. The rapid slide to global recession and the continuing paralysis of the financial system touches almost every corner of the world - even the new Asian economic powers. In coastal China there have been reports of serious unrest as export plants close. In some cases the employers have run off with money owing to the mainly migrant workers made redundant.
It is fear which now moves governments to commit almost limitless sums of money to prevent an outright collapse of the world financial system. Most states accept the need for much tougher regulation of the financial system although the US is resisting giving world bodies like the IMF serious new supra-national powers.
Moreover, the US has not yet come to terms with the political price to be paid for a reformed global financial system: a far greater influence in global decisions passing to countries such as China, India and the Gulf States.
The Americans and Europeans have little option but to agree to this loss of pre-eminence. Only Asia and the Gulf States have the reserves to plug the massive financial hole created by the astronomic bailouts of the banks. But the power shift to the east will not be restricted to finance. It will be reflected in development and climate-change strategy and it seems certain increasingly to influence western foreign and security policy.
Hopefully, the tidal wave of money being pumped into the financial system will limit the severity and duration of the recession. But even if the worst is passed by 2010 what happens then? The debt mountain will have to be repaid. Servicing it will mean that the eventual economic upturn may prove to be slow and fragile for years to come.
This need not be all bad news. Apart from the crisis generated by bankers too greedy and too ignorant to understand fully the chaos they were unleashing, the world must also soon decide now to tackle climate change. This demands a paradigm shift to a greener and more sustainable economic model. Indeed, massive investment in alternative energies and transport systems already appears the best spearhead for economic recovery from recession.
Slower but more sustainable growth will, however, also generate demands for social change. The experience of wartime is that economic hardship makes gross inequalities of wealth and income intolerable. Greater social egalitarianism may be the price to be paid for getting widespread public acceptance of the economic pain of recession and slower growth.
The relative powerlessness of even large states like the US to handle this kind of global crisis alone is now obvious. Ireland's problems might have proved as catastrophic as those confronting Iceland but for its membership of the EU and the euro zone. But if the EU is to help design and construct a system of global governance capable of bringing finance capital under regulatory control, and if it is to lead the world to sustainable development, it must strengthen its own decision-making capacity. It is now high time the Lisbon Treaty debate was put in its true global context.
John Palmer is a Practitioner Fellow at the European Institute of Sussex University and an advisory council member of a number of European think-tanks including the Federal Trust in London and the European Policy Centre in Brussels of which he was founding political director. He was previously European editor of the Guardiannewspaper