A New World Order? Western economies’ 2022 decline
By TOME LOWE
‘I’m afraid there is no money’: How the unholy alliance of Brexit and Covid-19 pulled the UK economy apart.
Upon his departure as Chief Secretary of the Treasury in 2010, Liam Byrne left a note for his successor that simply read: ‘I’m afraid there is no money. Kind regards, and good luck!’. The note reflected the state of the British economy at the time - crippled by a recession with its financial markets in chaos.
If this situation sounds familiar, it is because it is. As we reach the end of 2022, Britain finds itself teetering on the edge of recession, inflation running wild at 11.1%, and the dust still settling from Brexit and Covid-19. The ONS reports that the UK is the only G7 nation to have an economy smaller now than before the pandemic. Comparatively, the economic woes of the West have affected the UK worse than most; but why has this happened?
Despite the record profits recorded by energy companies and the fact that the UK gets 80% of its gas from the North Sea and Norway, the government has been quick to point the blame of inflation at the conflict in Ukraine. It is true that the wave of Western sanctions on Russia has driven prices up as demand continues to outstrip supply, but the UK would not be the only country impacted by this. Conveniently, the narrative of the government has ignored the economic consequences of Brexit when tackling the cost-of-living crisis.
Brexit was allegedly meant to take the UK down the road less travelled, freeing the country from the shackles of European integration. Instead, it has hampered the UK’s ability to recover from Covid as effectively as its European and US counterparts, and aggravated inflationary trends.
Ending free movement for European Union migrant workers has constrained the labour market; trade tariffs have incurred extra costs on business; and London lost its status as the financial capital of the world.
This is not indicative of the so-called ‘Golden Age of Britain’ that Brexit promised to usher in. It is vital that the government acknowledges, addresses, and ameliorates Brexit’s economic consequences, or it risks plunging the UK further into recession.
Like most Western economies, the UK is headed for recession. However, unlike these countries, the issue of Brexit is likely to affect the country’s finances for years, if not decades, to come. It seems that Britain’s role as a dominant leader in shaping global economic policy has finally reached its long, drawn out, conclusion.
United we fall? Addressing economic problems in the European Union
Despite performing comparatively better than the UK in the wake of Covid, the EU still has a mountain of economic problems going into 2023. The entire Eurozone is forecasted to only grow by 0.5% in 2023, with recessions likely in over half of its members according to the International Monetary Fund (IMF). Inflation is likely to stabilise, though only to between 6-12%, well above the 2% target.
The EU, and the Eurozone in particular, is no stranger to ‘sharing the burden’ of economic crises, because of the interdependence between members, exemplified in the balance-of-payments crisis present following the 2008 financial crash. However, in 2022, the main risk to European prosperity is not a financial meltdown, but the Russian invasion of Ukraine and the aftermath of a global pandemic. The EU is particularly reliant on natural gas from Russia, and therefore assumed a substantial burden when imposing economic sanctions on Putin’s regime.
Business ties and collaborative projects (such as the €10.7bn Nord Stream 2 project between Russia and Germany) have either been frozen or severed altogether, actions which have exacerbated economic problems brought on by the pandemic, especially inflation. Lax monetary policy and massive government spending during Covid-19 had begun to drive prices up before the invasion, meaning that Europe now faces the brunt of a commodities boom coupled with sluggish economic growth.
Covid-19 highlighted the flaws of the neoliberal project within Europe – how could governments balance competitive, free market economics, with social welfare during periods of great hardship? The EU is now feeling the economic turbulence that comes from this paradox – member states must now juggle the reduction of inflation, the fostering of growth, and the maintenance of generous social policies.
Jean Monnet, a founding father of the European Coal and Steel Community (a predecessor of the contemporary EU) is famously quoted in saying that ‘Europe will be forged in crisis’. It is undeniable that Europe now faces a crisis unlike any seen before on the continent, one that has the potential to tear the Union apart.
The economic stability that the EU has relied upon since the end of the Second World War continues to be threatened by an onslaught of economic crises. If the Union continues to have its economic credibility undermined in the defence of a neoliberal agenda, it is likely that disillusionment, nationalism, and anti-EU sentiment will follow.
The EU needs to rethink how to pursue its economic project. If not, it risks pulling itself apart.
Ridin’ with Biden: Can the US maintain its economic hegemony?
Pax Americana – Latin for ‘American Peace’ – is a term used to describe the dominance of the US in political, economic, and military affairs in the post-war world. The US played a crucial role in the rebuilding of Western Europe with the Marshall Plan following the war, and emerged as the hegemon of the international economy at the end of the Cold War.
In the 20th century, the US’s economic dominance in the West was reliant on its exports. Automobiles from Detroit, crude oil and natural gas from Houston, and manufactured goods from Seattle all made the US the strongest economy in the world. However, the transition to a knowledge economy, coupled with the disastrous effects of the global financial crisis on competitiveness, has seen China overtake the US as the world’s leader in exported goods.
The value of China’s annual exports dwarf that of the US’s today, standing at an estimated $2.72 trillion, compared to the US’ $2.12 trillion. Chinese dominance in electronic equipment, as well as their comparatively cheaper labour and export prices, has fuelled this global dominance. As technology becomes more crucial than ever to the global economy, countries will be increasingly reliant on Chinese exports, rather than those coming from the US.
In October 2022, Saudi Arabia was involved in an agreement with Russia to cut the production of oil by 2 million barrels a day. This is indicative of the US’s waning political authority in the Middle East and will likely have negative consequences on the US economy by putting further pressure on oil prices.
Joe Biden came to power promising the American electorate that he would ‘Build Back Better’. Since taking office there has been very little evidence of this. Despite a moderate (and expected) reduction in the unemployment rate, and encouraging results at the 2022 midterms, Biden has a near-impossible task to sustain the US’s position as the leading world economy.
The hegemonic economic power once wielded by the US is shifting eastwards. The overreliance of the US on Saudi oil has come back to bite them. The US no longer has the authority to dictate the comings and goings of the global economy. It truly seems that Pax Americana is coming to a rather unceremonious and embarrassing end.
A way forward for the West?
The economic norms of the world are changing. Western notions of universal economic liberalism are clearly under threat as China looks poised to become the world’s largest economy by 2030. Britain and the EU share an increasingly strained and complex relationship following Brexit, whilst Biden grapples with the possibility of cutting economic ties with the Saudis.
2022 has been an embarrassing year of economic crises for the West, highlighting what I believe to be the critical flaw of globalisation. High levels of economic interdependence between Western economies mean that an economic burden affecting one is likely to affect all. An oil price spike in the EU is likely to raise export prices to the UK and US (bolstering global inflation), whilst the fluctuation in London’s financial markets adversely affects confidence in New York, Amsterdam, and Paris.
Each Western nation faces unique economic challenges as we head into winter; problems which are being exacerbated and shared due to the failure of governments, and of the neoliberal project that they have upheld for decades.
Of course, I am not advocating for the West to immediately cut economic ties with each other – we have all seen the consequences of Brexit – but there is no denying that the unforeseen problems of neoliberal globalisation have greatly exacerbated the global economic consequences of Covid, the war in Ukraine, and the transition towards a knowledge-based economy.
Neoliberal globalisation has run relatively unchecked by the Western world for decades. Lessons were not learnt from the collapse of the financial markets in 2008, and the chickens are now coming home to roost. The decline of the Western economy is reflective of its waning political and cultural influence in a world that is increasingly looking eastward for economic guidance and control.
Image: Chauncey/ Flickr