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NEW ALLIES AHEAD

The rise of the BRIC economies and the Growth Markets will result in dramatic changes in relationships between those countries and the rest of the world, and regional economic and political ties will be subject to deep and lasting change. At times, this shift may test historical relationships between nations, but if policymakers can think openly and positively about the potential benefits of forging new trade and other links, it could be an opportunity for fresh and stronger alliances.

Take the huge increase in many countries’ exports to the BRIC economies. Brazilian commodity exports to China have risen so much that China is now easily Brazil’s number one export market. On the back of this, China’s direct investments into Brazil are rising sharply. Both developments are leading to a new era of relations between the two countries. China’s expanding investment into Africa is a similar exciting development, and raises the prospect of very different external relations for many African countries.

ASIAN AXIS

Asia’s centrality to the future of the world economy makes it an obvious place to begin.

Within twenty years, China might be the world’s biggest economy and India the third largest. More than two-thirds of the world’s population is in Asia. In China and India, Asia has the world’s only two economies with more than a billion inhabitants; their combined population is not far off 40 percent of the world’s current population. Indonesia, with around 240 million people, is the fourth most populous country. Japan, Bangladesh, Vietnam, Pakistan and the Philippines are among the top twenty populous countries. In total, six of the N-11 economies are in Asia, as, of course, are China and India. Taken together, the prospects for the continent are incredible.

For much of the period from the Second World War until 2010, Japan was the world’s second largest economy. China has already overtaken Japan, and within twenty years so might India. The relative as well as absolute economic changes between China, India and Japan may necessitate a sea change in their interrelationships, made no easier by their checkered mutual history. This will require compromise and flexibility. In terms of coordination, Asia’s leaders are going to have to be very tolerant and open-minded. Changes in relative wealth are unlikely to be quite as dramatic, but they will represent a considerable relative shift nonetheless.

Given all this, how is it possible to devise a healthy, peaceful economic, monetary and social relationship for Asia? How will the new giants, China and India, treat each other? What will be the regional role of the still prosperous but economically much smaller Japan? The same issue faces South Korea and all those large-population countries with great potential such as Bangladesh, Indonesia, the Philippines, Pakistan and Vietnam, and the smaller, more prosperous economies such as Singapore. What will happen to Taiwan? Will it become part of China as Hong Kong has? Hong Kong’s “Basic Law” protects the Hong Kong dollar only until the capital account of the balance of payments in China becomes open. If that happens, will the Hong Kong dollar cease to exist? What about North and South Korea? Will unification be helped or hindered by the BRICs’ development and the changing landscape?

Beyond these commonly discussed issues are even bigger ones. The often fraught relationship between India and Pakistan could be tested even more by India’s emergence as the world’s third largest economy. Another complexity will be the relationship between China and Japan: can they forgive and forget the traumas of the past and move on to a healthy and compatible relationship as China becomes bigger—albeit less wealthy—than Japan? An even thornier issue could be the relationship between China and India.

These are all significant challenges for Asia’s thought leaders, who need to find ways of rising to them.

JAPAN AND THE BRICS

For Japan, the emergence of China is both a huge opportunity and a threat. With Japan’s aging demographics, it has often seemed to me that “embracing” China could be a passport to a better economic future. The same is true with respect to India, and the huge markets that Indonesia and the other N-11 economies offer. But it will require Japan to undergo quite dramatic cultural change.

Given its technological prowess and its advanced stage of development, Japan has a lot of things to offer the Asian growth economies. Two areas are obvious: Japan’s leadership in modern consumer appliances, ranging from autos to electronic appliances, as well as its leadership in modern energy efficiency. In recent years, it appears as though Germany is more successful in many areas of Chinese demand as consumers rise up the wealth ladder, with high-end cars being a particularly interesting example. Given the global leadership of Toyota in the auto industry, this should be a major opportunity. But relative to BMW and Mercedes, Japan’s leading motor manufacturers don’t seem to be quite seizing this opportunity. German brands are more popular in China. Japanese companies may suffer from the troubled history between the two countries. This is something that Japan is going to have to get beyond. It is arguably something that Germany has successfully achieved through the creation of the EU and European Monetary Union, which is why some advocate a monetary union for Asia. Commitment to this sort of powerful shift in the cultural and political relationship between China and Japan is the sort of step necessary for Japan to reap what appear to be huge potential benefits.

When I visit Tokyo, I am often struck by how isolated Japan seems when faced with the changing dynamics of Asia. At a meeting I had with a leading Japanese consumer company strategy team a couple of years ago, I had expected them to be bursting with questions about China and India, but instead it was I who had to bring up the subject. I was quite astonished that they didn’t emphasize the dramatic consumer opportunities that were on their doorstep. A market of 2.5 billion people or more—yet they didn’t seem especially eager to exploit it. I’ve had similar experiences with other Japanese companies in different industries.

Another aspect of the Japan dilemma might be the use of English as a spoken language. How can the Japanese expect to exploit the potential benefits of China, India and beyond if they can’t engage in a common language? At most of the meetings I’m part of in Japan, there is a translator present. That used to be the case in Germany when I started in the financial services industry thirty years ago. Not today. If I give a speech in Frankfurt, I give it in English; the audience listens, understands and asks lots of questions—in English. In Tokyo there will be simultaneous translation, and questions will usually be asked in Japanese.

In the past couple of years Japanese officials have embarked on a strategy to boost Japan’s appeal as a tourist destination. I have traveled a little in Japan, and it is a beautiful and fascinating country. But for a non-Japanese speaker it is not an easy place to get around once you leave Tokyo and the train system. Embracing the English language would probably make it a lot easier for Japan to be successful in so many ways.

Similarly, more openness in Japan could help ameliorate the biggest problem the country faces: a dwindling labor force. What Japan needs is a major immigration strategy. Instead, whenever I raise the subject during my visits there, I am usually lectured about how foreign immigrant workers are responsible for the modest amount of crime that occurs in urban Japan. Japan must shift its attitudes if it is going to benefit from the rise of the BRICs and the N-11.

CHINA AND ITS ASIAN AMBITIONS

In addition to its relationship with Japan, China will need to develop a healthier relationship with the other BRICs. India will be especially important. China and India have experienced a checkered relationship, and as they both become more important economically, they will have to develop a more positive dialogue.

Three areas seem especially important. First, the scope for China and India to dramatically boost trade with each other is huge. In recent years it has started to accelerate significantly, but this is only the beginning. If China and India are set to become the biggest and third largest economies within the next twenty years, then their direct bilateral trade should become the largest trade relationship in the world, or close to it. Indeed, one might suggest that if Chinese-Indian bilateral trade does not rise dramatically, then they won’t succeed in achieving their economic potential.

Second, China and India will be in direct competition for increasing quantities of global resources, and their involvement in finding solutions to the predicaments of diminishing reserves and climate change is going to be critical. Of course, both countries are always going to put their own domestic economic interests first, but they will have to find a mutually acceptable stance for there to be a truly credible global agreement on climate change. It will probably be the case that enlightened self-interest will lead to both nations realizing that they face resource constraints. With bold and open-minded leaders, at some stage in the future this should present an opportunity for China and India to adopt a common stance.

Third, the need for a common position between India and China is likely to extend beyond climate change. The future shape and stability of Pakistan is one example. The leadership, shape and role of global institutions such as the IMF, World Bank and possibly even the UN are all areas where China and India will have to try and explore common ground. Following the exit of Dominique Strauss-Kahn from the helm of the IMF in May 2011, the apparent lack of discussion between China and India on a suitable jointly desired candidate is something that will have to change. Today the United States and Europe find it natural to debate and agree upon a common ground on global matters of mutual importance, and have done so for many years. China and India will need to do the same.

China’s long-term stance on Taiwan and North Korea and its style of decision making is likely to have a major influence on its relationship with the rest of Asia as well as the United States. Just as with the bilateral relationship with Japan, Chinese leaders may have to develop a different form of engagement to meet all these challenges. It won’t be easy, but if China is going to achieve its potential, it will have to adapt.

ASIAN MONETARY AFFAIRS

Some academics suggest that, against this complex background, Asia should and will develop a single currency in the same way that the euro has developed at the core of modern Europe. Many Asian thinkers have long dreamed of an Asian single currency, with some going as far as naming it the “Acu,” the Asian Currency Unit. The birth of the euro and the structure of the European Monetary Union are regarded as an ideal model. The underlying comparison—closer economic and political cooperation born out of a desire not to repeat a troubled history—is understandable. But the differences between the relative size and structure of Asia’s major economies add to the considerable complexities of developing a common currency.

A rush toward monetary union in Asia would be a highly risky pursuit. As the present crisis in Europe demonstrates, it is far from clear that the euro is successful in Europe. While there is little doubt whether technically the euro has functioned, there are doubts over whether the stability will persist and, more important, whether its existence will help deliver greater prosperity.

At the time of this writing, the European Monetary Union is under severe threat. While the immediate challenge is the degree of sovereign debt outstanding in Greece and some other smaller countries, in my judgment it is actually a test of the structure, governance and leadership of Europe. We can’t have complete confidence that all the current member countries will stay in the eurozone, or for that matter whether a common currency has a long-term future. It will require very bold decision making from Europe’s leaders.

This experience is important for those in Asia who are thinking about their own monetary futures, but there are differences between Asia and Europe, especially in terms of relative economic structures. Three things in particular are important.

First, the “core” countries that entered the EMU in 1999—France, Germany and the Benelux countries—enjoyed a reasonably similar GDP per capita. At the beginning of the EMU, these countries perhaps were an optimal currency zone. The optimality of the EMU started to be questionable once it became clear that Spain, Portugal and Greece and, to some extent, Ireland, Italy and Finland would join. Introducing a single currency among China, India and Japan might be more akin to agreeing on a single currency between Germany, Poland and Turkey, not the core group that was conceived for the EMU’s creation. Japan has a GDP per capita of $36,000, China $6,000 and India $1,500. While China’s and India’s wealth will rise dramatically, it is tough to envisage those countries becoming as wealthy as Japan in the foreseeable future. Similarly, individual Indians are unlikely ever to become as wealthy as Chinese citizens.

Second, there are quite different patterns of trade relationships for the different major Asian economies as compared to the core members of the EMU. Most of the EMU member countries are significantly “open,” and their biggest trading partners were one another back in 1999. In creating the EMU, much of the goal was to create a common trade area and to reduce currency instability between the members. Within Asia the situation is different; for example, India is much less open to trade than China. A future Asian single currency based on the possible dominance of China and India might eventually be feasible, but this is not a given. While China has overtaken Japan as a trading partner for many Asian countries, Japan remains much more important than India. To introduce a single currency based on unstable trade relationships could be dangerous. Without more stable and more similar trade patterns, especially with one another, the case for a shared currency, at least economically, is not very strong.

The third factor relates to purpose and motive. France and Germany entered the concept of the EMU with a common and strong desire to put in place an institutional framework that would avoid repeating historical conflicts, especially the two world wars of the twentieth century. In Asia, and especially between China and Japan, presumably there is a similar desire to avoid the aggression of the past, but does there exist the shared vision for the future that monetary reform involving China would require? Is it possible for a nondemocratic country like China to consider seriously a monetary union with other nations? Perhaps China will have to evolve its system of politics and governance to encompass this possibility.

Given the complex issues surrounding Asia’s structure, to cope with the ongoing rise of China and India, both absolutely and relatively, a pursuit of more flexible exchange rates combined with strengthened macroeconomic policies is likely to deliver more stable results. Enhanced flexibility of their foreign exchange policies in many Asian countries, together with the adoption of credible inflation-targeting regimes, are likely to help deliver greater stability. If China and India give more formal weight to inflation targets, it will enhance their chances of sustained growth. South Korea, of course, already practices inflation targeting and it seems likely that the Bank of Japan will move closer to a more formal inflation-targeting framework at some stage. Against a background of inflation targeting, these big four countries should allow their exchange rates to move against each other, and against the dollar and the euro. Occasional central bank intervention to smooth out excessive currency fluctuations would be sensible, but to try to fix their exchange rates against each other seems an unhelpful pursuit.

If in a few decades the big developing economies have reached their potential, then perhaps stronger efforts to move toward a shared currency may be more sensible. Until then, given the divergent pressures that are liable to persist in their economies, it will probably remain too ambitious a goal.

 

 

 

Ofcourse, the feasibility and structure of any future Asian monetary system will depend crucially on what happens to the renminbi. If China reaches its economic potential in the next twenty to thirty years, and if it has allowed full convertibility, under which there would be no restrictions on the use of the renminbi, either for Chinese individuals and businesses or for anyone else around the world conducting any transaction with China, then it is quite likely that the renminbi will sit at the heart of global monetary affairs and not just those of Asia. While Chinese policymakers are always very careful not to commit to any timetable, it seems as though there is a commitment on the part of the Chinese government to full convertibility. Indeed, without the renminbi being freely accessible in terms of trade and capital flows between China and the rest of the world, it is not obvious that China can reach its other stated goals—in particular the desire for Shanghai to be a leading international financial center. While many international companies show an interest in listing their equity on the Shanghai stock market, unless they can be more comforted that investors would be able to buy and sell with the same general laws that are associated with stock exchanges in the West, then many will be reluctant.

During 2010 and early 2011 there were some initiatives to open up the use of the renminbi for investment purposes in Hong Kong. These hint at the ultimate potential for the renminbi. The growth in renminbi-denominated deposits in Hong Kong since 2009 has been remarkable, and is set to grow a lot more.

For other Asian economies, especially those with large tradable-goods sectors, the logical path is active exchange rate policy management against a basket of the big three currencies of China, Japan and India (combined with some reference to the dollar and euro). This would be applicable to Indonesia, Malaysia, the Philippines, Thailand, Vietnam and other countries in Asia.

THE BRICS AND THE UNITED STATES

While the most thrilling aspects of the BRICs story lie in Asia, the dynamics involving the United States are nearly as complicated and exciting. How will the world’s only superpower continue to deal with the prospect of losing this mantle, especially to a “communist” regime in China? How will the United States manage its Asian relationships? Will Japan remain its preeminent geopolitical partner in the East as it has been for much of the modern era, despite its relative decline? Or will the United States “drop” Japan? How should the United States support the emergence of Russia without dramatic changes in how the Kremlin presides over business and general life in Russia? And what about Latin America, in which Brazil and Mexico may emerge as more forceful voices on the global scene? Finally, and probably key to the answer to all these questions: how will the U.S. economy cope with the collective BRIC challenge?

Despite the threat to its sole dominant world leadership, many signs suggest that U.S. policymakers are coping admirably with the emergence of the BRICs, allowing the economic forces of globalization to benefit their globally minded companies and thereby supporting an environment in which the BRICs can emerge. It also often seems as though U.S. policymakers are at the forefront of those willing to include the BRIC economies in global dialogue. Certainly, the revival of the G20 in late 2008 by President Bush was a major step in bringing the BRIC countries to the center of global policymaking. At the same time, the United States has been eager to develop stronger bilateral dialogue, especially with China and India both.

Such an open-minded approach from U.S. leaders is sensible in view of the changing patterns of U.S. trade relationships. The scale of the changes in U.S. trade can be seen from looking at a number of indicators. For example, the Federal Reserve Board has an index to measure the performance of the dollar against all the U.S. trade partners. It is calculated on the basis of both direct bilateral trade with each other and trade in markets other than their own. The Chinese currency now carries a weight that is as important as the Japanese yen. The combined weight of the renminbi and the Mexican peso is already greater than the euro, and the aggregate weight of G7 currencies is not much beyond 50 percent.

During the next five years the most important goal of U.S. economic policy will be to double its exports and reduce its large foreign debt. If the United States is to succeed in reversing its balance of payments deficit, managing the trade relationships with the BRIC economies is vital.

And managing the relationship with China is especially important. These are the two biggest economies in the world and are likely to remain so for at least the next twenty to thirty years. Trade between the two economies is likely to rise significantly. Their stance on matters of global economic importance will be key to a prosperous world, as will their stance on matters of global security and political issues. It is going to be more and more vital that U.S. citizens be educated objectively about China. The two countries are going to have to find successful ways of cooperating. After all, the United States is the world’s largest democratic economy and China is the world’s biggest nondemocratic economy. Many U.S. citizens have been educated to believe that democracy is the only model that can deliver success.

China is challenging that wisdom. At a time when the U.S. economy is struggling, it is easy to blame others, and especially China. It is highly fashionable for U.S. politicians to blame China for America’s economic problems. Proposals to introduce policies to restrict Chinese exports are often circulating in congressional committees. These ideas are probably wrong. Many U.S. multinational companies have been at the forefront of helping China export to the United States. This has benefited U.S. consumers in terms of cheaper products and higher living standards. Walmart’s growth typifies this reality.

But things are changing. As China develops and becomes wealthier, it will cease to be a source of cheap imports. In fact, it is becoming an ever larger recipient of other countries’ exports. In 2010 Chinese imports rose to $1.4 trillion, an increase of $400 billion in just twelve months. If this pace is maintained, then by 2015 China’s dollar value of imports will be bigger than America’s. This is a huge opportunity for U.S. exporters. Members of the U.S. Congress have to resist the temptation to blame China for lost jobs in key marginal states simply to attract superficially easy votes. It will be better to look to the opportunity.

Of course, just as U.S. politicians need to keep open minds in the pursuit of more and freer global trade, the BRIC countries have to recognize the need for more “free” economic policies, especially regarding exchange rates. As I have said, it was impressive that President Bush moved to bring the BRIC countries into the G20, so solutions could be found for complex economic problems. From a U.S. perspective, increasing world trade with the BRICs together with increased flexibility of BRIC and Asian currencies (China’s in particular) is a likely goal. U.S. leadership on these issues is highly important for the continued benefits of globalization, not just for the United States, but for us all.

Some U.S. citizens may be scared of the challenge and competitive threat posed by China and the BRICs. To them I would again emphasize the difference between wealth and size. It is very unlikely that the BRIC economies will see their wealth get close to U.S. levels in the foreseeable future, even if the size of some of these economies surpasses the United States. If China’s GDP gets to $80 trillion by 2050, the U.S. GDP will become $36 trillion. The United States will still treble in size and its wealth will probably double or more. Individual American citizens will earn around $94,000 each, making them nearly twice as rich as the Chinese and four times as rich as their Indian counterparts.

In 2006 the OECD studied different measures of “success,” and concluded that well-being appeared to correlate highly with GDP per capita. If China, India and the other BRICs become large economies, it will be because of the size of their working populations rather than per capita GDP. The United States has prospered despite the decline of its manufacturing industry for many years. There is no reason why this trend can’t continue. In fact, it is quite possible that the United States could even reverse this decline in manufacturing. If the United States were to succeed in doubling exports over the next five years, it is likely that manufacturing will benefit disproportionately. The Boston Consulting Group published a highly important report in May 2011 showing it is possible that the United States will completely restore lost manufacturing competitiveness versus China in the next five years.¹

When I discuss U.S. manufacturing and exports with many financial market professionals, they think that this sort of idea is wildly fanciful. I think that such skepticism is not justified. With the competitiveness offered by the decline in the dollar and the growth in demand in the BRIC countries, the United States has an opportunity to rebuild its domestic manufacturing capacity.

THE UNITED STATES, BRAZIL AND LATIN AMERICA

It occasionally seems that because of the security and terrorist threats emanating from the Middle East, and the excitement surrounding Asia, the United States is no longer either as interested in or as influential in Latin America as it once was. Latin America’s repeated economic crises, while Asia boomed from the late 1990s onward, have added to the perception.

It will be interesting to see whether this changes as Brazil’s economy continues to get bigger. Brazil, already drawn more to China because of trade, sees itself firmly at the center of the BRIC political club and is less needy of Washington. It may also see its influence grow throughout Latin America. Past Brazilian goals such as Mercosur, a common market of South American countries, may reappear as major priorities. For U.S. policymakers, ensuring a healthy and vibrant trade relationship with Latin America as a whole will involve staying highly engaged with Brazil.

The bilateral meeting between President Obama and President Dilma Rousseff in March 2011 was a positive sign that the United States realizes Brazil is embarking on a different, more prosperous path, and one that could be good for America.

Developments in China may have an extremely important bearing for Mexico. It is often noted how poorly Mexico has performed relative to Brazil as the BRIC story has unfolded. One credible reason is that China’s appearance as a major low-cost production center reduced the attraction of Mexico for U.S. companies. As China becomes wealthier, its wages rise and its living standards improve, it is conceivable that Mexico could be a big winner.

THE UNITED STATES AND RUSSIA

In terms of Russia, there are three broad issues that matter for the U.S. relationship: oil, politics and Europe.

First, oil. Given the insatiable global appetite for energy and the persistent Middle Eastern troubles, Russia is important to the United States as a key energy player. Its oil production strategy and the resulting implications for energy prices matter. Since the collapse of the Berlin Wall in 1989, Washington often seems eager to try to observe Russia in a positive light, despite their volatile relationship. Now, with Russian oil and natural gas at least in theory open to the influence of world market dynamics, the United States has a natural interest in engaging with Russia.

The second issue that will frame the U.S. relationship, linked to the oil issue, is of course politics, and the structure of the U.S. and Russian societies. Since the Cold War days, the Russian political ideology has been a topic of importance to American leaders irrespective of whether Democrats or Republicans were in power. Many U.S. politicians remember the Soviet Union and what it meant to be raised in that era. They are mindful of any signs of a reversion to those days in terms of Russian governance or, more important, engagement with the rest of the world. As the Russian economy grows and individuals prosper, the United States obviously has a big role to play in encouraging this trend, especially in helping Russian politics become more open. The complexities of this interplay will inevitably increase with Russia’s success. The United States may need to adopt a more imaginative approach to some of their differences of opinion. Quite often it seems as though Russia and the aspirations of its citizens are seen by U.S. citizens in a very black-and-white framework—specifically, there seems to be a presumption that Russians would like to enjoy a similar society to that of the United States. But in my view, Russians want wealth and power; American-style democracy doesn’t seem high on the agenda. Understanding the mentality of Russians will remain an important concern for the United States.

This brings me to the third factor, which I will discuss in greater depth in the context of the challenges Europe faces vis-à-vis the BRICs. If Russia’s economy does become as big as Germany’s in terms of GDP per capita as well as in absolute size, it is highly probable that the United States may need to rethink aspects of its overall relationship with its postwar allies in Europe. The whole nature of the European Union may need to change if Russia becomes as large as its potential suggests. Indeed, Russia might, one day, be a candidate to become a member of the EU. The United States is highly likely to want to play a role in influencing any such development.

EUROPE AND THE BRICS

It is a popular perception among Europeans that Europe can only lose from the BRICs’ success. This is a peculiar mind-set, and is among Europe’s greatest barriers to future economic progress. In many ways, it reflects a more common European concern that somehow Europe can no longer influence the rest of the world, and can only be influenced by it. Changing this perception and raising the awareness that the emergence of the BRICs can be a positive for Europe is an urgent task for Europe’s political leaders and intellectual thinkers. Part of the problem is that three of the four BRIC countries are distant from Europe. The distance breeds unfamiliarity. The challenge posed by the emergence of China as the most important BRIC is particularly tough. And even though Russia is geographically closer (or at least Moscow and St. Petersburg, its major cities of influence), this brings its own problems and opportunities.

The four BRIC countries are also viewed differently by different countries in Europe. This in itself adds to the task of turning the BRICs’ potential from a threat to a collective opportunity. In those European countries with less sophisticated economies, China has long been an important competitor in various manufacturing industries. On the other hand, in larger and more sophisticated economies, where services comprise a larger proportion of output, India may be seen as providing more competition than China. However, it is important that all European leaders work hard to persuade their populations that the emergence of the BRICs and their ability to fulfill their potential is something that will be good for the whole continent. While many low-value-added manufacturing countries think they lose out to China in terms of manufacturing, a quick glance at Germany shows how this perception does not need to be true. Domestic German industrial production is thriving. Exports are at the heart of this strength.

The top German carmakers have seen enormous growth in their business in the BRIC countries, as have some of the heavier industrial companies, including those in the chemical industry. A day spent visiting the famous companies of Munich can leave you with an impression that what is going on in China is more important than anything happening in the rest of Europe, or indeed possibly in many parts of Germany. Of course, there are some important complications that arise from these changing trade patterns, including the importance of the EMU to German companies.

Europe’s individual citizens as consumers should play a more forceful role in trying to welcome the competition from the BRIC economies. It would mean cheaper consumer goods, which would allow the budgets of European households to be spread more effectively and so give rise to stronger consumption. Europeans should be happy to “trade” better, more productive jobs with lower inflation for the less efficient industries it can afford to lose to the BRICs and other emerging economies. Indeed, it is easy to observe in recent years that the individual European countries that are prepared to allow cheap imports from the developing world are typically the same countries that have frequently seen positive inflation surprises, and in many cases stronger economic growth.

This is almost definitely not a fluke but a function of sound economic policy. The whole rationale of international trade is that it is for the benefit of both sides. International trade is not a zero-sum game, and our political leaders need to understand its benefits and explain it to their citizens.

 

 

 

Europe often seems to struggle more than the United States in responding to today’s changing world economy. An appropriate collective response is pretty straightforward, at least on paper. Allow the EU and the EMU to function. As a common economic zone, the twenty-five-member European Union has a population much bigger than the United States, which gives it scope to be bigger economically. The potential consumer market is so vast that it should be easy to accommodate the emergence of four BRICs. If the European Union were allowed to operate as a genuine free economic trade area, then the resulting benefits would be highly significant.

Free trade with external non-European countries, especially the BRICs, should be not only tolerated but encouraged. Within the European Union, legislative policies are necessary to complete the single market, in particular for service industries. To complement this, EU member countries must allow cross-border mergers to accelerate, allowing more efficient international business. Unfair domestic regulatory support of national champions should be strongly discouraged. Free movement of labor and enhanced flexibility of wage agreements need to advance significantly. Improved steps to allow immigration between EU members and from outside are also necessary. Supplementing labor, especially skilled labor, will be necessary to help business in view of the inevitable decline in the indigenous labor force in many European countries. Policies to raise the retirement age and allow people to work longer are vital. As people are likely to live longer, this would expand the labor pool as well as reduce the dependency ratio that otherwise looms as a massive challenge.

In such a bolder, braver environment, my guess is that it would be likely that the BRICs’ emergence as major economic actors would be regarded more as an opportunity than a threat.

EU RELATIONS WITH RUSSIA

Of the challenges posed by the BRICs, that of Russia to Europe is perhaps the most interesting, because the two share a border. There could be a case for allowing Russia to eventually join the European Union or some future version of it. Of course, geographically large parts of Russia sit in Asia, but if Russia is to achieve its potential, surely a positive-minded Europe should seek to welcome the country into the EU. Of course, the same could be said of Turkey.

Russia is going to remain a major energy source for much of Europe, both its old enemies and some countries that used to be part of the Soviet empire. This factor alone suggests an ongoing need for EU countries to pursue good relations with Russia, despite tendencies for the relationship frequently to become tense.

Russia is an important trading partner for many EU members, and if Russia is going to grow to the size of its potential, it will become an even bigger export market for those countries. This is where the economic rationale for Russia to become part of an EU economic zone is substantial. The case for the EU’s and the EMU’s existence rests largely on the amount of trade between member countries. If Russia remains as important in terms of trade and fulfills its BRIC potential, then including Russia in the European Union would make a great deal of economic sense.

Whether Russia would want to join it is another matter. (Norway and Switzerland both manage to thrive within Europe despite being outside the EU.) Given its history and frequently different political philosophy, Russia might prefer to be outside. Gaining economic clout may add to Russia’s desire to stay as a powerful independent voice in world affairs. This in itself would be reason for the European Union (and the United States) to encourage a different way of thinking. It will become increasingly fascinating as Russia emerges as a more powerful economy.

EUROPE AND THE REST OF THE BRICS

China is currently the most important of the other BRIC countries so far as Europe is concerned, despite its distant location, because of its major importance in terms of rising trade with Europe.

It is notable how much more focused on the topic of monetary reform European policymakers have become in the past couple of years. While EU policymakers don’t attract the media headlines enjoyed by U.S. politicians, they share an obsession with the need for the significant appreciation of China’s currency. Future efforts toward global monetary reform are emerging, as evidenced by the stance adopted by the French during their presidency of the G20 in the first half of 2011. In March, President Sarkozy and his team had proposed a meeting of all G20 members and used the opportunity to promote the idea of a different monetary system in the future. Suggesting that the meeting should be hosted in China was a clever symbolic statement of the French belief that the renminbi has a role to play.

As for Brazil, its strongest trading relationships are with Spain and Portugal—so if Brazil fulfills its BRIC potential, then it will be of economic benefit to both these countries. Some Spanish- and Portuguese-based multinationals are heavily exposed to business in Brazil (as well as in other Latin American countries) and this could be very helpful to them in the future. Given the relatively developed nature of Brazil’s capital markets, it is quite likely that financial institutions in Europe will be looking to explore other opportunities in Brazil.

In order to adapt successfully to the changing conditions resulting from the rise of the BRICs—and the other Growth Markets—it is vital that nations actively share policies to support the smooth operation of rising international trade. It’s also crucial to move toward a better structure of global economic governance or, it might be said, a new world order.