Repercussions of the financial crisis and its impact on foreign policy

The minister’s introduction was based on the following speaking points
(check against delivery)

• Pay tribute to NHH – a leading academic institution. Recognised for a variety of activities ranging from academic research to business development, management and administration. 
• Appreciate invitation – and that NHH recognises the link between the financial crisis and foreign policy. This link was the main topic of my last foreign policy address to the Storting this spring. Understanding the financial crisis and its impact is fundamental to understanding the world we live in. 
• My first point:
  • Financial crisis is occurring at the same time as a fundamental global power shift – partly driven by economic forces.  
• Striking feature of this shift: never before so little emphasis on military might. 
• Our time: Age of Turbulence, to paraphrase Alan Greenspan. 
• Financial crisis and global power shift must be seen together, they are partly interrelated, and also partly self-reinforcing.
• At all times: what is a political crisis for some can be an opportunity for others. Neither politics nor financial affairs are zero-sum games. What we are seeing – in political terms – is a formidable power shift, with the “old” West on the defensive and the emerging states in the East and the South on the offensive.
• Today’s world organisation: to a large part a result of the end-game of the Second World War. Never before or since has a similar will and ability to organise the world been mobilised.
• On China: not so much emerging, as re-emerging. We are not seeing the rise of a new power; we are seeing the return of a power. And we all know the famous quote – often attributed to Mao – in response to a question about the significance of the French revolution: “It’s a bit early to draw a conclusion on that.”
• Other emerging economies: India, Brazil, Thailand, Indonesia – but also parts of Africa.
• Will China overtake the US as the world’s leading economy in 2030? Does the date really matter? Because the greater part of that economic and technological rise is taking place here and now. And I believe that never in history has a country – or a civilisation – failed to translate economic and technological power into political power. What will happen this time, with a country that is not a carrier of a universal message – of ideas they believe have universal applications – remains to be seen.
• The US: relative decline:
• In the 1990s: only remaining superpower.
• After the Bush years: overstretch, emergence of multipolarity.
• 2009 was the worst year for the US economy in more than 60 years, with a historically large drop in GDP, an increase in unemployment (today lurking around 10%), a record budget deficit and high public debt. Multiple deficits.
•  However, there have been many previous predictions of the fall of the United States – which have not passed the reality check. I believe the US will continue to be the strongest single nation for a long time ahead. In military terms, the US will continue to be the only superpower capable of operating on a global scale. The US regularly demonstrates its ability to achieve technological breakthroughs and revitalise its economy. And the US still possesses (some of ) the world’s most innovative environments – from Seattle to San Diego.
• What about Europe? Current situation: EU consumed by enlargement, the Lisbon Treaty, the Euro. Looking inwards politically. Will come back to this.
• Spill-over: from financial crisis to economic crisis, to social crisis, to political crisis. Different states at different stages.
• What makes this current crisis so fundamental is that the stability of states is being exposed. Compared to previous crises, for instance the Asian crisis in late 90s, or the dot-com bubble. Severe crises in certain sectors, but not critical to the state as a whole.
• Current crisis (since 2008) has exposed states. Greece, Ireland, Portugal, but also states such as the UK, France.
• Global shift in power, to East and South.
• Some say we are returning to the 17th century in terms of global balance of power – but at that time there was very little interaction. That was also the period when the state system was shaped – Westphalia.
• The way the world responds to the current crisis will have an impact on what the world of tomorrow will look like.
• In January 2008, IMF Managing Director Strauss-Kahn issued a warning that a financial crisis was emerging. When the crisis struck later that year we saw positive effects of close international cooperation.
• A range of institutions were already in place, and states have been willing to make use of them. Coordinated rescue packages on an unprecedented scale were a key factor in preventing a total collapse of the world economy.
• Because states were in dire need – the IMF moved from virtual obscurity to prominence. Pressure on governance, board representation – but still a key institution, also due to global membership of 187 countries
• WTO: world economy is just as open today as it was before the crisis, but we note the warnings that individual countries may feel forced to protect themselves against other countries’ rescue packages by increasing trade barriers, particularly of a surreptitious and indirect nature.
• In addition: WTO is an organisation with teeth
• But the key institution when the crisis hit was the G20. Showed resolve, common action/direction. Positive handling of initial stages.
• G20 still key – but some fundamental questions: self-appointed, lack of legitimacy, mandate, mission creep, Nordic interest.
• Challenge for Norway: internationally exposed, responsible member of the international community – but without representation?
• New dimension of foreign policy: international challenges linked to global finance and currencies, “currency wars”
• China: Yuan overvalued. Prime Minister Wen warns of potential disaster if currency appreciates. Argument: danger to social stability and harmony in China (which is key priority). Question: for how long can China shield itself?
• China has not lost a soldier abroad since 1979.
• China’s exports: equivalent to one Norwegian Pension Fund every 8 months. Placing its surplus abroad (cf. Piraeus, etc.)
• US: despite all its imbalances –bound to win the “currency war”, by printing dollars.
• Where will excess dollars go? To emerging markets – in turn exposing their local currencies will be stronger.
• Measures in e.g. Thailand, Brazil, to tax inflow of credit
• Vote in US Congress on sanctions against China. Krugman: Too weak...
• EU: sorting out internal imbalances. Economic and financial affairs: policies without institutions. Foreign policy: institutions without policies. Merkel/Sarkozy: on how to design and manage the financial stability pact.
• In sum: a real drama – also for foreign policy. Real conflicts – but fought in new arenas – without weapons. But exposing states.
• Danger is not that states will attack each other – the “old fashioned” way. But that states will fail, or weaken dramatically. Again, the state system has been exposed by this crisis.
• Because states are exposed – foreign policy is exposed.
• Fragile states: not only Afghanistan and Somalia.
• Failed states: perhaps number one threat to international peace and security.
• States can only really be regulated by international laws and regulations – look at Maastricht (France and Germany)
• Finally, on Europe:
• It is in Norway’s interest that Europe does well.
• Triple challenge: managing enlargement, managing the Euro, implementing the Lisbon Treaty
• In sum: Has the EU become more introvert?
• Some analysts believe that we must be prepared for a new economic reality where developed countries – particularly in Europe – see lower rates of growth and higher unemployment for many years to come. The combined effect of major budget deficits and the need to service large national debts is putting severe pressure on public finances.
• On the global scene: increased division between rich and poor. In 2009, total number of people suffering from malnutrition increased by 100 million, to over 1 billion. In 2010, 64 million more people will fall below the threshold of extreme poverty, compared to the previous year.
• Women likely to be hit harder.
• Also reason to fear that the financial crisis is putting further pressure on labour rights and decent work.
• Illicit capital flows, frequently channelled through tax havens, constitute a significant obstacle to economic and social progress in many developing countries. This has become even more apparent during the financial crisis. Today, the US, EU and others are paying more attention to this issue.
• In the field of foreign policy: Are we seeing a “battle of models”? How to arrange society/economy?
  • US faces many roadblocks
  • UK – with new government – using cuts in spending/deficit reduction also to promote political project
  • Attractive authoritarian models? I.e. China in Africa – no longer is the West the unchallenged model
  • Place for Nordic model? Basic traits: tripartite cooperation, flexicurity, small differences, efficiency, strong public sector, social capital. We experience increased interest in the Nordic model from outsiders.
• Effects of financial crisis on the multilateral system, consequences for global decision making. “Spirit of Bretton Woods” is gone
• G20: Will it stand the test? International cooperation worked well in the immediate aftermath of the eruption of the financial crisis. Now: a new, more combative tone has taken hold.