FRIEDMAN: Fixing Arabia, Europe, China and the U.S.

Keywords Forefront / Opinion

Thomas L. FriedmanHold onto your hats and your wallets. Since the end of the Cold War, the global system has been held together to a large degree by four critical ruling bargains. Today all four are coming unstuck and will need to be rebuilt. Whether and how that rebuilding happens—beginning in the U.S.—will determine a lot about what’s in your wallet and whether your hat flies off.

The European Union is cracking up. The Arab world is cracking up. China’s growth model is under pressure and America’s credit-driven capitalist model has suffered a warning heart attack. Recasting any of these alone would be huge. Doing all four at once—when the world has never been more interconnected—is mind-boggling.

Let’s start with the Middle East. Libyans just joined Tunisians, Egyptians and Yemenis in ousting their dictator, while Syrians and Iranians hope to soon follow suit. In time, virtually every Middle East autocrat will be deposed or forced to share power. The old model can’t hold. That model was based on kings and military dictators capturing the oil revenue, ensconcing themselves in power—protected by well-financed armies and security services—and buying off key segments of their populations. That lid has been blown off by an Arab youth bulge that today can see just how everyone else is living and is no longer ready to accept being behind, undereducated, unemployed, humiliated and powerless.

Farther north, it was a nice idea, this European Union and eurozone: Let’s have a monetary union and a common currency but let everyone run their own fiscal policy, as long as they swear to work and save like Germans. Alas, it was too good to be true.

Large government welfare programs in some European countries, without the revenue to finance them from local production, led to a piling up of sovereign debt—mostly owed to European banks—and then a lender revolt. The producer-savers in northern Europe are now drawing up a new deal with the overspenders—the PIIGS: Portugal, Italy, Ireland, Greece and Spain. The northern Europeans are trying to force stronger, rule-based discipline on the PIIGS. But how much more austerity can these countries absorb, especially if there are further social stresses from deeper recessions?

Going East, China has been relying on a model built on a deliberately undervalued currency and export-led growth, with low domestic consumption and high savings. This has allowed the Communist Party to sustain a unique bargain with its people: We give you jobs and rising standards of living, and you give us power. This bargain is now under threat. Persistent unemployment in China’s U.S. and European markets is making Beijing’s model less sustainable for the world.

China also has to get rich before it gets old. It has to move from two parents saving for one kid, to one kid paying for the retirement of two parents. To do that, it has to move from an assembly-copying-manufacturing economy to a knowledge-services-innovation economy. This requires more freedom and rule of law, and you can already see mounting demands for it.

As for America, we’ve thrived in recent decades with a credit-consumption-led economy, whereby we maintained a middle class by using easy credit, subprime mortgages and construction work, and less education, skill-building and innovation. It’s put us in a deep hole, and the only way to dig out now is a new, hybrid politics that mixes spending cuts, tax increases, tax reform and investments in infrastructure, education, research and production. But that mix is not the agenda of either party.

When the world is experiencing so many wrenching changes at once—with already high unemployment and weak economies—the need for America, the most important pillar of all, to be rock solid is greater than ever. If we don’t get our act together—which will require collective action normally reserved for wartime—we are not going to just be prolonging an American crisis, but feeding a global one.•

__________

Friedman is a New York Times columnist. Send comments on this column to [email protected].

Please enable JavaScript to view this content.

Editor's note: IBJ is now using a new comment system. Your Disqus account will no longer work on the IBJ site. Instead, you can leave a comment on stories by signing in to your IBJ account. If you have not registered, please sign up for a free account now. Past comments are not currently showing up on stories, but they will be added in the coming weeks. Please note our updated comment policy that will govern how comments are moderated.

{{ articles_remaining }}
Free {{ article_text }} Remaining
{{ articles_remaining }}
Free {{ article_text }} Remaining Article limit resets in {{ count_down }} days.