COMMENTARY: Europe's political climate change
The economic super-boom is gone with the wind, and climate questions are outrunning terrorism as the number one global issue. This means more power for Europe.
By Kari Huhta
Every January, the world’s great and good and wealthy and influential flock to Davos in Switzerland to share out wisdom with one another and with others.
The World Economic Forum collects in one place around 2,500 decision-makers from Bill Gates to Pervez Musharraf in a small town dwarfed by looming snowy Alps.
The organisers brag that the atmosphere at the WEF is always upbeat and informal, however tricky the subjects under discussion might be.
This year, apparently, the subjects were just too difficult. At the beginning of the meeting last Wednesday, there was an air of general bewilderment, and as the week progressed the confusion morphed into something increasingly close to tetchiness.
The problem for the world’s economic elite was not simply the credit crunch spreading out like some contagious disease from the US subprime mortgage crisis, nor even the economic recession skulking in the background to the crisis.
The cause was a general and deep sense of uncertainty. At the previous Davos gathering a year ago, the wise heads had not been able to predict where we were going.
Now it was as if they were at a loss to say even where we had ended up.
And just before the doors opened, the world’s financial markets had gone berserk.
First stock prices went through the floor, and then they bounced around crazily like some pinball machine on steroids.
To cap it all, news came through from France of a colossal banking fraud in the arbitrage department of Societe General, in which a rogue trader managed to take a position on stock-index futures - unbeknownst to his colleagues or anyone else at the bank - that cost his employers around EUR 4.9 billion in direct losses.
The American Nobel economist Professor Joseph Stiglitz from Columbia University voiced a common sense of frustration, listing a string of known unknowns:
“No one knows how far real estate prices will fall, how many mortgages will go into default, the extent to which the problems will spread to other credit markets, and the nature and effectiveness of the policy responses.”
The mood was no more relaxed at the Keilaniemi headquarters of Nokia in Espoo. There, too, was an air of almost unprecedented confusion.
On Tuesday, around 15,000 Germans had gathered in a demonstration in which a coffin was carried, draped in a Nokia flag.
German politicians noisily switched mobile handset brands. The reason was Nokia’s announcement that it is to close down its manufacturing plant in Bochum.
The inflamed passions that the decision generated took the Nokia President and CEO Olli-Pekka Kallasvuo by surprise. “Considering that the reaction was so strong, something could have been done better”, Kallasvuo pondered in a Helsingin Sanomat interview on Wednesday.
Over the Bochum closure, Nokia received something of the same angry response to that encountered by Stora Enso when it earlier announced its plans to shut down paper and pulp mills in Finland.
The volume of the anger came as a shock - it was widespread and it did not die away quickly.
There was no point in attempting to explain that other companies had shut down plants or mills in the past, and with far less hubbub surrounding the matter.
Or that the German mobile phone manufacturers, along with others, had themselves deserted the homeland several years ago.
That was then, this is now, and the difference was that conditions today are somehow different from what they were - and thus the decisions also have different consequences.
But what exactly has changed?
The answer to this has to be sought from a tangled skein of issues, a mixture of credit crunch, the struggle for energy resources, a threatening food crisis, struggles between competing political systems...
And thrown in on top, climate change.
But first, a little about the global economy. The best place to ask about the changes going on is where the money is, in other words in Davos.
"The current crisis is the culmination of a super-boom that has lasted for more than 60 years", declared financial speculator and investor George Soros in a piece for the Financial Times on the eve of the Davos meeting.
Soros argues that we have seen periodic financial upheavals that have emerged, crises occurring since the end of the Second World War at intervals ranging from 4 to 10 years, and always precipitated by the boom-bust bursting of some bubble or another.
The crisis generated by the US housing market bubble is just one of these, and it does not adequately explain the whole mess.
In Soros’s view, what we are seeing now is the end of an entire era of super-boom and credit expansion founded on the United States dollar as the international reserve currency.
It went on for decades, but now the party is over, he claims.
George Soros may well know what he is talking about.
He is after all the gentleman who earned billions in 1992 by betting against the Bank of England and most everyone else on the fortunes of sterling, leading - after the pound was devalued - to his being nicknamed “The man who broke the Bank of England”.
However, the crisis can be seen from other perspectives than directly through the money markets.
From a European viewpoint, it is as if the political macroclimate has changed.
Climate change has politicised economic thinking. Both large economic ventures and the consumer’s use of the figurative remote control device are now being analysed from the standpoint of how they will affect climate change.
A walking, talking example of the special position accorded climate change is Al Gore.
The Nobel Laureate and Oscar-winning former Vice-President of the United States was there in Davos, warning again that the climate crisis was “significantly worse and unfolding more rapidly” than had been hitherto anticipated.
At much the same time in Brussels, the European Commissioners were setting out each EU member state’s emissions-cutting targets with the sort of dogged unanimity that could not be shaken by criticisms or counterblasts from the business community or the environmental groups.
Climate policy has already become the world’s #1 talking point, outrunning terrorism as the top global issue. And in the realm of global climate policy, Europe looks to hold a pre-eminent position.
The US administration’s delaying tactics and rearguard action to keep the economy separate from climate matters is clearly a lost cause.
The European Union’s leading role in climate policy is of particular significance, since right now we are going through a period of reshuffling the pack in terms of leadership positions: the United States clearly still enjoys absolute military supremacy, but its grip is slipping on the economic front.
The credit crisis in the world’s banks has only served to accentuate the importance of China and other emerging economies vis-a-vis Europe and the United States.
Banks are desperately looking around for new sources of financing from Asia.
On the corridors of global exchanges, the abbreviation UBS no longer automatically means Union Bank of Switzerland, but Union Bank of Singapore.
Europe’s economic outlook is brighter than that of the United States.
Furthermore, Europe currently enjoys more by way of international respect and clout.
The democratic and relatively prosperous countries that are the EU often appear more impressive from the outside looking in than they do to us on the inside - and now even internally the Union is starting to look surprisingly good.
It would nevertheless be more than a little premature to let out any indiscreet whoops of European triumph.
Politics are rising at the expense of the economy. The reason is that without the help of states the markets alone cannot resolve for instance the interwoven problems of global energy supply and food supply.
When the going gets particularly rough, companies turn for succour and assistance to the central banks - in other words to states.
In Davos this was expressed in such a way that the giant pendulum was now swinging back towards the state and away from the hegemony of the markets.
The motion can be seen in the way that people can demand a state - as a part-owner of the company - takes steps to prevent Stora Enso from closing its mills, or in the way that German Chancellor Angela Merkel can pick up the phone and call Olli-Pekka Kallasvuo about the Bochum handset factory closure.
In Europe, the French President Nicolas Sarkozy has emerged as the leading champion of the role of the state in guiding the ship.
Sarkozy defends France’s right to bolster the success of her companies by a policy of selective protectionism. The phenomenon itself is not a new one, but it is generally something that is met with argument and dissent. Sarkozy is making a virtue out of selective protectionism.
His vision is of a strong France supported by strong businesses, as part of a strong Europe.
In the eyes of those looking on from outside Europe, Sarkozy’s selective protectionist remedy means that Europe wants to avoid the downsides of globalisation but to gather up all the benefits.
Speaking in Davos, the World Trade Organisation’s Director-General Pascal Lamy warned that protectionism is a dangerous trap.
Investor George Soros took the same view, albeit Soros dressed it up in even more dramatic language. Writing in the FT, he charged that the end of the dollar-driven period of growth was fraught with dangers: “the resulting political tensions, including US protectionism, may disrupt the global economy and plunge the world into recession or worse”.
Soros himself regards great change and economic realignment - the decline of the US and the rise of China and others - as a more likely outcome than great catastrophe.
But it is not going to be an easy time.
When the positions on the economic podium shift, it is only to be expected that there will be efforts to change the political ground-rules for globalisation.
The events in the headlines over the past week show that Euope is living through a period of change.
We now saw some examples of what is going to change, and what is not.
Olli-Pekka Kallasvuo had to apologise to the Nokia workers in Bochum for the effects of closing down the plant.
And yet at the same moment, Nokia was being rewarded for its fourth-quarter and annual results and its tight economic discipline with a humungous double-digit increase in its share price on the exchanges.
Now which was the more important of the two?
To the investors, it is not strictly relevant whether the factory under threat of closure is a profitable one.
The investor is interested in how profitable the company is, and what is the return on capital invested.
And if that return happens to be better in Cluj-Napoca, Romania than it is in Bochum, Germany, then the factory will move to Romania.
In the new increasingly politicised climate, the next time a large corporation wants to shut down a factory - in Finland or elsewhere in Europe - the outcome will in all probability be exactly the same as it has been thus far. The factory will go. The company can only compromise on its profit targets if it does not need the investors’ money. And people worldwide are competing fiercely for that money.
Even so, an apology is a sign of change.
The redundancy benefits and other compensation paid by corporations may go up, and companies may make more strenuous efforts to find a new business to operate in the premises that get axed.
Just as happened in Kemijärvi on Friday, with the announcement of a factory to manufacture glued laminated wood beams being set up in the facility vacated by Stora Enso.
At Davos, too, the jittery mood settled down somewhat towards the end of the week.
The discussion turned at last to a slightly easier topic - the Middle East situation.
Helsingin Sanomat / First published in print 27.1.2008
KARI HUHTA / Helsingin Sanomat