We live in a world that is still trying to recover from the fallout of the financial crisis of 2008. Extensive commentary has taken place on the economic causes and consequences of the crisis — household debt and liquidity crises are just a few of the factors that have been, for the most part, accepted as the culprits. Notwithstanding economics, the politics of the crisis and its aftermath seem to be just as important.
The crisis unveiled a hierarchy of international currency with the U.S. dollar at the top of the pyramid, causing European banks to search for dollars rather than euros when they were squeezed for liquidity and unsettling the balance of the global economy.
There exists a paradox of widespread economic globalization without any global governance mechanism to regulate it, which underpins many conflicts today.
The crisis fell on surprised and helpless national governments to handle the pressures that globalized finance has put them under and national politicians soon realized in varying degrees their inability and powerlessness in exerting control over the national economies.
This imbalance between borderless economic politics and national politics is exemplified by the monetary union of the Euro without a fiscal union to control the currency’s exchange rates. This has created a situation in Europe where Greece and France have the same currency exchange rates even though they have vastly different national trade balances.
Moreover, the ‘independent’ European Central Bank has become a site of political maneuvering even though it operates completely outside the nation-state framework. This is reflective of the populist anti-European Union movements across Europe where people see these supra-national institutions as suppressing national sovereignty and seek to control them.
At the same time, the crisis reinforced the interdependence of U.S. as the central node of the global financial system. The U.S. Federal Reserve provided resources to national central banks that were instrumental in providing the liquidity that banks needed desperately, essentially acting as the lender of last resort without any political mandate to do so.
While Europe would have faced a much worse situation without this support from the Fed, European economic stress is disastrous for the U.S., too because European banks receiving these funds had huge amounts of American assets on their balance sheets.
Thus, the crisis further increased the dependence of the European economy on the American financial system. In political terms, this means European politicians must defer to American interests in their decision-making that may have little to nothing to do with finance, further complicating the already complex debate on national sovereignty in the EU.
As the crisis evolved, U.S. officials feared a mass sell-off of dollar assets held by Chinese investors in the form of debt and a collapse of the U.S. economy meant a reduced American demand for Chinese goods, which requires a careful balance of the countries’ economic policies.
This precarious balance unveils itself today in the trade war between the U.S. and China, with Chinese exports to US totalling more than $500 billion and Chinese holding of U.S. debt crossing $1 trillion. Before the crisis, American politicians feared debt-selloff because of a potential fall in the value of the dollar.
Today, the concern is related to the increased power of China from this huge ownership of U.S. debt.
The asymmetries of power between Wall Street, the Fed, other central banks, and national governments have generated political dynamics as well as financial ones. The political features of the financial crisis, which are still very much influencing politics, deserve more attention than they currently receive.
