Back to realpolitik: only the promise of prosperity will ensure the return of liberal diplomacy

Yet another ceasefire has been arranged in Syria’s civil war, although this morning it looks close to collapse. The difference with this one is that the US and the EU have not been involved in its negotiation. And, not coincidentally, it does not include the Kurdish forces. It is the result of a rapprochement between Russia, Iran and Turkey. It looks as if this is the shape of things to come: a world where there is only the faintest pretence that countries should look out for the needs of people outside their own borders.

It looks like the death of an idea: liberal diplomacy. For liberal diplomacy, and its cousin the ethical foreign policy, the object of diplomacy, and the use of military power, should be to create a better world. A world of peaceful relations and prosperous trade, where human suffering is the responsibility of all. In its place we are left with the idea that countries should pursue their interests, and seek whatever advantage they can. There is an old name for this approach: realpolitik. It was the way most countries ran their affairs before the First World War, with only a few prominent dissenters, such as the British Liberal leader William Gladstone.

How it resolved in that era was that countries were ordered into a small number of great powers, able to conduct independent foreign policy, and project their power over a sphere of influence. Then came minor powers, nominally independent, who did the best they could in the spaces left behind, and finally subject nations – colonies, protectorates and such, managed by great powers, and sometimes minor ones. It was a system established at the Congress of Vienna in 1815, after the fall of Napoleon. It was taken for granted that major powers would use force to pursue their interests – and that their only constraint was avoiding wars between themselves. This did not always work. From 1853 (the Crimean War) to 1870 (the Franco-Prussian War) there were a series of short wars between European powers. But, compared to previous periods of 99 years, the years from 1815 to 1914 were remarkably peaceful for Europe. But it had its dark side. The great powers exercised their might with little restraint within their spheres of influence. It was a century of colonial oppression. The weakness of the Chinese empire was cynically exploited: amongst other things the British used force to maintain the opium trade there; the death and destruction wrought in Belgian Congo is probably the biggest blot on a cynical century. And in the end the prevailing matter-of-factness about the use of warfare led to the European powers to drift into a catastrophic war in 1914.

After 30 years of war and an unstable interwar period, in 1945 the world moved into a different order: the Cold War. The Cold War resurrected the idea of realpolitik, but between just two great powers: the United States and the Soviet Union. And these powers projected their power within their respective spheres with an ideological slant: promising to promote peace and prosperity amongst their allies through their political philosophies. But the failure of the Soviet system to deliver its promises became so obvious that it collapsed from within in 1990. This ushered in the period of liberal diplomacy that now seems to be coming to an end. It was not without its success. Perhaps no period of 30 years in human history has seen so many people lifted from abject poverty – as the countries left behind in earlier phases of development took advantage of a peaceful, trade-friendly world (and ,some might say, the enlightenment of neoliberal economics).

What caused it to fail? I think there were two main problems. The first was that the United States, which emerged as a hegemonic power, became tempted to abuse its position. Many Americans felt that their country should use its massive military power impose its will in a manner more explicitly to favour its narrow interests. These were led by the Neo-Conservatives who gained influence in the presidency of George Bush from 2001 to 2008, and reached its apogee with the US invasion of Iraq in 2003. The Neocon strategy was dressed up in the language of spreading peace and democracy – but this convinced nobody. The feeding frenzy of US businesses following the invasion of Iraq was shocking. Other countries, especially Russia and China, resented what they saw as an abuse of raw power, and drew the lesson that they too should advance their interests by building military power.

But the election as US president in 2008 of Barack Obama might have saved the day. No US leader has been as faithful to the idea of liberal diplomacy. But by then it was too late. The financial crash of 2007-2008 had fatally undermined the authority of liberalism. The winning idea of liberalism was that it was the surest route to prosperity. That was how the US won the Cold War, after all. But after the crash, people lost confidence in it. The economies of the developed world stagnated. Amongst those who lost confidence were many American people themselves: Donald Trump won the presidential election by promising to go back to realpolitik. But authoritarians from Vladimir Putin to Recep Tayyip Erdogan, to say nothing of the Chinese Communist Party, saw that they had nothing to lose by pursuing an authoritarian path. And liberal diplomacy without the promise of economic prosperity simply looks like weakness.

So what happens next? The objective of the nascent Russian-led Syrian peace process looks to be first to persuade the Syrian Kurds to submit to the authority of the Syrian government. Russia no doubt also wants to wind down its presence. They also hope that the Sunni rebel groups will either submit or be crushed, except those allied to Turkey, who can expect some form of autonomy. That leaves the question of Islamic State, but the US will help with that. This way forward may bring an end to the civil war, but at a terrible cost. We had hoped for a less oppressive government – instead we will no doubt have to confer status onto one of the most vicious regimes in post-1945 history.

The main uncertainty in this new world of realpolitik is how the new US government will interpret its national interest. The main ideas that are emerging are: the identification of US interests with those of Israel, including a vigorous pursuit of Iran; renegotiation of trade deals to reduce access to US markets; the finishing off of Islamic State’s control of territory in Iraq and Syria; and some kind of engagement with Russia. This does not look particularly coherent, and neither does it look particularly rigorous in following the US national interest – so how it will play out in practice is anybody’s guess.

Meanwhile China will proceed to consolidate its influence in Asia as America reteats. Russia’s main aim for now is to weaken and lift the economic sanctions imposed on it. Russian leaders probably want to establish all the countries of the former Soviet Union in its sphere of influence – but just how far it will be prepared to go in that aim is moot.

But there is one key problem behind all this. The authoritarians taking over leadership of the world powers understand realpolitik and the consolidation of power. But they do not have an answer to economic prosperity. Each country, including Russia, Turkey and even China, is threatened by economic stagnation or worse. That fate also awaits the United States if Mr Trump prevails on protectionism and the Republican deficit hawks prevail on budget policy. That will undermine their authority in the long run, though no doubt the ruling elites will still prosper.

If liberalism, ethics and humanity is to return to world affairs, then its advocates need to show that it is the surest route to economic prosperity. Absent that, the world faces a grim prospect.

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9 thoughts on “Back to realpolitik: only the promise of prosperity will ensure the return of liberal diplomacy”

  1. I agree with the title. I also agree with the last sentence.

    “If liberalism, ethics and humanity is to return to world affairs, then its advocates need to show that it is the surest route to economic prosperity.”

    I also agree with much of what you write in between. I’d probably describe myself more of a leftish social -democrat type than a liberal. But we should share a belief in having a managed capitalism to minimise the social inequality that can result from laissez-faire capitalism, yet still retain the incentive that results in people working harder and risking more for greater personal reward.

    So if liberals go along, as they used to in the UK, with the idea of a managed capitalism and a mixed economy, isn’t it just a matter of getting back more control of the system and managing it better than it is? In other words government should govern and not expect the central bank alone to produce conditions of full employment. Or has the liberalism of the post war period morphed into the neo-liberalism of the early 21st century?

    In a previous comment I made the point that the “ruling elites”, as you term them, consider Keynesian economics ( and I don’t mean so-called New Keynesian) to be an emergency war time measure only. Many on the left expected that when WW2 ended it would be a re-run of the post WW1 period which produced economic stagnation in the UK. There was no “roaring 20’s” here. But instead we had growth and full employment. Sure, mistakes were made but was there any real need to throw the baby out with the bathwater in the 80’s ?

    In a way, post WW2 was still a wartime period. There was a cold war with the bad-guys lurking on the other side of a wall in Europe. The “ruling elites” had to be on their best behaviour to show theirs was the superior system. They are quite capable of showing a superior system when they want to! But as time passed and the cold war looked like it was won, and the Red menace didn’t seem quite so menacing any longer, it was soon their wish to get back to their bad old ways.

    That’s why the eurozone is in such a mess, and why, albeit indirectly, we’ve just voted for Brexit, and why Mr Trump has just been elected President of the USA. Then I could go on and and add that Marine le Pen will likely do very well next year!

    Isn’t the path to prosperity just so obvious? That’s not to say there aren’t going to be wars and other problems. We’ve always had them. It’s not going to be Utopia. The world faces severe environmental problems and real resource limitations in the coming decades. But they haven’t really started yet. And, if we can’t manage our economies properly when we still are largely unaffected by them, what hope will there be when we are?

    1. I will grant you Peter that it is possible that a more aggressive management of fiscal policy could unlock a one-time bonus, cutting unemployment and, if it is particularly cleverly designed, in conjunction with other policies that we haven’t devised yet, it could reduce underemployment and increase working class pay too. Though if we get this wrong Britain would join a long list of economic basket cases that let government spending get out of hand (I’m thinking South America especially here – Argentina, Brazil, Ecuador…).
      And even the old masters that you like to quote would admit that ultimately the health of the economy depends on its capacity – and here there are now big headwinds, especially in the developed world. The ratio of working aid age population is falling; gains from trade are going into reverse; technology is not producing the right types of product; too many big businesses can protect fat margins. This means that in order to lift economic welfare (which I still think is perfectly feasible) you need a bit more of a fundamental rethink about how to manage the economy. I think that has been the main difference between us from the start of our conversations. You say: it’s demand, stupid! I say: we are bumping into more difficult problems.

      1. Just a quick one on South America. The South Americans are far too fond of American dollars and need to work on the improving their own currencies and own economies. They should have more confidence in their own currencies. They aren’t as bad as they used to be, perhaps, when they didn’t bother to collect taxes on time and had huge rates of domestic inflation. Anyone with a tax bill could just sit on it until inflation had whittled it down to next to nothing.

        Except Ecuador. They have so little faith in their own ability as a currency issuer they use the American dollar for everything. I’m not sure if that is better or worse than the EU countries having to use the euro. It really makes no sense to use someone else’s currency. The Canadians know this. That’s why they have their own dollar.

        1. Well I will grant that brazil has made great strides: they are still in a whole lot of trouble, but their currency remains largely functional. But if I was selling a Brazilian anything, I would demand to be paid in something more solid than BRL. I don’t know the background to Ecuador, but it is quite remarkable, but they have had quite a strong government in recent years, and it is quite remarkable that they have stuck with the dollar. It must be very popular with the Ecuadorian public. But running an economy on USD must be a nightmare – for example the latest surge; must be worse than a European economy using the Euro. The ability to use your own currency depends on confidence, which in turn depends on institutions. By and large European institutions (and Canadian ones) are much stronger than those in S America. But doing away with central bank independence and running a big twin deficit (budget and external) would out those institutions under major pressure.

  2. But if I was selling a Brazilian anything, I would demand to be paid in something more solid than BRL

    But you wouldn’t though, would you? Inflation in Brazil is running at 7% . That’s relative high by recent standards in Europe and the UK , but its not high enough for you to have to worry about your cheque losing value before you put it into the bank. Maybe the bank would pay you 10% interest on those Reals so you’d have to make a decision on whether to keep you money in Reals or switch to some other currency.

    Even if you wanted to end up with US$ it wouldn’t do your relationship much good with your Brazilian customer to demand he pay you in dollars. Much better to let him choose his own currency and then you can switch to whatever you like later and factor in the forex conversion charges into your quote.

    1. It’s about friction. Being paid in your own currency is frictionless. after that you would prefer to be paid in one of the more liquid currencies where the cost of conversion (and other risks) are low. If I take BRL payment then the transaction costs sit with me. If my client pays GBP the transaction costs stay with him. If we settle in USD we share (as transaction costs overall will be lowest for USD). I am very unlikely to want to hold BRL, and keep a BRL bank account, unless I mean to invest in Brazil. That means I will not benefit from BRL interest rates – the intermediaries snaffle all of that. Liquidity is the key especially in larger amounts.

      1. Actually a bigger issue is that big business is done on credit, for which no interest is charged. A BRL asset in your balance sheet not earning interest and subject to exchange rate fluctuations that you don’t understand, and maybe the arbitrary implementation of capital controls. You don’t want that. BRL paid in advance would clearly be more acceptable, but the client would probably prefer to be billed in GBP.

  3. But doing away with central bank independence and running a big twin deficit (budget and external) would out those institutions under major pressure.

    The idea of central bank independence is a fiction. If anyone really believed it before 2008 and the later rounds of QE I doubt they do now. Like the BoE independently decided to buy up £375 billion of bonds? I don’t think so. So it really wouldn’t make any difference at all if the Treasury said it was in control. It would be just formalising what everyone knows anyway.

    The conventional view is that Government decides of its own volition to run a deficit or a surplus. That’s not the case. The government’s budget position depends on what everyone is doing. And, yes, what everyone else is doing depends on what government does. So if the Govt cuts spending and raises taxes the economy slows down, and the Govt’s revenue is reduced.

    A better way of looking at it is to look at what everyone else wants to save. Everyone else includes our overseas trading partners and if they want to save, by running a trade surplus, ie spending less than they earn, then the government has to be in deficit.

    If the government tries to fight that, they’ll only succeed in slowing the economy down even further which probably won’t do much for a reduced deficit. If they really want to reduce their deficit they have to somehow persuade everyone else to save less.

    So a high twin deficit is simply a sign that everyone else is saving. Its not putting the government under any pressure at all. The so-called independence of the CB is quite irrelevant.

    1. My point is that in a world of free capital flows, confidence is a key ingredient if you want foreigners to buy your government bonds, directly or indirectly. This is as much theatre as economic reality – central banks have been an important part of that theatre. It may be perfectly healthy that a country is running a twin deficit – but equally it could point to poor economic prospects. It depends on why the level of private saving is high; this might arise from poor confidence in the country’s prospects and an expectation that income will fall. The state’s ability to create its own money to many poses the threat of inflation or inflated asset values.

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