by Adam Tooze
With trillions of dollars at stake and markets feverishly trying to second-guess the Fed’s policy, was Bill Gross’s pastoral image not wishful thinking? Rather than a herd grazing contentedly, to the Financial Times it seemed that relations between the markets and the Fed were increasingly coming to resemble the contorted psychodrama of a rocky marriage. Investors might take Gross’s advice and “practice believing that central banks love me.” But the refrain hid deep tensions and uncertainties. For the past five years, under the influence of massive Fed stimulus, investor strategies had come to resemble one another, leaving them to second-guess themselves, one another and the central bank: “What are you thinking? What are you feeling? What have we done to each other? What will we do?—a refrain equally applicable to a concerned policy maker as a nervous husband. . . . The whole thing reeks of a marriage built on shaky foundations.”42 At any given moment the balance might be upset by a shift in policy or a market mood swing. The consequences for the entire global economy would be “deeply unpredictable.”43
IV
“I will practice believing that the Fed loves me” was also the prescription that foreign central bankers would have to follow. The decision not to halt QE3 eased pressure on emerging markets. India’s rupee, which had been hardest hit by the taper tantrum, rebounded from 68 to the dollar to 61.9 to the dollar in early October.44 Indonesia’s currency stopped its precipitous slide. This was a relief. But Rajan and his colleagues would have to believe that the Fed bore them in mind despite the fact that Congress jealously watched over the Fed’s exclusively American mandate and despite the fact that the Fed had made its decision while ostentatiously flaunting its indifference to the rest of the world. All the more significant was what the Fed did behind the scenes. On October 31, 2013, in the weeks following the September taper pullback and the congressional budget standoff, the Fed, the ECB, the Bank of Japan, the Bank of England, the Bank of Canada and the Swiss National Bank made a low-key, joint announcement:
“[T]heir existing temporary bilateral liquidity swap arrangements are being converted to standing arrangements, that is, arrangements that will remain in place until further notice. The standing arrangements will constitute a network of bilateral swap lines among the six central banks. These arrangements allow for the provision of liquidity in each jurisdiction in any of the five currencies foreign to that jurisdiction, should the two central banks in a particular bilateral swap arrangement judge that market conditions warrant such action in one of their currencies. The existing temporary swap arrangements have helped to ease strains in financial markets and mitigate their effects on economic conditions. The standing arrangements will continue to serve as a prudent liquidity backstop.”45
The swap lines that had been so crucial to stabilizing global financial markets and which had been uncapped in October 2008 were now being established on a permanent basis.46 As in 2008, this network had limits. None of the most fragile emerging markets were included in the inner core of the Fed’s swap network. But they were not left out in the cold either. What began to take shape were regional subnetworks. These were uneven. There was nothing of note around the core European central banks. But in Asia the central banks were more active. In September 2013, as anxiety about the Fed’s tapering rose to a crescendo, India negotiated an increase in its existing swap line arrangement with Japan from $10 billion to $50 billion. In December Japan doubled the swap line facilities it offered to Indonesia and the Philippines and announced that it would be looking to negotiate similar bargains with Singapore, Thailand and Malaysia.47 Japan’s enormous reserve holdings of dollar assets, second only to those of China’s, gave it the means to offer such facilities. And in the event of a crisis, the Bank of Japan could always draw on the Fed. Thus dollar liquidity would percolate out through the entire system.
As in 2008–2009, in 2013 the public bluster about the need for a new monetary order and a “de-Americanized world” distracted from the reality that a powerful new network of liquidity provision was being rolled out across the world economy. The swap-lines story stayed buried on the interior pages of the Financial Times and the Wall Street Journal.48 There was no fanfare, no new Bretton Woods Conference. There was also no congressional or parliamentary approval. These were administrative measures. But they were also far more than that. Five years on from the crisis, while markets remained unsettled and the American political system was racked by dissension, the global dollar system was being given a new and unprecedentedly expansive foundation.
About the technical efficacy of the swap lines there was little doubt. Their political legitimacy was a different matter. And in the autumn of 2013 one couldn’t help thinking of another of America’s technical systems of power that had been revealed earlier that year: the NSA’s electronic surveillance network.49 The network that Edward Snowden exposed in early June also centered on US power and technological capacity. It too was no American monolith. Like the Fed, the NSA worked through local agencies. It too promised to provide a blanket of security for the United States and its allies. Of course spying and exchanging currencies were not the same things. But they did have in common that their functional power and administrative efficacy were not matched by anything resembling public political authorization. They were testimony, at one and the same time, to the continuing significance of US global power and the difficulty in justifying that power in public either in the United States or in the countries whose governments and business interests were enrolled in America’s network.
Chapter 21
“F*** THE EU”: THE UKRAINE CRISIS
Before 2008 the driver of crisis was expected to be the balance of financial terror between the United States and China. A huge unwinding of the global disequilibrium centered on China and America and driven by profound domestic imbalances in each of them would, it was feared, rock American power to its foundations. In 2008 the expansion of the EU and NATO in the face of Russian opposition had added another dimension of risk. Georgia and Russia had clashed and Moscow had approached Beijing to mount a joint attack on America’s fragile finances. Beijing had held back. There was no great dollar selloff. The geoeconomic course of the crisis took an unexpected and innovative direction. The Fed’s liquidity swap lines stabilized the dollar-based financial system. In November 2008 the upgrading of the G20 had added a global leadership forum and this had been important in legitimizing the dramatic expansion of IMF resources in 2009. This backstopped the IMF’s urgent engagement in Eastern Europe. A year later, remarkably, the IMF would find itself committing hundreds of billions of dollars to rescuing the eurozone. At the same time, the United States was aggressively pushing a new system of regulation for global banking through the normally slow-moving Basel Committee.
In 2008 and 2009 Washington kept ahead of the geoeconomic challenges unleashed by the crisis. Could it stay on pace? In May 2010 the Obama administration and the IMF were crucial to forcing the Europeans toward the first fix for the eurozone. But then things began to get sticky. November 2010 was a turning point. The Democrats lost control of Congress. The recovery was so lame and the fiscal impasse so threatening that the Fed launched its cautious second wave of QE, to be met with violent opposition at the G20 meeting in Seoul. But carping at the G20 was one thing. When it came to chaperoning the Europeans through the near disaster of 2011 and 2012 it was obvious that only the Obama administration could serve as a counterbalance to Germany. Obama was right. At least as far as Europe was concerned, the United States as an “inside outside” arbiter was indispensable. But with the stabilization of Europe and the beginning of the second Obama administration, the questions of the Bush era returned.1 Should Washington maintain its massive global footprint? Could it safely withdraw? Would either internal constraints or external pressures allow this to be decided as a matter of deliberate choice? Would it be an orderly retreat, leaving a legacy of stability, or would it be a disorderly rout?
I
Impelled as s
he was by the energy and sense of mission that descended from the 1990s as well as her own ambitions for the presidency, Hillary Clinton, as secretary of state, was in the proactive camp. In the autumn of 2011, as it finalized the pullout from Iraq, Clinton’s State Department tried to get back on the front foot. The “pivot to Asia” was its new initiative.2 In military terms this consisted of the redeployment of a carrier battle group to the Pacific. In economic terms it axed on the Trans-Pacific Partnership (TPP). As Europe slid deeper into crisis in 2011, the US Treasury and trade representative pressured Canada and Mexico to join them in a wide-ranging trade and investment treaty with the leading economies of Asia, not including China. The aim was not to face China down, let alone to stop its economic growth. Everyone had too much to gain. The aim was to establish a bloc strong enough to offer a counterweight to China’s rising strength. It was, as one of Hillary Clinton’s indiscreet correspondents dubbed it, a “de facto China containment alliance.”3
Back to 1947 containment was the glue that held together the powerful alliance network that the United States had constructed in Western Europe and East Asia. That alliance system massively extended America’s reach. It was the grounds on which committed liberal internationalists defended the idea that America remained a hegemonic force.4 But it also exposed the United States to risk. Containment could be given different shadings, and those depended as much on America’s allies as on any decision in Washington. The allies had their own politics and their own economic problems. Their enrollment in America’s sphere, whether through finance, trade or security policy, excited those interests further. From Beijing’s point of view, America’s Asian pivot took on a distinctly darker coloration with the election in December 2012 of the nationalist politician Shinzo Abe as the Japanese prime minister. Abe was deeply concerned about China’s power. He was unabashed in his support for a stronger and more independent Japanese military. And he was also willing to override domestic economic interests for the sake of strategic cooperation with the United States. He was even willing to sacrifice Japan’s rice farmers to make his country into a key pillar of TPP.5 If he was willing to do that, what else might he do? By 2014 there was talk of a war scare between Japan and China.
Corralling South Korea, Australia, Japan and Vietnam into the American geoeconomic alliance system was, if anything, too easy. Their interest in containing China was obvious. The risk was that America’s new engagement with Asia would harden positions and trigger regional clashes, which were not in America’s interests. That was not the case with the Europeans. But by the same token, their enrollment in the project of containing China was less reliable. The EU was deeply interested in Chinese trade and investment. Germany wanted to sell cars and engineering equipment. When they tired of the endless battles in the eurozone, Berlin’s policy elite liked to fantasize about a global future in partnership with Beijing.6 The City of London was angling for a special position in the internationalization of the RMB.7 Nor were the Americans the only ones pursuing an expansive geoeconomic strategy.
In October 2013, on his way to the APEC meeting in Bali, President Xi Jinping announced China’s new investment bank proposal. It was a bold multilateral initiative to upgrade Asia’s infrastructure. Everyone was invited to join. It was a leaf straight out of America’s own playbook, and Washington did not like it. The Obama administration let it be known that it did not approve the Chinese initiative, and South Korea, Japan and Australia promptly fell into line.8 But the UK, which was doing everything possible to court Chinese business, took up the offer from Beijing to become a founding member of the Asian Infrastructure Investment Bank.9 Washington was furious.10 London had made its decision, a State Department official let it be known, without prior consultation. America did not approve the “trend toward constant accommodation of China, which is not the best way to engage a rising power.”11 But London wasn’t listening, nor were the other Europeans who promptly signed up too. Asked about US opposition, one British official commented wryly that it must be difficult for the Obama administration to conduct international economic policy under current political conditions. If Congress wouldn’t approve a tiny increase in China’s IMF quota, what was to be expected on trade and investment? “They couldn’t have got congressional approval to join the AIIB, even if they wanted to.”12 Indeed, thanks to the congressional shutdown, Obama was prevented from attending APEC’s Bali meeting. America’s domestic political problems were spilling over into the conduct of global strategy and the world was not going to wait.
Given the stresses that the United States was evidently under, it might have made sense to invert Kissinger’s famous move in the 1970s and to seek a closer relationship with Russia as part of the effort to contain China. It is unclear whether Washington was ever willing to take Russia seriously as a strategic partner, at the level even of Japan or Saudi Arabia.13 In 2009 the Obama administration did set out to build better relations. With Medvedev as president, the “reset” seemed promising. To promote his modernizing agenda, Medvedev was invited to tour Silicon Valley in the company of Governor Schwarzenegger.14 Russian business eagerly seized the opportunities offered by cheap dollar funding. In 2011 Medvedev was compliant over NATO’s intervention in Libya, so much so that it provoked a counterreaction in Moscow. Putin, biding his time in the number two position as prime minister watching footage of Gaddafi’s horrible fate, became morbidly preoccupied. The same Western powers that had shamelessly courted the Libyan dictator had turned on him, bombing his military and delivering him to the vengeful mob. One would be a fool to trust them. Medvedev’s appeasement would only invite further aggression. Putin would have to take back control. This decision was only confirmed when Moscow erupted in protests over the winter of 2011–2012 following rigged parliamentary elections. Clinton barely disguised her enthusiasm for regime change. Instead of reset and détente, Putin returned to the presidency in 2012 with new determination. In opposition to the liberalism of the Obama administration, the Kremlin donned the garb of conservative cultural nationalism. Gay rights, feminist pop provocateurs and the Greek yogurt rations for America’s Olympic athletes all got sucked into a postmodern rerun of the cold war.15
It was certainly not the balancing against China that one might have expected. But nor was it the Americans who brought about the open crisis in relations between Russia and the West. It was America’s most important ally, the Europeans. The EU would later claim that it “sleepwalked” into the Ukraine crisis. This was part of a piece with its guileless insistence that “the EU does not do geopolitics.”16 That perhaps described the naïveté of some officials in Brussels, but it never really rang true. It would be fairer to say that European nation-states did not agree on the geopolitics they were pursuing by way of the EU. France and Berlin loved the détente with Moscow. Poland and Sweden did not. With active support from NATO, the “new Europeans” championed the EU’s Eastern Partnership with the post-Soviet states. It was no secret in Warsaw or Riga that this, like TPP, was a “de facto containment” policy. As far as Poland was concerned, the priority was clear. In the words of President Bronislaw Komorowski: “Never again do we want to have a common border with Russia.”17
The instruments of the EU’s Eastern Partnership were EU Association Agreements. These were complex documents harmonizing regulations, liberalizing trade and the movement of workers. The agreement with Ukraine, initialed in 2012, was hailed as the most extensive agreement ever completed with a non-EU member. It ran to 1,200 pages of technical detail, subdivided into the twenty-eight separate subsections of the acquis communautaire.18 Trade and business regulations were the main focus of the Association Agreements, but they were not innocent with regard to security policy. Article 4 of the Ukraine Association Agreement called for “political dialogue in all areas of mutual interest. . . . This will promote gradual convergence on foreign and security matters with the aim of Ukraine’s ever-deeper involvement in the European security area.”19 Article 7 provided for
“EU-Ukrainian convergence in foreign affairs, security and defence.” Under Article 10 on “Conflict prevention, crisis management and military–technological cooperation,” Ukraine and the EU were to “explore the potential of military and technological cooperation. Ukraine and the European Defence Agency (EDA) will establish close contacts to discuss military capability improvement, including technological issues.”20
By 2013 talks with Ukraine were the most advanced. But the EU’s Eastern Partnership negotiations proceeded on a broad front. At a summit conference in Vilnius on November 29–30, 2013, Brussels was hoping not only to sign the Association Agreement with Ukraine but to initial agreements with Moldova, Georgia and Armenia. Brussels had also been negotiating with Belarus.21 After incorporating the Baltics and the East European Warsaw Pact in the early 2000s, Brussels was now seeking to deepen and transform its relations with the rest of what had once been the western Soviet Union. It was undeniably a major shift in international relations and it was all the more significant for the fact that it clashed directly with Russia’s ambitions for the region. Since 2011 Russia had been developing its Eurasian Customs Union into a more comprehensive Eurasian Economic Union. It was clearly intended as an alternative to the EU’s Eastern Partnership. The details of its agreements were far less onerous than those demanded by the EU. But they meant entering into a lopsided relationship with Russia, and the customs union included setting a common external tariff. This was incompatible with the EU Association Agreement.