Countries Have to Choose Between U.S. and China Says Blackrock

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The massive finance firm Blackrock says there will be “de-globalization” and intensifying rivalry between the U.S. and China no matter who wins the November elections. Heiner Flassbeck says Europe cannot agree to take sides, on theAnalysis.news podcast with Paul Jay.

Transcript

Paul Jay
I’m Paul Jay and welcome to theAnalysis.news podcast.
With millions still unemployed in the United States and COVID cases spiking across the country, it’s going to take some time before the economy returns to whatever normal is going to look like. The American government’s extension of unemployment payments ends at the end of July, and the Republicans are complaining that workers would rather sit at home with their government checks than try to go to work. In other words, risk their lives to get the economy going – while the investor class with the Fed support cashes in no matter what. Europe and Germany have been praised for finally coming around to the need for government stimulus during a recession. The German investor class has made austerity practically a religion; but is its current stimulus actually such a big break with the past? How long will this revolution in policy, as the massive finance company BlackRock calls it, last? Talking about stimulus funds, the pandemic is far from over, yet there is already talk of inflation down the line and eventually the need for austerity. Now joining us is Heiner Flassbeck. He became the state secretary, vice-minister of the federal German Ministry of Finance from 1998 to 1999, where he was responsible for international affairs, the EEU and relations with the IMF. Flassbeck worked for the United Nations agency UNCTAD in Geneva from 2000 on and from 2003 to 2012 he was the director of the Division on Globalization and Development Strategies. Since January 2013, Heiner has been director of Flassbeck Economics, a consultancy for global macroeconomic questions. Thanks so much for joining us, Heiner.

Heiner Flassbeck Thanks for inviting me.

Paul Jay: So what city are you in? Where are you today?
Heiner Flassbeck: I’m in Geneva, and France soon.

Paul Jay
Let’s start with Europe and then we’ll move to the United States. Germany and most of the other European countries that have the capacity to do so have put, what we read about in the newspapers at the very least, significant amounts of stimulus money directly into the economy. We’re told Germany has done something significant. How do you rate how the governments’ central banks of Europe, particularly Germany, are dealing with the crisis?

Heiner Flassbeck
Well, first round the institutions, the government, the central bank, and the European central bank, seem to have understood how dangerous this crisis is so they reacted immediately. They reacted with huge sums of money that they put on the table. But the very open question is now, how deep is the crisis? And more critical than that, how quickly would Europe and Germany get out of this crisis? And there is a lot of uncertainty around this. We have seen the biggest shock ever in economic history since the wars at least, and that was clearly a government-made shock. So it was an intentional shock, it was not coming from the economy, it came from the government. And the first idea was that the government would, so to say, create a scenario of a long vacation. We all will have two months of vacation, more or less, and then we go back to work on the first of September every year.
But this has not played out because the unemployment check was too big and the compensation that the government gave all of Europe, including Germany, was too little and too small. So that even in Germany, we have something like nine million people who are directly affected by the economic fallout of the crisis of the Corona shock, and this is quite something. This is 20% of the whole employed population. And if you shock so many people and they are living in uncertainty – and many of them are living at 60% or something like that of their former pay – then it’s absolutely clear that you cannot immediately get out of this crisis, once the direct threat of the pandemic is over. So the point is that we have all of Europes’ quick reaction, but the quick reaction may not be big enough because we do not have clear calculations of what the second quarter was, but the calculations in the second quarter go up to a minus of 10%. And if it is 10% and the recovery is not immediate and quick after that, then the government programs indeed are too small.

Paul Jay
So give us some of the numbers. What has Germany done and what do you think they should do now?
Heiner Flassbeck
Well, the numbers sound quite impressive – Germany has an increase in the government deficit of something like 200 billion. But we’re talking about a total economic loss of, maybe something, like four hundred billion. So this number gives you an idea that the reaction may be too small. And in Germany in particular, we have a special problem, which is not the same in the other European countries. Germany has this extremely huge surplus on the current account up to the very last moment before this crisis. And we see now that the exports are dropping like a stone. The German exports are down from the year before in April, and in May, by something like 30%, which means that this is an additional shock that comes with the domestic shock. So my calculation for Germany is that we get overall a drop in the GDP of something like at least 10%, maybe a bit more, for the year as a whole.

Paul Jay
In your article, on your website, you talk about how the German auto industry, which is particularly important for the German economy, both domestically and in terms of exports, is also particularly vulnerable. And this may be a somewhat structural vulnerability.

Heiner Flassbeck
Right, Germany has a structural problem, which is that the export sector is much too big for the size of the economy. We have an export share in our GDP of something a bit more than 45%, imagine. So Germany is extremely dependent on exports and in particular automobiles and machines. And what we see now, the pattern of recovery is that the people are going out and spending on smaller items. For the bigger items like automobiles or for the company’s investment goods, the demand is not yet there. So Germany’s strength before the crisis can easily turn into its fundamental weakness, after the crisis.

Paul Jay
How do you rate how the United States has done in terms of the policy and response to the crisis?
Heiner Flassbeck
Well, one of the main problems, in my view, is that in the United States, you have plain unemployment in the first round. In Germany and other European countries that followed Germany in that respect, we have a scheme that is called short-time work, which is not exactly the same as unemployment, but it may be also unemployment. But in the first round, people are less scared by this short time work because they’re still on the job. They’re not fired, they’re still on the job. They have a right to return as soon as the company does better, and as soon as the scheme is over, and so this situation is a bit different than in the United States. In the United States, I think the biggest shock was the enormous numbers of unemployed people that we have seen. The number of registrations for unemployment compensation was absolutely dramatic. And I think this sent shockwaves through the whole economy, and the government, obviously, is not able to respond. The first reaction was also okay, but I haven’t seen any consistent plan for what is happening in the United States if the recovery does not come as most people expect.

Paul Jay
Well, every indication is that it’s not going to, for much of the country. California is under lockdown again. Texas, Florida, some very major states, and New York are a little better off. But now they’re talking about how does New York keep its numbers low when so much else of the country is spiking? There is so much travel to New York with people leaving and coming back and people visiting. And then they hit the fall and it gets cold in winter and people head inside. You know, the second wave is what people are talking about, or even just a more intense period of the first wave. It’s hard to see that the United States, given how chaotic everything is, there, is going to be able to make much of a recovery soon. But ironically, I don’t know if ironically is the right word, China actually does seem to be making a significant recovery and the economy seems to be opening up significantly. Well, I guess we’ll see if there’s any significant new spiking there. But if China does stay on this course of
reopening and the economy gets stronger while the American economy continues to be mostly closed and in trouble, what does that mean geopolitically? And let me read you something. BlackRock, the big asset management company – something like seven trillion dollars under management – has probably become the most influential financial company in the world, including managing some of this bailout money that the Fed has given mostly to prop up the stock market. But let me read you something in their report that just came out. This is a sentence where they say, “the world is increasingly becoming bifurcated with the U.S. and China at opposite poles. Intense rivalry looks set to affect nearly every dimension of the U.S. China relationship, regardless of the U.S. election outcome. Other countries will increasingly be pushed to choose sides”. It’s very interesting. They also use the word de-globalization because, they’re saying, these global supply chains have proved to be so unreliable at times like this pandemic. So given this U.S. China rivalry, how is this going to affect Europe, especially if the American economy is really in the doldrums, as a purchaser, say, of German cars and goods, and China becomes a stronger purchaser of machinery and perhaps cars and other things? What does that mean to the geopolitics?

Heiner Flassbeck
Well, that is definitely meaning a big change. I’m hesitating for the moment to use the word de-globalization. What we see actually is de-globalization, but it’s not systematic de-globalization driven by policy. It’s by chance that we have de-globalization at this moment. Whether it will come back in the old way is an open question. The crucial point in all that is how are governments able and willing to respond? And if I mean respond, I do not mean only the first three months of response, but I mean the next two years or five or ten years. This will be absolutely crucial and will decide about the strengths of Europe compared to the U.S. or China. And let me explain that for a minute. The point is that the U. S., with the election coming up, is obviously unable to react very strongly and effectively at this moment. Europe has reacted to a certain extent, but there is a lot of infighting, a lot of horse-trading now, about this seven hundred billion that was promised to be paid to the most affected regions. So now they’re discussing what is the most effective regions. But the crucial thing is, as you said at the beginning, they already talk about austerity policies later, about inflation dangers later and so on. So there is a great uncertainty about European politics, nearly as big as in the United States. Because many people in Europe have not understood what this shock really means and how to live with it over the years. Just yesterday there was a letter from the Bank of France to the president of France saying, well, we have to cut down everything from the government expenses, beginning in 2022 already. And these same voices you hear in Germany, and that is extremely dangerous. We will not come out of this crisis like a Phoenix from the ashes, we will come out in a very dirty and slow way. So the governments must understand – and the new government in the U.S. hopefully also understands – that it is their job to push the economy further on. There is no market. We had many interviews in the past, Paul, and I always told you that we have a fundamentally changed world. There is no locomotive on the company side anymore as it was 20-30 years ago after the Second World War. No, the companies are not savers, they are blocking the economy instead of pushing it, and the result is BlackRock. These are the people that are administering the money, but the money is useless. All this saving of money is useless if it is not put into machinery and equipment and infrastructure. And this has to be done by the government, and if the governments are not willing to do it, they will fail, and I’m sure China will be willing to do it. You see, this is the big difference: in the last ten years, even the U.S. was more willing to do it than Europe. Now it’s a very open question whether the US will have a functioning government at all, I’m not sure. But in Europe, the biggest problem is to overcome the prejudices about government debt and the perceived dangers of government debt. This is the biggest stumbling block for Europe. And so the cards were definitely new. The cards will be on the table and China will come out of this crisis stronger than ever before. That’s a fact of life and we have to live with it. China will be the strongest economy in the world in 10 years, and nobody can do anything against it. Instead, it is absolutely a reason to cooperate with the Chinese and to try to make the best of this fact and not to go into infighting like the UK now does with whoever.

Paul Jay
I don’t think anyone can accuse the United States of being reasonable about the decline of their empire. So I wouldn’t expect much reasonableness about it. Here’s a little more of that memo from BlackRock, after they say ‘other countries will increasingly be pushed to choose sides between the US and China’, it goes on to say, ‘Decoupling,’ which they mean decoupling the US and Chinese economies, ‘is focused on but not limited to the technology sector. This means investors need exposure to both markets, which, of course, is how they always play. They invest in China and the US and see if they can take advantage of the rivalry. ‘This means investors need exposure to both markets, especially since the center of gravity of global growth is moving to Asia, as the shifting center of gravity chart shows’, and they have a chart here. ‘Second, the pandemic is poised to accelerate de-globalization as it magnifies nationalist and protectionist trends. The crisis adds to existing pressures such as global trade tensions and populism [a totally misused word, because anything that isn’t politics under their control, they call “populism.”] ‘This threatens to disrupt the web of global supply chains at the expense of efficiency. It may lead to ensuring the production of strategic goods’. So they’re painting a very dangerous picture of a very intense U.S. /China rivalry and the rise of nationalism and protectionism. And, of course, that’s always been a very serious trend in Europe that has led to fascism. So what do you see in terms of how this might affect European politics?

Heiner Flassbeck
Well, in Europe the biggest danger is still the return of nationalism. We had the Euro crisis, we have now the Corona crisis, which is much bigger than the Euro crisis. If Europe is not able to find common ground on economic policy, as I said before, and the common ground must be that the role of the government is much, much stronger than ever in Europe than before. If they do not find that common ground and end up fighting all the time about the right way out of this crisis, then I think Europe does not have a future. Then there are nationalist tendencies that will come up in Germany as well as in Italy. This is the funny thing: that on both sides we will have rising nationalism and how long Europe is going to survive that is a very open question. You see, the tensions in Europe are very strong: up to four weeks ago or so, the French president came out with an interview with the Financial Times where he was extremely critical of Germany. And he said, we are missing an historic chance, and Germany has not understood what is at stake and so on. And in response to that, Madame Merkel and Macron joined forces, obviously pushed by the diplomats on both sides. And so they threw a lot of money into the game, first $500 billion, now $750 billion going through the European Commission, which will distribute that money. And the negotiations about this distribution are now underway and this weekend will be crucial. But this is not the way to do it. The right way to do it would have been for Europe from the very beginning of this crisis, as in other countries, as in the United States, that the central bank is obviously financing a large part of the government funds that are used to fight the crisis. And that should have been an open discussion in Europe. But it is a taboo. The central bank is not allowed to finance the government. But this is stupid. If from the very beginning, the European Central Bank would have said we are financing Italy as well as we are financing Germany, then every country could have done what is absolutely necessary to fight this Corona shock. Now, as I said, there’s a lot of horse-trading and this horse-trading may go on for another three months. And this will really disturb the European mood that was brought up by Merkel and Macron for a minute. And there is not really a strategic plan of Europe to this crisis. People are sticking to the old treaties, the Maastricht Treaty, that lays down all these silly things that I’m talking about: that the central bank is not allowed to finance the government, even in such a situation that the limits to government debt are clearly set at 60% of GDP, which is just really stupid after this crisis because we will all be far beyond this. France will be at 120%, Germany will be at 100%, Italy will be at 160%. So it’s absolutely crazy to talk about returning to something like 60%. And I do not see at the moment that there is a leader in Europe who could jump over this and say, no, we need a new game, a totally new view of the world, to regain European strength. And that is why, in my view, Europe will be weak and the U.S., also, I think – whoever becomes president – will also be weak for a long time.

Paul Jay
Let me read this sentence again from the BlackRock document, “The world is increasingly becoming bifurcated with the US and China at opposite poles. Intense rivalry looks set to affect nearly every dimension of U.S./China relationship”, and goes on to say, and this is important, “regardless of the U.S. election outcome.” And one can see that now. Biden’s rhetoric on China, if anything, he’s trying to be even more militant or aggressive in his rhetoric about China. And it says, again, “other countries will increasingly be pushed to choose sides.” So if the Americans put even more pressure on Europe to side with the U.S. in this rivalry with China, but as you said, China’s actually going to have a stronger economy in a decade, then it doesn’t serve Europe very well to side with the declining U.S. against China.

Heiner Flassbeck
That’s right, that’s absolutely right. If I have to recommend a policy, I would always say keep good relations with China and try and hope for a better president in the United States. So be strategic on China, because you can be rather sure that the party line will be stable and concise for many, many years, whoever is president. So that is right, and don’t forget the German economy, the French economy, the Italian economy, they’re all heavily engaged in China. They cannot afford to give up China and take sides with the United States. That would be extremely costly.

Paul Jay
About how big a market is China for Germany?

Heiner Flassbeck
Well, it’s not a big market as such. Their direct export-import is not too much, but the production of German companies in China is remarkable. And the production of French companies in China for the world market is important. So this is more important than the direct trade relations.

Paul Jay
So this idea of decoupling is not something Europe is going to be very interested in?

Heiner Flassbeck
No, no, there is no decoupling, and that’s even true for the United States. China is the big production hub of the whole world, and you cannot suddenly cut the relationship to this hub. It’s the hub of all of us, of all countries, and to say we don’t want China anymore. Well, it’s too late, I can only say it’s too late. Thirty years ago, you could have said that. But to say it today is really stupid. And what can you do, find compromises with China? It’s not an irresponsible government there. They have their interests, their local interests, as everybody has, and you have to deal with them. You have to deal with Taiwan. You have to deal with the South China Sea and so on. But try to find compromises. The country is willing to compromise. There’s no question about it. It’s not as strict as the United States in many respects, where there is no compromise at all. It’s a different country and a different approach. It’s an Asian approach, which means talk to the people and try to convince them.

Paul Jay
We know Trump just announced that the United States won’t recognize any sovereignty of China over the South China Sea whatsoever as recognizing some of the rights of the Philippines and some of the other countries there. I mean, it’s clearly done in the most provocative of ways, and Steve Bannon, who’s apparently still in Trump’s ear, has openly advocated a military confrontation in the South China Sea and actually pushed the Chinese when they passed this enormous new military budget – over a trillion. When the Secretary of Defense was asked in Congress to justify the reasons for such a large budget, his answer was, “There are three reasons: China, China and China.” For the Pentagon, the whole approach is preparing for war. I don’t know how serious they are about it because it would be crazy, but this would not be the first war that’s crazy that gets waged.

Heiner Flassbeck
It’s absolutely crazy, but it would be the craziest one. You see, if you look at the history of China, China has never been an imperialistic power. China has always defended its home country and what it perceived to be its territory, its people. This is the China approach, it’s not an approach of going out and conquering other countries or other regions.
Paul Jay
Well, that’s not quite right because although they have not gone out militarily, and that’s been their tradition, they’re really competitive commercially. And, you know, in Latin America, I think in Brazil, China’s actually a bigger trading partner than the United States, and that’s through the number one or number two trading partner all through Latin America. And certainly in Africa, China has stronger relationships than the United States in many countries. I mean, China really is a global power, even if
it’s not a global military power.

Heiner Flassbeck
But we’re talking about the military power at this moment. No. That’s absolutely right. But don’t forget, China is so strong – that is what I said before – China is so strong because so many Western companies are producing there. Not everything is originally from China. What comes from China is to a large part our products produced in China. That’s a different thing. I do not have the latest number, but up to 10 years ago, when I was at UNCTAD and we were discussing these things very intensively, it was absolutely clear that Chinese exports consisted at that time of 60-70% of exports from affiliates of Western firms in China, not originally Chinese exports. But it’s absolutely clear also that if a country that is so big – and it has had 30 years of enormous growth which we have taught them – didn’t we tell them the market is a good thing? – so they have 30 years of extraordinary growth -the biggest growth story and success story of all times, then it’s absolutely clear this country is becoming rich and has the means and it will use the means to go out. We have been in China all the time, but now they’re coming out, but the coming out is still small compared to what is in China.

Paul Jay
I guess we’ll have to see how serious this decoupling is. I mean, it seems what BlackRock is predicting is that there’s going to be real pressure in the United States to close down some of the production in China and move it back to the United States. I mean, Trump talked about it but didn’t really do much about it. It’ll be interesting to see, if there’s a President Biden, if he is more serious than Trump was.

Heiner Flassbeck
Well, I must say, when I heard Biden the other day, I was really scared. I never thought highly of this guy, but what he said there was really not much better than what Trump says. And he said, “buy American.” It’s no longer possible. You can buy American whatever you want, but it would be extremely expensive. You see the whole process – that the people obviously have not understood in the United States – of China becoming this huge production hub is a process of using hyperactivity, our hyperactivity and combining it with low wages in China. If you bring it back, well, this all can be used in the United States, but you have to close all borders and you should not have any trade with anyone in the world anymore because it’s not competitive at all. This is absolutely clear. And I am asking myself, is this a reasonable way for a great nation like the United States? And then people would say, ‘oh, your tech companies are successful in the rest of the world, oh, let’s close them down and protect ourselves against your tech companies’. This would be a disastrous fight that would begin with this decoupling idea.

Paul Jay
And what happens to the standard of living of American workers, which, frankly, is so much subsidized – at Wal-Mart and others – through cheap products from China? If they don’t have those cheap products, people are going to have trouble living on the wages they’re getting paid.

Heiner Flassbeck
Luckily, we are compensated by the government, but it will be extremely costly, no doubt about it.

Paul Jay
Well, I think this whole system is concluding that this kind of capitalism just doesn’t work anymore.

Heiner Flassbeck
If we would know what the alternative is, I would be happy to go for the alternative, but unfortunately, we do not know. That’s the problem.

Paul Jay: Well, let’s do another segment on that. Thanks very much for joining us.

Heiner Flassbeck: Thanks for having me.

Paul Jay: And thank you for joining us on theAnalysis.news podcast.