The Finnish Institute of International Affairs (FIIA) published the report The Great Regression? International Relations in an Age of Global Interdependence on December 16th 2009.

Download the report from FIIA´s website.

The Great Regression? International Relations in an Age of Global Interdependence
Executive summary

The financial crisis and the ensuing global economic downturn have been the focal point of news coverage and policy analysis for over a year now, and speculation has been rife about how things will pan out. At one extreme are those who shrug the situation off as a significant yet transient dent in economic development, with marginal repercussions on the global system. At the other end are those touting the crisis as the first step in an epoch -making transition in the global power balance, where rapidly expanding economies like China, Brazil and India will make gains on the hitherto dominant developed nations, shifting the distribution of power in the world. Whatever the eventual outcome, there is no denying that the crisis’s impact on international relations will be significant.

This report provides a comprehensive overview of the dynamics of the global financial crisis and the challenges it poses for governance across the board. This is followed by detailed accounts of the way in which key international and institutional relations have been strained by the crisis with potential ramifications for the global distribution of power, focusing on relations within the European Union, Russia’s relationship with the West, and China’s relationship with the United States. Rather than addressing the speculative debate about recovery models and economic outlooks, the report focuses on how politicaleconomic relations between countries, the fabric of globalization, have been tested by the steep economic downturn. It seeks to assess whether the numerous potentially destabilizing factors of the financial crisis have indeed nudged international relations onto a substantially different path than previously assumed.

The financial crisis began to gain its full momentum in 2008 as the extent to which major financial institutions had acquired substandard assets was disclosed. The failure of banks and government intervention has challenged conventional notions of the market’s ability to regulate itself, while the age-old debate over the necessity of government intervention and regulation has illustrated regional differences in approaches to dealing with the financial crisis. Efforts to reverse the financial downturn have largely been conducted on a national basis. In an age of global interdependence, however, national economic policy has economic ramifications for other countries.

Furthermore, the impact of the financial crisis has been much greater in some countries than in others; China only witnessed a blip in its rapid growth while Russia is in the throes of a deep recession. In its attempts to overcome financial depression, the EU has found itself held hostage to its member states, at times struggling to achieve agreement between member-state policy and union-wide policy.

Nevertheless, the European Central Bank’s move to lower interest rates amidst the crisis paved the way for counter-recession measures across Europe. The Union, and the Eurozone in particular, albeit not a single political entity, still retains its appeal as a single market that has the power to shield the weaker economies in Europe. Meanwhile, Russia’s relationship with the West remains complex and is based on constellations that predate the crisis. Russia, defiant against Western political institutions and determined to claim its interest in affairs close to its borders, has been more severely hit by the crisis than many other countries, yet reform either in domestic or foreign politics is not a viable option due to Russia’s rigid government structure that revolves around the prevalence of a select elite. The government’s fiscal balance remains bearable, but currency reserves are diminishing and corporate debt rates are high.

The economic relationship between China and the United States constitutes a deep mutual interdependence. In spite of the two parties’ political rivalry, they rely on each other to complement their economic cycles: China purchases US treasury bonds to provide the US with currency, with which US consumers purchase Chinese goods to keep the Chinese export industry afloat. China benefits from the situation by utilizing its financial upper hand as political leverage against the debt-ridden US, but China’s success depends on America’s fortunes. Both countries recognize this relationship as being politically as well as economically unsustainable in the long run, and China in particular is already moving to reduce its dependence on the US.

The unbalanced effect of the financial crisis in different countries has indeed affected the relative political influence between nations on a bilateral and a regionally limited basis. What the impact will be on global institutions, however, remains to be seen, as the promise of improved and more “inclusive” global governance is little more than lip service at this stage. The developed countries accustomed to being at the forefront (and most severely hit by the crisis) are understandably unenthusiastic about any reform that would compromise their international political influence, and the financial power therefore remains highly concentrated and politically potent.