World Economy

The Crisis of Our Crises

The Crisis of Our CrisesThe Crisis of Our Crises

At first glance, today’s major international crises seem to have little in common. Some, such as Greece’s debt drama, are economic disasters; others, like Syria’s implosion, are characterized by brutality and political chaos; and still others, most notably Ukraine’s predicament, fall somewhere in between. But, despite what policymakers might like to believe, these events are not unrelated. On the contrary, they reflect a deeper crisis of international integration and cooperation.

Over the last 60 years, the world experienced unprecedented peace and prosperity for a simple reason: countries voluntarily integrated themselves into an international community underpinned by shared rules and norms. But this trend has given way to piecemeal crisis responses, whether austerity or localized damage control, that are based on the unreasonable assumption that problems like those in Greece, Syria, and Ukraine will eventually correct themselves, Anne-Laure Delatte wrote for Project Syndicate.

In relying on stopgap measures to address crises, global leaders seem to have forgotten how interdependent the world has become. Upheaval or stagnation in one part of a complex system can have outsize consequences elsewhere, in the form of, say, a refugee crisis or an uptick in inequality.

For example, Europe’s malaise–which has persisted partly because its leaders have insisted on muddling through, rather than seeking comprehensive solutions–has had serious consequences for Ukraine, a country teetering on the edge of a meltdown. By the end of this year, Ukraine’s economy is expected to be 15% smaller than it was 2013, and its debt-to-GDP ratio may be near 200%, exceeding Greece’s at its worst. And the security situation in the eastern part of the country is deteriorating.

Creditors cannot be expected to be any more lenient with Ukraine than they have been with Greece, a member of the eurozone. But a hard stance on Ukraine while it fights a war with Russia could threaten Europe’s strategic buffer from the Baltic to the Balkans.

The economist Albert O. Hirschman once said that a crisis can be either disintegrative or integrative. Individuals and organizations, confronted with adversity and lacking faith in policymakers, can either “exit” from the institutions and societies that bind them, or rally together to revitalize them.

  Capital Flight

Unfortunately, today’s crises so far have seemed largely disintegrative. Consider capital flight, which forced Greece to impose controls. Of course, exit mechanisms like capital flight can have a positive impact. In the eighteenth century, capital flight kept predatory rulers in check. Adam Smith viewed the rise of movable capital as a force that would encourage enlightened public policies that serve the general interest.

But, in today’s interconnected world, capital can move much more quickly and to many more destinations, crossing borders with the click of a mouse. Moreover, the global financial industry is largely autonomous, driven by self-interest, rather than a desire to advance the common good.

As we have seen in Europe since 2010, as well as in Ukraine and Puerto Rico more recently, the ability to rush for the exit at any time removes investors’ incentive to compromise. As policymakers struggle to create a consensus around a reform agenda, the prospects of rejuvenating the pacts and policies underlying integration and cooperation deteriorate.

But the world order is by no means fated to devolve into chaos. Today’s crisis of international integration can become the catalyst for the creation of a new or revitalized global system.