EconomicCrisis.US

What better time to hold the World Economic Forum than in the middle of the biggest global economic crisis since 1945? And yet the delegates who make the trek up to Davos this year are more likely to be disorientated than energised by the state of the world economy.

The global economic crisis has raised fundamental questions about the stability of the world economy, about the role of high finance and about the balance of power between the West and the emerging powers. Added to this mix is the new sense of political instability caused by the Arab spring and the outbreak of popular protest from Occupy Wall Street to the streets of Moscow.

The fear of another big financial crisis, plunging the world into a deep recession or worse, still hovers over world leaders. There could be any number of triggers over the coming months: a disorderly Greek default on its debt; a failed Italian bond auction; the collapse of a leading bank. European governments still feel as if they are dancing on the edge of a precipice. Further afield, the leaders of all the world’s big powers are well aware that their economies would be severely affected by a crisis within the EU.

But even if Europe manages to avoid an economic disaster, there is a grim realisation that years of austerity lie ahead with all the social and political consequences that will entail. A big question for Europe is whether, under such circumstances, the political centre will hold – or whether new radical forces come to power. The performance of Marine Le Pen and the National Front in this year’s French presidential election (the first round will be held in April) will be a key indicator of the strength of populist nationalism in Europe.

In a presidential election year, the US will also be having a vivid argument about living standards and the “American dream”. If the election comes down to a contest between Barack Obama and Mitt Romney, the angry populism expressed by the Tea Party and by Occupy Wall Street will not be represented on the ballot.

But the arguments made by these movements will still influence the debate. President Obama, who won as a candidate of hope in 2008, will have to decide whether to stigmatise Mr Romney as a cruel capitalist and a representative of “the 1 per cent”. Mr Romney will use the crisis in Europe to bolster his campaign – arguing that the president wants to impose a failed European social model on the US and that he embraces American decline.

Lurking behind this debate will be the question of whether Europe’s problems are just one part of a generalised crisis of the West that also implicates the US.

Those who take this view will argue that both the US and the EU cannot control public finances and are burdened by unaffordable promises to their citizens and by cut-throat economic competition from rising powers.

However, if the US economy recovers strongly over the course of the next year, it will be easier to make the argument for US exceptionalism. In that case, expect to hear a lot about the unique flexibility and resilience of American capitalism

The economic and political malaise of Europe and the US have fed the sense that western democracy is going through a crisis. However, the Arab spring pushed sentiment in the other direction. The demand for political freedom across the Middle East – and the way in which this movement has caused palpitations in Beijing and Moscow – makes it possible to believe that the world might be on the brink of a new wave of democratisation.

That said, the year begins with much of the early euphoria that surrounded the Arab spring beginning to dissipate. The advance of Islamist political parties from Morocco to Kuwait – and, in particular, their very strong showing in the Egyptian elections – has underlined the point that democracy and liberal values may not advance hand-in-hand across the Middle East. Religious minorities and women clearly have reason to be anxious.

Meanwhile, the outside world will be worrying about whether the Arab Spring increases conflict in the region. The fact that Turkey, run by the mildly Islamist AKP party, has clashed with Israel, raises the fear that several hither­to moderate Arab states may adopt a more confrontational foreign policy – which is likely to be met by Israeli obduracy in return. In the immediate future, there are several potential sources of regional instability. Syria is now in the grip of a low-level civil war. If that remains unresolved for much longer, then international intervention – once regarded as all but unthinkable – will become much more likely.

A crisis in Syria could be pre-empted by a conflict between the West and Iran. The face-off over the Iranian nuclear programme has been going on for many years now and has always involved a good deal of bluff and bluster on all sides. But a genuine crisis does seem to be moving closer, with western anxiety about Iranian progress on the nuclear front being matched by Iranian anxiety about the tightening economic squeeze on the country and the threat of an oil embargo.

There are now also suggestions that the “Arab spring” is going global.

The demonstrations in Moscow at the end of 2011 raise the prospect that a long period of political quiescence by the Russian middle class is finally coming to a close.

A crucial political test will come with the presidential election in March. Will Vladimir Putin face a real challenge? Could he even lose? And, if Mr Putin cruises to his expected victory, amid allegations of media manipulations and ballot rigging, will the Russian middle class take to the streets and demonstrate again?

Since the financial crisis of 2008, the large Chinese delegation in Davos has presented a smooth and confident exterior. With the US financial system in crisis and US democracy apparently dysfunctional, the “Chinese model” has attracted a lot of interest and respect.

This year begins, however, with a new mood of scepticism about China in the air.

The Chinese government reacted extremely nervously to the Arab spring, censoring the internet more harshly and even briefly banning the sale of Jasmine, the symbol of the Tunisian revolution.

Popular protests about everything from factory conditions to corruption and train crashes have become a feature of Chinese life.

The stability of the Chinese economy is also now a leading concern – with worries about inflation, labour unrest and a housing bubble.

Among China-watchers, there is a growing sense that 2012 – which is meant to feature a smooth transition from one leadership team at the top of the Communist party to another – may instead be a year that raises big questions about the stability of the Chinese system.

India, the other great emerging Asian power, also enters 2012 in a less confident mood. Popular protests against corruption have become a feature of political life in India, while economic reforms appear to have stalled.

Beneath all these political and economic issues lies a bigger question.

In the aftermath of the cold war, “Davos man” helped to define “the new world order”. But a world built around globalisation no longer seems quite so new, or quite so orderly. Can the World Economic Forum adapt to this situation? Or has Davos man had his day?
By Gideon Rachman – ft.com