R Ravimohan: After 4-11

The competition between the US and Europe is bound to throw up opportunities for the rest

Just after Prime Minister Jose Maria Aznar lost the Spanish elections in March 2004, The Economist had a brilliant cover headed, "One down, three to go?"

It was alluding of course to the defeat of Aznar and the expected losses at elections of John Howard, the Australian Premier, of George W Bush of the United States of America, and of Tony Blair of the UK, in the forthcoming election in the United Kingdom.

They were the leaders who bandied together the war on terror. The purport of this thesis was by painting them with this broad brush, The Economist was perhaps hinting that the majority of the thinking western world rejected their aggression and would rather be happier with a path of reconciliation.

Howard won the Australian election with comfortable lead; so has Bush. It remains unclear as to whether Aznar lost his elections in Spain due to the adverse effects of 9-11. Elections in United Kingdom are yet a period away.

Does the ominous portent of the world order portrayed by the Economist article still hold? Or did they merely cry wolf, projecting issues to be larger than reality?

What does the victory in the elections on November 4 (in India, this is denoted as 4-11, when the result was known) of George W Bush as the President of United States of America, mean to the geopolitics? How would that affect the economics of the world?

Return to power for a second term by a President of the United States of America is indeed an important development. The second-term President cannot run ever again for office and therefore has no fear of a future loss of office.

That is especially important at this juncture. President Bush won the election, projecting tough leadership and the Americans have bought his story. He now has the opportunity to get more focused on achieving his objectives than during his previous term. Indeed, the first indications of what the future might hold are already being unfolded, by the metamorphosis of his strike team.

Colin Powell, arguably the most moderate of his erstwhile team, is being replaced by Condoleezza Rice, perhaps the most forceful member of the erstwhile team, as the Secretary of State. If the trend continues, the team's make-up would suggest that President Bush is likely to push for a resolution of the all outstanding confrontations with greater authority and decisiveness.

The US's war on terror and the stabilisation of Iraq have now the new dimension caused by Yasser Arafat's death at this crucial juncture. Even if a strong leadership does eventually emerge in Arafat's stead, it will take time to assert.

The situation therefore seems ripe for a forced settlement in the Middle East. Saudi Arabia's leadership issues remain hidden but by a thin veneer. Transiting the leadership there without any overt contest and having a regime at least as strong and as committed to the world order as now, would be another priority that would consume this Administration's attention.

Lending a supporting hand to Tony Blair in the run-up to his elections would be important to demonstrate the US's commitment to friends and also to strengthen the surviving alliance of like-minded western nations. Many more issues remain. However, even this sample serves to illustrate the dire situations that demand conclusive resolution.

The controversy raised by the absence of any weapons of mass destruction in Iraq has not died down. However, rather than facing any loss of credibility, the Bush Administration appears to have successfully gained support for its assertive action.

Future conflict resolutions might tend to be conducted more bilaterally rather than in the global alliance format, which was the norm thus far. Its strategies might become more direct and result-oriented.

However, these would heighten the differences that have already cropped up within the NATO alliance. With China yet to begin flexing its military muscles and Russia in a considerably weaker spot, clearly the dissension line will be drawn across the Atlantic Ocean.

This will be a new tussle that the world will witness and learn to cope with. In almost all the global conflicts, the positions that favour continental Europe and those that benefit the US seem misaligned; so are their philosophical leanings.

Unless creative ways are found to resolve these supplanted interests, there is a chance that the relationship between the US and Europe will become more adversarial. Given their maturity and leadership in the world comity, the tension in their interaction is not likely to find any military expression.

Rather, it will all manifest in economic, social, and other fields including environmental issues. On the economic front, these could take the form of direct anti-trade support measures, including tariff hikes. Both will woo countries to align with them by showering trading privileges.

This could warp the designs of the WTO in cobbling together a fairer world trade regime. It will encourage bilateral trade arrangements to the cost of globalised arrangements. If taken to extremes, this will dilute existing common market access and force new trade channels to evolve.

Issues like carbon trading, the Kyoto protocol on global warming, the funding of UN organisations, and such like issues are less likely to be unanimously settled in future as they were in the past.

Clearly, the US outscores Europe on current strengths. If Europe decides to assert itself, it needs to demonstrate to the world its ability to help economically. This it can do by either getting its act together as a common market and offer the world an alternative market to the US.

Or, it needs to share its immense wealth of technology and finances with well-chosen strategic partners, by investing in third countries. For the world outside of the US and Europe too, this would be a good development, because their risks could get spread.

The competition between these two powerful economies is bound to throw up fantastic opportunities for the rest of the world and spur the aggregate global economy to greater heights. While some element of bi-polarity will seep in as countries play favourites, this contest will create greater effervescence for world trade.

Given the action-biased strategy that is likely to evolve, commodity prices are likely to remain high to support the greater economic activity. Global inflation is likely to harden therefore.

This, along with calls for greater investments, would also see higher interest rates. Currencies will be buffeted by competitive devaluations between global economies and are likely therefore to contribute to market activity.

Given the current dominance of the US, it is likely to be able to assert greater will on where it wants the dollar to be. It will for now benefit from a weak dollar to restore the growth momentum in its domestic economy. That's the way it's likely to stay at least for some months.

Dharma-yudh seems to have yielded to karma-yudh.

(The author is managing director and CEO, CRISIL. Opinions expressed here are his own. He can be contacted at ravimohan@crisil.com)