Articles / Rubric: Global

"Tonga Wont Feel the Crisis"
The article is published in: July - August 2012

Edward Luttwak, the Senior Researcher at the Center for Strategic and International Studies (the CSIS) in Washington, believes that Greece needs to leave the European Union immediately, followed by Spain, Portugal, and possibly Italy. Luttwak spoke to the WEJ about the opportunities that the Chinese Yuan has ahead, as well as the problems with the Russian ruble.

Mr. Luttwak, Nouriel Roubini, a well-known U.S. economist who predicted the financial crisis of 2008, Nouriel Roubini, is now saying that the world will face a new wave of financial turmoil in 2013. Do you agree with Roubini’s forecast?
Not everything can be avoided, but if the correct decision is made today, it can enable us to escape the crisis of tomorrow. Western Europe, however, still remains at the center of world economic events, due to the high demand for non-European goods and services, and the European Union is not even able to follow through on the decisions of their own economic authorities. The only thing the EU has managed to accomplish is a consensus concerning the failures of tough economic measures.

In such a dire situation, would you agree with the new German tax policy, which will lead to significant tax cuts starting next year?
Germany is stimulating business, but the country itself is not really experiencing a crisis. The Germans will all be ok, because they are Germans.

Which countries would be the first to experience the new crisis in 2013?
Without a doubt, the countries suffering the most in this current crisis, with the exception of Ireland, will feel the new crisis to an even greater extent. And if the newly elected president of France keeps all of his campaign promises, France will also be one of them. Let us hope that he does not.

Does any country stand a chance at avoiding it?
India no longer falls under that category – it is facing its own internal economic problems. China also experienced a 5% decline with the rest of the world, and Australia and Brazil won’t be able to avoid trouble either… of all the countries, I would say that Tonga would be one of the few to escape the crisis.

Why do you have such a negative outlook on China’s survival?
China cannot be, and does not want to be, a country that the world can rely on. Instead of facilitating imports, they restrict them, and while China’s foreign exchange reserves amount to at least 2 trillion U.S. dollars, more than 300 million Chinese citizens live in abject poverty. If China were to adopt a policy to strengthen the Yuan in relation to the dollar and stop discouraging imports, it could help revive the global economy.

And the Chinese yuan could become a reserve currency along with the U.S. dollar?
Yes, but Chinese authorities still prefer having a cheap currency because it increases exports. The Yuan can only be tied to the dollar if the government allows domestic demand to increase.

While we are on the subject of currencies, can you tell us why, in your opinion, the ruble weakened so suddenly and for such a long amount of time?
The ruble remains a risky asset because investors are not confident in the Russian authorities. Russian laws need to apply to everyone, including the government itself. People often forget that Russian officials are simple civil servants who can be arrested and jailed for corruption just like any other citizen. It’s like the situation with the ex-governor of Illinois, who was unable to avoid punishment for trying to get a bribe.

What other world economic and/or geopolitical risks can you tell us about?
The global crisis is much more serious than many people think, and the most important reason for that is because of the high unemployment rate. In countries with developed economies, there is a phenomenon known as intellectual bankruptcy, where there is no macro-economic concept, and no one knows what to do. Experts do not offer solutions that have been proven to work. With Greece, for example, it seems as though every economic solution has already been tried, with the exception of leaving the European Union and returning to the drachma, and nothing has been working so far. To get out of the crisis for good, debt needs to be eliminated, a process that will take a long time. But we do not have time to spare, and the next chapter is not economical, but political: the crash of the entire system.

Edward Luttwak is the Senior Researcher at CSIS. He served as a consultant to the Secretary of Defense Office, the National Security, the U.S. State Department, and the U.S. Army, Navy, and Air Force, as well as several allied governments, international corporations, and financial institutions. Luttwak is also the author of several books, including “The Grand Strategy of the Roman Empire”, “Turbo-Capitalism: Winners and Losers in the Global Economy”, “The Threat of Extinction of the American Dream”, and “Coup”. His newest publication, “Strategy: The Logic of Peace and War”, was published in Chinese, French, German, Hebrew, Italian, Estonian, Turkish, and English. Edward Luttwak is also a member of the editorial board of the Washington Quarterly and Geopolitique (based in Paris).

Text: Anastasia Yakovleva

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