Scenes of Lehman Brothers’ employees hurriedly clearing out belongings from their London offices in September 2008, as the bank filed for the largest bankruptcy in US history, became part of the iconic imagery of the Global Financial Crisis (GFC). Lehman’s collapse was the pivotal moment in the unfolding of the crisis, causing inter-bank lending markets to seize up and demonstrating the magnitude of the peril faced by the global financial system.
Beyond the immediacy of the crisis, however, the image had a wider significance: it represented the catastrophic culmination of a long process – extending over decades – of Anglo-American financial market integration. The collapse of an American bank was felt in London just as it was in New York. This was a crisis in the heartland: a financial disaster incubated in liberalised and globally oriented Anglo-American financial markets that served to transmit contagion around the world.
The institutional infrastructure for this global transmission was built up through decades of market liberalisation and integration, beginning with the Euromarkets in the 1950s, accelerating under the governments of Reagan and Thatcher, and then further advanced by the administration of Bill Clinton and Tony Blair’s New Labour government.
It was fuelled both by official cooperation and market competition between financial centres and institutions vying for global supremacy. These financial linkages, spatially embodied by the role of London and New York as the world’s premier financial centres, have been critical to the post-Second World War political economy of Anglo-America. With this model now gravely delegitimised, will historians of the future view the GFC as the beginning of a terminal crisis of Anglo-America?
There is certainly evidence to suggest that new strains are emerging within the Anglo-American financial heartland of the global political economy. New tensions are being prompted by the perception of weakened American power in the wake of the crisis, both in absolute and relative terms, and a rethinking of the way in which the UK is integrated within the world economy.
George Osborne and the City have, as I have argued previously, increasingly moved to hedge their bets on rising Chinese financial power and the gradual internationalisation of the RMB. But the UK’s courtship of Chinese power has gone much further. The UK is now the largest recipient of Chinese Foreign Direct Investment (FDI) in Europe. This is important because large reciprocal flows of FDI between the UK and the US have been a hallmark of post-war investment patterns and a further underpinning of Anglo-American financial integration. With close investment links and interdependency, new political contours inevitably emerge.
Now China is building a strategically significant ownership link with the UK economy, taking substantial stakes in Heathrow and Manchester Airports, as well as household brands such as Pizza Express and Weetabix. China’s richest man, Wang Jianlin, heralded the UK as ‘the best place in the world’ to invest earlier this year.
The UK is, similarly, expected to quadruple its investment in China within the next five years. These moves represent the UK’s adjustment, as a remarkably open liberal market economy that hosts in the City a genuine global financial centre, to a changing geo-economic order in which China and East Asia more broadly are gradually shifting the global economy away from its Western centre.
Albion’s tilt towards China has not gone unnoticed by the Americans. American bankers have criticised London’s ‘lovefest’ with China, arguing that Chinese banks in London are now receiving preferential regulatory treatment. More importantly, a growing divide over the future of the global economy came to light with a rare public spat over the UK’s application for membership of the newly founded Asian Infrastructure Investment Bank (AIIB), led by China. A senior US administration official rebuked the UK for its ‘constant accommodation of China’ and criticised the UK government for having taken the decision after ‘virtually no consultation’ with the US.
The Americans view the AIIB as a rival to the multilateral institutional structure, notably the IMF and World Bank, established under their auspices and prevailing influence after the end of the Second World War. That infrastructure was deployed to promote unbridled financial liberalisation under the Clinton administration, advancing a model of political economy now delegitimised in many parts of the world.
Many states have become more willing to countenance Chinese-sponsored alternatives. Britain’s endorsement of the AIIB, which prompted a cascade of European endorsements, is loaded with enormous symbolic significance. The UK was the key co-architect of the post-war Bretton Woods order and has long been one of America’s closest allies. These moves by the UK government suggest therefore that, although the US remains, as it were, by far the tallest boy in the playground, others are growing rapidly.
At the same time, the UK’s prevarication over its European future is weakening its importance as a partner to the US. It prompted a very public declaration of the US desire for the UK to remain part of the European Union by President Obama. Bereft of the EU, the UK will be of substantially reduced importance to the US, no longer able to play its role as a Trojan horse for economic liberalisation and regressive labour market restructuring. The changing relationship between the two states cuts both ways.
Ironically, it is concerns over the future of the City of London, the economic core of the UK’s ties to the US, that are central to the Conservative government’s concerns over EU membership.
Fears over EU regulation that might harm the City’s future loom large. Indeed, the financial institutions of the City themselves remain divided over the issue of continued membership. The prevalence of the City of London within the UK’s dysfunctional economic model ensures that forward planning for the City’s future vitality drives geo-economic rebalancing. If that means alienating the Americans, then, it would appear, the attitude is increasingly ‘so be it’.
Does this constitute a terminal crisis of Anglo-America? It’s of course too early to say. The deep institutional enmeshments that have driven Anglo-American financial integration and political cooperation will not fade away overnight. The coordinated monetary policy responses of the Federal Reserve and the Bank of England in the wake of the GFC testified to their continuing capacity for concerted global financial leadership. The TTIP’s impending implementation also speaks of further trade integration.
What can be said for now is that the relationship is evolving to reflect a global political economy in which power is more diffuse and new poles of dynamism are rapidly emerging. Anglo-American integration and interpenetration will continue, but the GFC will likely mark a tipping point towards a diversification of power within the global political economy and, ultimately, a weakening of the heartland position of Anglo-America.
This blog was originally published by Sheffield Political Economy Research Institute.
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