Who Should Lead the Global Economy?

Harold James and Domenico Lombardi reflect on who would lead the global economy given massive probems in US. Laughingly they evaluate whether Eurozone (along with China) can play the role of global leader. Eurozone? Really? EZ was poised to take control as the crisis hit US shores but graduallt we realised how faulty the design of EZ was and needs to be fixed.

In terms of global economic leadership, the twentieth century was American, just as the nineteenth century was British and the sixteenth century was Spanish. Some Chinese and Europeans think that they are next. Are they? And should they even want to be?

The most important prerequisite for global economic leadership is size. The bigger an economy, the greater its systemic importance, and the more leverage its political representatives have in international decision-making. The United States is the world’s largest economy, with a GDP of roughly $16.7 trillion. The eurozone’s $12.6 trillion output puts it in second place, and China, with a GDP of around $9 trillion, comes in third. In other words, all three economies are conceivably large enough to serve as global economic leaders.

But an economy’s future prospects are also crucial to its leadership prospects – and serious challenges lie ahead. No one thinks that the eurozone will grow more quickly than the US in the coming years or decades. While China is expected to overtake the US in terms of output by 2020, decades of rigid population-control measures will weaken growth in the longer run, leaving the US economy as the most dynamic of the three.

Another key requirement for global economic leadership is systemic importance in commercial, monetary, and financial terms. Unlike China, a large trade power with underdeveloped monetary and financial capabilities, the eurozone meets the requirement of systemic significance in all three areas.

Whatever little econ history I have read, in order to take over US, the takeover economy has to be both large and stable. US took over UK in early 1900s as it kind of fulfilled both conditions. Some might say it is difficult to replace US as in these globalised times USD is the reserve currency. Well when US took over UK, we had fair bit of globalisation even then and one cannot give this as a reason that US hegemony cannot be broken.

The important thing for the next takeover economy is to manage this paradox –  integrate with world to become larger and at the same time not be impacted when US economy goes down under.  As the saying goes, when US sneezes world catches cold. This time US suffered a near heart attack and many others followed too some immediately and others with a lag.

It will require something to takeover from US..

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