By Michael Hudson
It is now clear that today’s escalation of the New Cold War was planned more than a year ago, with serious strategy associated with the US plan to block Nord Stream 2 as part of its aim to block Western Europe (“NATO”) from pursuing prosperity through mutual trade and investment with China and Russia.
As announced by President Biden and US national security reports, China was seen as the main enemy. Despite China’s useful role in enabling US companies to reduce labour wage rates by deindustrialising the US economy in favour of Chinese industrialisation, China’s growth was recognised as posing the ultimate terror: prosperity through socialism. Socialist industrialisation has always been perceived as the great enemy of the rentier economy that has gripped most nations in the century since the end of World War I, and especially since the 1980s. The result today is a clash of economic systems: socialist industrialisation versus neoliberal financial capitalism.
This makes the New Cold War against China an implicit opening act in what threatens to be a long-term Third World War. The US strategy is to wrest from China its most likely economic allies, especially Russia, Central Asia, South Asia and East Asia. The question was where to begin to divide and isolate.
Russia was seen as presenting the greatest opportunity to begin isolating both China and the Eurozone from NATO. A sequence of increasingly severe – and hopefully fatal – sanctions against Russia was drawn up to prevent NATO from trading with it. All that was needed to ignite the geopolitical earthquake was a casus belli.
That was easily arranged. The escalation of the New Cold War could have started in the Middle East, over resistance to the US takeover of Iraq’s oil fields, or against Iran and the countries that help it survive economically, or in East Africa. Plans for coups, colour revolutions and regime change have been drawn up in all these areas, and the US military in Africa has been reinforced particularly rapidly in the last two years. But Ukraine has been undergoing a US-backed civil war for eight years, since the Maidan coup in 2014, and offered the opportunity for the biggest first victory in this confrontation against China, Russia and their allies.
So, the Russian-speaking Donetsk and Luhansk regions were shelled with increasing intensity, and as Russia continued to refrain from responding, plans were reportedly drawn up for a major confrontation to begin in late February, starting with a blitzkrieg of western Ukraine organised by US advisers and armed by NATO.
Russia’s pre-emptive defence of the two eastern Ukrainian provinces and its subsequent military destruction of the Ukrainian army, navy and air force over the past two months has been used as an excuse to begin imposing the US-designed sanctions programme we are seeing unfold today. Western Europe has dutifully followed suit all the way. Instead of buying Russian gas, oil and food grains, it will buy them from the US, along with a sharp increase in arms imports.
The possible fall in the euro/dollar exchange rate
It is therefore worth examining how this might affect Western Europe’s balance of payments and hence the euro’s exchange rate against the dollar.
European trade and investment prior to the Sanctions War had promised growing mutual prosperity between Germany, France and other NATO countries vis-à-vis Russia and China. Russia provided abundant energy at a competitive price, and this energy was to take a quantum leap with Nord Stream 2. Europe was to obtain the foreign exchange to pay for this growing import trade through a combination of exporting more industrial manufactures to Russia and capital investment in the development of the Russian economy, for example by German car companies and financial investment. This bilateral trade and investment is now at a standstill – and will remain at a standstill for many, many years to come, given NATO’s confiscation of Russia’s foreign exchange reserves held in euros and sterling, and European Russophobia stoked by the US propaganda media.
Instead, NATO countries will buy US LNG, but they will have to spend billions of dollars on building sufficient port capacity, which may take until perhaps 2024. (Good luck until then.) Energy shortages will sharply increase the world price of gas and oil. NATO countries will also increase their arms purchases from the US military-industrial complex. Near-panic buying will also increase the price of arms. And food prices will also rise as a result of desperate grain shortages resulting from the cessation of imports from Russia and Ukraine, on the one hand, and shortages of gas-based ammonia fertilisers, on the other.
These three trade dynamics will strengthen the dollar against the euro. The question is: how will Europe balance its international payments with the US? What does it have to export that the US economy accepts as its own protectionist interests gain influence, now that global free trade is dying fast?
The response is: not much. So what will Europe do?
It could make a modest proposal. Now that Europe has virtually ceased to be a politically independent state, it is beginning to look more like Panama and Liberia, offshore “flag of convenience” banking centres that are not true “states” because they do not issue their own currency, but use the US dollar. Given that the eurozone is set up with monetary handcuffs that limit its ability to create money to spend in the economy beyond the 3% of GDP limit, why not simply throw in the financial towel and adopt the US dollar, like Ecuador, Somalia and the Turks and Caicos Islands? That would give foreign investors security against currency depreciation in their growing trade with Europe and their export financing.
For Europe, the alternative is that the dollar cost of its external debt taken on to finance its growing trade deficit with the United States in oil, arms and food will soar. The cost in euros will be even higher as the currency falls against the dollar. Interest rates will rise, slowing investment and making Europe even more dependent on imports. The eurozone will become an economic dead zone.
For the United States, it is dollar hegemony on steroids, at least vis-à-vis Europe. The container would become a slightly larger version of Puerto Rico.
The dollar versus the currencies of the Global South
The full version of the New Cold War triggered by the “Ukraine War” risks becoming the opening salvo of World War III, and is likely to last at least a decade, perhaps two, as the US extends the struggle between neoliberalism and socialism to encompass a global conflict. Apart from America’s economic conquest of Europe, its strategists seek to lock African, South American and Asian countries into a line similar to that planned for Europe.
The sharp rise in energy and food prices will hit food- and oil-deficit economies hard, at the same time that their dollar-denominated foreign debts to bondholders and banks are maturing and the dollar exchange rate is rising against their own currency. Many African and Latin American countries – especially those in North Africa – face the choice of starving, reducing their gasoline and electricity consumption, or borrowing the dollars to cover their dependence on trade with the United States.
There has been talk of the IMF issuing new SDRs to finance growing trade and payments deficits. But such credit always comes with strings attached. The IMF has its own policy of condemning countries that do not obey US policy. The first US demand will be that these countries boycott Russia, China and their emerging self-help trade and currency alliance. “Why would we give them SDRs or give them new dollar loans if they are just going to spend them on Russia, China and other countries we have declared enemies?” US officials will ask.
At least, that is the plan. I would not be surprised to see some African country become the “next Ukraine”, with US proxy troops (there are still plenty of Wahhabi supporters and mercenaries) fighting the armies and populations of countries seeking to feed themselves with grain from Russian farms, and feed their economies with oil or gas from Russian wells – not to mention participation in China’s Belt and Road Initiative which was, afterwards, the trigger for the US to launch its new war for global neoliberal hegemony.
The world economy is swelling, and the US has prepared for a military response and the militarisation of its own oil and agricultural export trade, arms trade and demands for countries to choose which side of the New Iron Curtain they wish to join.
But what’s in it for Europe? Greek trade unions are already demonstrating against the sanctions imposed. And in Hungary, Prime Minister Viktor Orban has just won an election with a basically anti-European and anti-US worldview, starting with paying for Russian gas in roubles. How many other countries will break ranks and how long will it take?
What’s in it for the countries of the Global South that are being squeezed – not simply as “collateral damage” from deepening shortages and rising energy and food prices, but as the very goal of US strategy in inaugurating the great split of the world economy in two? India has already told US diplomats that its economy is naturally connected to those of Russia and China. Pakistan finds the same calculus at work.
From the US point of view, all that needs to be answered is: “What is in it for the local politicians and client oligarchies we reward for handing over their countries?”
From its planning stages, US diplomatic strategists viewed the impending World War III as a war of economic systems. Which side will countries choose: their own economic self-interest and social cohesion, or submission to local political leaders installed by US meddling, such as the $5 billion that Undersecretary of State Victoria Nuland boasted of having invested in Ukraine’s neo-Nazi parties eight years ago to start the fighting that has erupted into the current war?
In the face of all this political meddling and media propaganda, how long will it take for the rest of the world to realise that there is a global war going on, with World War III on the horizon? The real problem is that by the time the world realises what is happening, the global fracture will have allowed Russia, China and Eurasia to create a truly non-neoliberal New World Order that does not need NATO countries and has lost trust and hope for mutual economic benefits with them. The military battlefield will be littered with economic corpses.