Mark Leonard

For most of the last 30 years China’s leaders have been kept awake at night worrying about their country’s poverty. But as the country approaches its once-in-a decade leadership transition this fall, it is China’s affluence, rather than its poverty, that is causing sleepless nights.

Deng Xiaoping declared in 1979 that the goal of China’s modernization was the creation of a “Xiaokang (moderately well-off) society,” where citizens would be comfortable enough to lift their eyes above the daily struggles of subsistence. For more than a decade, Chinese people have been living a version of this once-utopian concept.

On a recent trip to the prosperous Guangdong province on the Pearl River Delta I was struck by the sophistication and wealth of China’s urban experience – but also by the fragility of the social compact on which it is founded. The country’s economic growth “slowed” to 7.6 percent in the second quarter (the weakest quarter since 2009, when 20 million Chinese lost their jobs as a result of the global financial crisis). Only last week, Premier Wen Jiabao warned of tough economic times ahead.

In Guangdong – where migrant laborers repeatedly riot, and where a new middle class fights hard to protect its advantages in the face of an economic slowdown – the regime is particularly challenged. After the experience of Tiananmen Square in 1989, China’s leaders are painfully aware that social strife and revolution are more likely to come about as a result of the thwarted ambitions of the aspirational than because of the complaints of the very poor.

Now that China is flush with wealth, some of its intellectuals are turning to a surprising source to understand its problems. J.K. Galbraith’s book The Affluent Society was a critique of the obsessive focus on GDP growth and production in the United States in 1958. He made waves by arguing that America’s obsession with the quantity of goods produced would have to give way to the larger question of the quality of life that it provided. In the introduction he famously argued that while poor men have a clear sense of their problems and the solutions, the rich man has “a well-observed tendency to put [wealth] to the wrong purposes or otherwise to make himself foolish”. As with individuals, claimed Galbraith, so with nations.

China has gone from being one of the most equal countries in the world to a nation with a bigger gap between rich and poor than the Unites States. Prominent left-wing thinkers such as Wang Shaoguang and Lu Zhoulai claim that Galbraith would have no difficulty recognizing the symptoms of his affluent society in today’s China. First, China’s leadership has spent a generation obsessively focusing on economic growth at the expense of all else. Second, inequality has run rampant as socialist China destroyed the “iron rice bowl” of social protection. Third, a surge of conspicuous private consumption has come at the expense of investment in public goods like pensions or affordable healthcare or public education. And fourth, spending on overdevelopment and vanity projects has grown, rather than necessary investments in welfare.

China’s  supply of cheap exports was made possible by a deep well of migrant labor guaranteed by the “hukou system,” which ties peasants to the land and deprives them of all social rights if they pack up in search of work. The result is that a city like Guangzhou (formerly known as Canton), the largest in Guangdong, has become like Saudi Arabia: It has a GDP per capita on a par with a middle-income country, but academics estimate that only 3 million of the 15 million people who work in Guangzhou every day are officially registered inhabitants. The rest have no rights to housing, education or healthcare and live on subsistence wages. In Saudi Arabia the cheap migrant laborers are attracted by the oil wealth; but in Guangdong the laborers are the sources as well as the by-product of the wealth.

An absence of protection for most workers helps solidify the other leg on which China’s growth stands, cheap capital for investment in domestic infrastructure. Without state-backed pensions, healthcare or education, citizens save almost half their incomes as a hedge against personal misfortune. But the state-owned banks give them an artificially low interest rate. This makes vast amounts of capital available to entrepreneurs at cheap rates for speculative investments, which have swelled the GDP and strewn the Chinese landscape with white elephants like palatial municipal buildings, factories that stand still and empty hotels.

It is not just Guanzhou that is seething with social unrest, although the high levels of development in this region make the inequality more visible. China’s thirst for growth and affluence has created a bubble economy and trapped millions in poverty.

The number of government-recorded “mass incidents” (defined as a violent demonstration involving more than 500 people) has risen from 8,700 in 1993 to 87,000 in 2005, and 180,000 in 2011 according to several state-backed studies.

The debate has been brewing in China over the last few years about how to escape from the trap of its affluence. On the one hand, many on the new left have been calling for ways to stimulate domestic demand to remove the causes of social unrest. At the top of their list is boosting wages, ending the artificial subsidies for exports, providing access to social services, reforming the hukou system and ending the “financial repression” of artificially low interest rates.

Increasing wages and slowly allowing the renminbi to appreciate will be hard enough, but ending the financial repression of artificially low interest rates will strike at the core of China’s most powerful vested interests.

What’s more, these measures will slow growth. That is why many on the right are looking for a way to make China’s affluence more acceptable. They want to privatize state-owned enterprises, encourage business to move up the value chain, and develop policies that can legitimate the inequality they think is essential to drive progress. Many have celebrated what the Chinese academic Xiao Bin has hailed as a “Guangdong model” of flexible authoritarianism that gives greater voice to the concerns of citizens on the Internet and allows civil society and NGOs to voice concerns. Last week – after some particularly violent riots in the town of Shifang in Sichuan province – senior members of President Hu Jintao’s leadership group encouraged cadres to “listen closely to the masses” and try to find ways of mediating and resolving disputes rather than relying on brute force.

But Wang’s worry is that without a massive attempt to deal with the causes of unrest, each of these problems will get worse. “Galbraith’s advice hasn’t led to anything in America”, he wrote in an essay last year, “so Socialist China should be doing better”.

The financial crisis did not therefore just signal the death knell of the Washington consensus. It also started a crisis of China’s own development model. Prosperous areas like Guangdong were immediately plunged into chaos as the West’s demand for imports from China fell off a cliff. This came on top of a growing sense that the traditional foundations of growth were eroding as labor costs, the price of land and exchange rates all went up.

China’s massive stimulus package helped in the short term but exacerbated the longer-term imbalances. Today, intellectuals declare that Deng’s Xiaokang society has reached its natural limits, as migrant workers take to the streets in unprecedented numbers and officials air differences about policy.

While their predecessors had to cope with the problems of poverty and the legacy of socialism, the new generation of Chinese leaders, who rise to power this fall, will need to escape the trap of a market that produces – in Galbraith’s words – private affluence and public squalor.

VIENNA — When Arnold Schwarzenegger declared “I’ll be back” at the end of the first Terminator film, very few thought he was talking about returning to Austria. Yet here in Vienna, where Schwarzenegger made a surprise trip this week, there is speculation that his political career will be resurrected – Lazarus-like – in his abandoned homeland. And if he does take the leap, the Terminator could find himself playing a walk-on part in the most grandiose story of his career: the breakdown of the postwar European political order.

The talk is that Schwarzenegger could be one of the most visible faces supporting a putative new “Alliance for Austria” party that is being planned. The man behind it is the expatriate self-made billionaire Frank Stronach, who has pledged to launch a revolution in this placid corner of Central Europe. Last month he released a glossy eight-page personal manifesto that starts with the memorable phrase “unhappily, government is made up of politicians.” Pledging to rectify this anomaly, he talks about instituting lotteries that will allow ordinary people to suggest topics for parliament to debate, introducing a flat tax, and scrapping all corporate taxation for companies that invest in Austria.

According to the Austrian magazine News, Stronach has not yet decided whether to launch a brand-new party or effectively to buy the existing BZO party (a more moderate breakaway from the neo-fascist Freedom Party) by making a big enough donation. Apparently the former would cost 20 million euros, while the latter would be cheaper at 7 million. Stronach hopes to capture up to 20 percent of the vote, which would be the biggest political upset to hit this country since Jörg Haider’s party won a shock victory in the 1999 general election.

The entrepreneurial Stronach has spotted a potential niche in the political market, one that is being exploited across Europe. The mainstream parties that have driven European integration are struggling. Since the beginning of the crisis, there has been regime change in 11 European countries. With the exception of Fredrik Reinfeldt’s center-right government in Sweden, which has presided over an unlikely period of growth, every incumbent that has sought re-election has lost.

The Netherlands – another well-to-do northern European country that used to be a symbol of cozy elite consensus – is also a cauldron of discontent with its politics being remade. Since 2005, the traditional right-wing parties have been eclipsed by the maverick breakaway faction of Geert Wilders (the PVV), which has set the terms of the Dutch debate. Now the same dynamic is taking hold on the left, with Emile Roemer’s hard-left Socialist Party overtaking the traditional Dutch Labor Party (the PvDA) in the opinion polls. Marietje Schaake, a fiercely bright member of the European Parliament from the centrist D66 party, points to a dramatic shift in the concerns of Dutch populism. “The PVV’s support was shrinking because Wilders was not seen to be delivering and people were tiring of his rhetoric on Islam,” she told me in a telephone interview. “But the crisis was a blessing for him – he is moving from Muslim-bashing to attacking Europe.”

The Dutch situation is being echoed across the continent. In Finland the populist, anti-European “Finns” Party (formerly the True Finns) is as big as any of the mainstream parties, and a six-party coalition, ranging from the socialist left to the greens to the conservatives, has huddled together in a government to keep them out of office. In Italy, the comedian Beppe Grillo is at 20 percent in the polls; in Ireland, Sinn Fein is now the second-biggest party in opinion polls; in Greece, radical Syriza has replaced the once-mighty Pasok as the main party of the left.

Even in countries where the electoral system prevents new parties from getting much representation, they are increasingly making the weather. In France, Marine Le Pen’s National Front and Jean-Luc Mélenchon’s Left Front got a combined 29 percent of the vote in the presidential elections (though the electoral system stopped them from translating support into seats in the parliamentary elections that followed). And in Britain, though the anti-EU UK Independence party is only at 7 percent in the polls, it threatens to come in second in next year’s euro elections.

As power shifts, so does policy. “We are scared shitless,” a Finnish cabinet minister told me. “The only way we can deal with the True Finns is to clone them.” This is why “pro-European” governments in Finland and the Netherlands are counterintuitively threatening to block the EU bailout fund; the “sensible” Greek New Democracy party is echoing Syriza’s call for a renegotiation of the austerity package; and the British Labour and Conservative parties are edging toward calling for a referendum on EU membership that they would both love to avoid. How else to shore up their credentials against the insurgent parties? In a new political order where elites have lost their freedom of action, will it be possible for the EU to take any decisions at all, including ones designed to save the system from collapse?

At the turn of the century, the late political scientist Peter Mair pointed to a void that had opened where traditional politics used to be. While citizens have retreated from the political sphere into their private lives, the parties that used to be embedded in civic life have become mere appendages of the state (a “governing class” that seeks office rather than a chance to represent ideas or groups in society). It is this void that the new parties are trying to fill and – so far at least – succeeding. They are recasting politics as a dispute between elites and the people, and are rediscovering the forgotten roles of opposition and expression (in fact some parties such as Greece’s Syriza and the Dutch PVV have gone to great lengths to avoid going into government).

It is becoming clear that the roots of the euro crisis are political rather than economic. The 2008 financial meltdown may well give birth to one of the great moments of political realignment – bigger even than 1917, 1945 or 1989. Europe’s governing class will hope that the new forces in Europe will implode once they are forced into power – but as Arnie’s Terminator films showed, a destructive force, once unleashed, can be nearly impossible to destroy.

PHOTO: Austrian-born actor, former champion bodybuilder and former California Governor Arnold Schwarzenegger is surrounded by media as he addresses the public in his hometown of Thal, October 7. 2011.

It may have been championed by European leaders such as Gordon Brown and Nicolas Sarkozy, but the G20 is increasingly seen as a disaster for Europe’s vision of global order. “We are not coming here to take lessons on democracy or on how to handle the economy,” said EU Commission President José Manuel Barroso ahead of the G20 meeting in Los Cabos, Mexico, where the euro zone crisis was expected to play a central part in discussions.

But after years of being on the receiving end of lectures from Europeans about how to run their affairs, the leaders of the world’s largest economies, including the “BRICS” nations (Brazil, India, Russia, China and now also South Africa) are seizing the chance to return the favor.

The EU’s lack of solidarity in the face of the debt crisis has squandered its moral high ground and engineered the region’s marginalization. Europeans are strongly in favor of global governance when it is a process they inflict on others, but they are not so keen when others comment on Europe’s affairs.

As Richard Gowan has argued: “European officials have become disillusioned with multilateral dealmaking both inside the EU and beyond it.” In the halcyon days before 2008, when the G8 was known as “the committee to save the world,” EU members held half the seats around the table. Although the rest of the world complains about European over-representation, EU nations account for just a quarter of the G20 today.

Power grabs and plays for more influence are rampant as the summit meets. At their informal caucus before the G20 meeting started, the BRICS pledged 75 billion euros to help Europeans through the euro crisis, a move that was likely designed to increase their voting weights.

Historically, Europe has been pushing for a world governed by international law and multilateral institutions rather than a balance of powers. The Europeans were behind the creation of the World Trade Organization, which can override national sovereignty and make treaties to solve global problems from climate change to genocide. One might say that if the U.S. was the sheriff of the liberal order, the European Union was its constitutional court.

But the G20 is not a global institution bound by treaties – it is a self-appointed group of powerful states that make decisions in informal settings. And many of those states do not share the European obsession with treaties. Although globalization may be limiting sovereignty in the West, for former colonies like China, India and Brazil, it is boosting their power in a way that is unprecedented. Now that they are strong, it is hard to imagine that the BRICS nations will invite the former colonial powers to interfere in their internal affairs.

Until recently, Western capitals hoped that integrating rising powers such as China into global institutions would encourage capitals like Beijing to identify their interests with the preservation of the postwar international system. But the result has been the notion that one power can use global groups as a means to contain another. Take the Copenhagen conference on the environment as an example. Denmark spent years preparing the conference, only for the outcome to be decided by a small meeting between Obama and the BRICS. The Europeans were not even invited.

Even in the General Assembly, the balance of power is shifting: Ten years ago, China won 43 percent of the votes on human rights in the United Nations, compared with Europe’s 78 percent. Last year, the EU won only 44 percent – more than 10 points behind China and Russia. Rather than being transformed by global institutions, China’s sophisticated multilateral diplomacy is changing the global order itself.

Meanwhile, the U.S. is increasingly turning against Europe. On the one hand, Americans continue to believe that they will transform rising powers by integrating them into existing institutions. On the other hand, they think that Europe’s over-representation in the existing institutions is a threat to the consolidation of that order. When Washington looks at issues such as climate change and international justice, it often finds Europeans isolated in their stance. Walter Russell Meade writes: “increasingly it will be in the American interest to help Asian powers rebalance the world power structure in ways that redistribute power from the former great powers of Europe to the rising great powers of Asia today.

The EU is still the world’s largest market and represents 17 percent of world trade, compared with 12 percent for the U.S. (The EU is also the world’s second greatest military power, comfortably outspending all the BRICS combined.) The euro zone collectively has less debt and lower deficits than the United States, the United Kingdom and Japan, and together its countries have enough capital to drag themselves out of the crisis.

It was only because of a breakdown of trust among EU members that the IMF was called in to act as an arbiter on the bailouts of Ireland, Greece and Portugal. But once the invitation was issued it changed the dynamics of the relationship and accelerated a more fundamental change in global governance.

Los Cabos may come to be seen in the future as the place where EU governments lost their religion on multilateralism. While EU diplomats joke that they don’t need tips on balancing budgets from the Americans, free trade from the Russians, climate change from the Indians, or the democratic deficit from the Chinese, their concerns about the G20 go much deeper than an aversion to posturing.

PHOTO: British Prime Minister David Cameron is seen through a window where palm trees are reflected during a news conference on the second day of the G20 summit in Los Cabos, Mexico, June 19, 2012. REUTERS/Victor Ruiz Garcia

How many countries will Germany need to bail out before it has erased the guilt of the Holocaust? That is the provocative question posed by Thilo Sarrazin, a publicity-hungry maverick whose 2010 book attacking immigration shattered Germany’s political consensus and sold more than 1 million copies. Last week he returned to the scene of the crime with a new book called Why Europe Doesn't Need the Euro. In a much-quoted passage, he says supporters of eurobonds are driven “by that very German reflex according to which atonement for the holocaust and the world wars will never be complete until we have delivered our entire public interest, and even our money, into European hands.” This title has raced to the top of best-seller lists and sent jittery markets into panic. Sarrazin is a narcissist who is more interested in self-promotion than serious analysis. But his views on Europe – as well as the political class’s reaction to them – tell us a lot about how the euro’s political travails have come about, as well as how they are likely to unfold.

An opinion poll last week provides just the latest proof that Sarrazin has his finger on the national pulse: Over half of Germans think their country has suffered by joining the euro, while 79 percent reject eurobonds as a solution to the crisis. Sarrazin – a former regional politician and Bundesbank governor who was stripped of his official positions because of his views on immigration – is not a man to do things by halves. His book breaks not one but two German taboos by linking Holocaust guilt with questions about the sustainability of the euro. (It is designed to be a refutation of Angela Merkel's argument that the breakup of the euro would lead to the breakup of the EU.) But although – or rather because – Sarrazin is so good at mirroring public opinion, the German political establishment is falling over itself to bury his arguments: Peer Steinbrueck, the former finance minister (and possible candidate for chancellor), described it as “bullshit”; while the current finance minister, Wolfgang Schaueble, described it as "appalling nonsense."

The antics of Thilo Sarrazin are a product of the constrained, elitist nature of German politics where – after the experience of National Socialism – many topics are declared outside the realm of political competition. As a result, all mainstream parties are in favor of Europe, the euro and the Atlantic alliance, and against war, inflation and nationalism. The result is a restricted political sphere where politicians have often been able to act against public opinion without fear of challenge – including the decision to replace the über-popular Deutschmark with the strikingly unpopular euro. But those who dare cross the threshold of political correctness – as Sarrazin has repeatedly done – tap into a vast reservoir of pent-up popular frustration. And because the establishment cartel turns them into outcasts rather than arguing with their views, this reservoir continues to grow.

What is worrying is that Germany’s leaders are now trying to treat foreign politicians who question German orthodoxy the same way they treat their own populists. When I was last in Berlin, I asked one of Merkel's aides what he thought her greatest achievements during the crisis were. He replied: "We could teach the neocons a thing or two about regime change." He may have been joking, but the brutal way that Merkel and Sarkozy used markets to topple Berlusconi and Papandreou has been replicated in the treatment of other leaders. First, Angela Merkel tried to dismiss François Hollande – not simply saying she disagreed with his views on the fiscal compact but refusing to meet him during the election campaign (the implication since the election is that it is all right to campaign in French, so long as you govern in German). And now they are trying to turn Alexis Tsirpas – the firebrand leader of the Greek anti-austerity Syriza party – into a non-person. A chorus of European politicians are trying to scare the living daylights out of the Greek people in the hope that the electorate will give a mandate to the mainstream New Democracy party, which had supported the bailout package. My hunch is that this approach is unlikely to deliver a mandate for New Democracy, and even if it succeeds, it could be undesirable. If European leaders want a sustainable deal that keeps Greece in the euro, they would do better to bind parties like Syriza into an agreement than to tie themselves to an ancien régime that has already lost much of its credibility.

One of the ironies of the last few days is that Angela Merkel allegedly asked the Greek prime minister to call a referendum on whether Greece should stay in the euro. Back in December, Angela Merkel and Nicholas Sarkozy forced George Papandreou out of office for suggesting just such a referendum. At the time, I believed that allowing the political process to unfold might have given Papandreou a mandate for standing by his agreements with the EU. However by suspending the political process and imposing a technocratic government, Merkozy did lasting damage to the legitimacy of formal politics in Greece and has created the conditions for populism to flourish.

The situation in Greece shows how Europe’s technocratic tendency is leading to a strong populist backlash. The traditional "Monnet method" of European integration – named after the French founder of the EU who tried to turn political issues into bureaucratic ones – has dramatically narrowed the political space in member states without creating any widening of the space for politics at a European level. Telling a politician such as François Hollande – who has received a mandate to renegotiate the fiscal compact – or Alexis Tsirpas in Greece that “there is no alternative” sends a terrible message to European publics: They can change governments but not policies. The markets have a legitimate fear that unless leaders take the necessary steps toward integration, the EU will collapse. But this approach of imposing rules on the grounds that there is no alternative in fact risks creating a full-blown rebellion, making it harder for countries such as Greece to undertake reforms.

So far, Germany’s willingness to bankroll the European project has kept the show on the road. But the most worrying feature of the Sarrazin story is that it shows how even in Germany, the power of pro-European elites is challenged. The rise from nowhere of the Pirate Party – a ragbag collection of Internet activists with no political program to speak of – that is now polling in double digits in some regional elections shows how fluid German politics has become. It is unlikely that the anti-charismatic Sarrazin will end up becoming the German equivalent of Holland’s Geert Wilders or Austria’s Joerg Haider. But the refusal of mainstream politicians to make the case for European integration or to engage in full-throated political competition with their opponents could pave the way for someone equally undesirable to claim that mantle. It would be a tragic paradox if the German establishment’s guilt over past extremism hampers its ability to overcome the populists of the future.

PHOTO: Former German central bank executive and controversial author Thilo Sarrazin leaves after he attended a news conference to present his latest book Europa brauch den Euro nicht (Europe Doesn't Need the Euro) in Berlin, May 22, 2012. REUTERS/Tobias Schwarz