Mark Leonard

All breakups are tough. But the divorces we have learned to fear the most are protracted, conflict-prone and ultimately unresolved. All the signs are that China and America are in the middle of one of these messy divorces between abusive couples who hate and need one another at the same time. As Washington and Beijing prepare for new political leaderships, they cannot avoid a major renegotiation of the terms of their relationship.

Since the global financial crisis in 2008, we have been living through the slow and painful end of Chimerica — the period when the American and Chinese economies acted as one. It drove one of the longest periods of global growth and prosperity in history. This perfect symbiotic relationship — popularized by the historian Niall Ferguson — was based on China saving half of its GDP while America borrowed the money to finance a spending binge it could not afford. The romance ended in September 2008 with the collapse of Lehman Brothers. Now the terms of the separation between the two nations risk awkward discomfort for the rest of the world.

On a recent visit to Beijing, I was struck by the near-universal assumption that American demand will not return to pre-2008 levels. This has led to a lively debate about how to reorient China’s economy. On the one hand, China is hedging against the dollar by investing in companies and assets outside the U.S. On the other hand, Beijing is bracing itself for slower growth, while looking for substitutes for exports and fixed investment.

There is an ongoing discussion in China about how to encourage the growth of small and medium-sized enterprises, how to stimulate domestic consumption and how to invest in social welfare rather than infrastructure. The American economic debate is less strategic, but there is a realization that the level of debt incurred in the boom years is unsustainable and some of the stimulus measures like quantitative easing will make it increasingly unattractive for the Chinese government to stockpile Treasury Bills.

As if in anticipation of the “Great Decoupling,” the political atmosphere between Washington and Beijing has soured. A film released in the U.S. this week called “Death by China” — narrated by the nation’s favorite fictional president, Martin Sheen — says that “China is the only major power that is systematically preparing to kill Americans.” A publicity poster features a blood-soaked map of the United States stabbed by a huge knife that is engraved with the words “made in China.” But the fear-mongering in the film is moderate when compared with the daily attacks on “perfidious” American leaders on Sina Weibo (the Chinese answer to Twitter) or in best-selling books such as “China is Unhappy” (an ultranationalist tract that sold over 1 million non-pirated copies in 2009).

Tensions have increased because the post-American world has become a reality — driving both a weakened Washington and a strengthened Beijing to be more assertive. The hawkish Chinese academic Yan Xuetong claims the world order is changing from “a unipolar system with the United States as its center to a bipolar system with China occupying the other pole.” But military conflict is not the only danger. Either protracted competition or a peaceful condominium between the two powers could be almost as damaging for the world.

The competition is already on. China’s nervous neighbors have welcomed Washington’s renewed focus on the region. Collectively the democratic Asian powers — in alliance with the United States — have more economic and military might than China (although their economies are utterly dependent on Beijing).

Professor Yan Xuetong thinks China should respond to Obama’s “pivot” to Asia by revisiting its strategy of “non-alignment.” It could forge a formal alliance with Russia, as well as offer security guarantees to other Asian states. Andrew Small, an insightful China watcher, warns that: “We could see a return of a lot of the negative dimensions of the Cold War where attempts to solve global problems, solve regional conflicts or build international institutions are instrumentalized in a contest to change the balance of power between the two poles.”

Fred Bergsten has long argued that — instead of competing — the two largest trading nations, on opposite ends of the world’s largest financial imbalance, should form a legal condominium to run the global economy. Zbigniew Brzezinski extended this to the political realm by suggesting an “informal G2″ that could find solutions to the global financial crisis <here>, climate change <here>, nuclear proliferation and regional conflicts.

This has been shot down by observers like Shi Yinhong, a Chinese academic, who argues that China and the U.S. bring out the worst in each other. “We lend too much money and the American government and people use this money to have an unhealthy mode of life,” Professor Shi said.”

Shi could go further and point to the way that China often makes American capitalists more rapacious, labor unions more protectionist, the military more hawkish and politicians more populist. The specter of American power and the attraction of American markets has a mirror effect in Beijing — fueling the most regressive aspects of the Chinese economic model and foreign policy. Thus, it is not hard to imagine the two worst polluters in the world — China and America — colluding to stop a solution to global warming or undermining multilateral institutions. The competition risks turning two great powers with a history of revolutionary universalism into nations obsessed with their own exceptionalism.

More important, the very idea of an international condominium dictating the global order runs against the spirit of a time when citizens and nations want to determine their own futures.

As Chimerica dissolves, each variant of the new Sino-U.S. relationship is unattractive. War would be catastrophic, strategic competition could paralyze global governance and a G2 format could bring out the worst attitudes of the two global powers. The only way of avoiding these dystopian futures is to encourage a multilateral order made up of more united regions — allowing China and America to have a normal relationship.

Other powers such as the EU or Japan will not be taken seriously by either China or the U.S. unless they solve their domestic woes and crank up their foreign policy capacity — moves they show no sign of making at present. Unless they do, they could find themselves trapped in a horrible custody battle between the two divorcing parties.

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