International relations and the stock markets

International relations and the stock markets

Alain_Vignette2

Alain E. Roch, MBA

President and CEO

Alain.Roch@bluebridge.ca

International relations and the stock markets

As I write this article, the United States has just struck a Syrian airbase in response to the chemical attack allegedly perpetrated by Bashar al-Assad’s regime, despite Russia’s warnings about military intervention against its Syrian ally. As I keep a close watch on the headlines, I find myself worrying about the impact on the civilian population and wondering about the relationship between international affairs and financial markets.

Since 2008, the global crisis has revealed the balance of power that connects states, international institutions, and stock markets. The stakes are high, given that the markets are the place where financing sources are established for national economies, the liquidity of long-term investments is organized, and the price of raw materials are fixed. To what extent will the present crisis shake up the current international order? Stock markets are more relevant than ever, and control over them still constitutes an important driver of geopolitical action.

Of course, one can always argue that these markets are now largely virtual. But they are dependent on national laws that all have their own particularities, making it impossible to talk about a global stock market, or even a European stock market. Stock markets are made up of a variety of players: first of all, institutional investors, pension funds, mutual funds, hedge funds, and sovereign wealth funds. The combined wealth of these players is far greater than the total GDP of the industrialized nations. Meanwhile, banks play the role of intermediary between banking and financial services. Private investors and financial market professionals, including rating agencies, must also be added to the mix. These players are far from being stateless, and must all obey national laws.

Stock market analysis provide a relatively accurate reflection of the current geopolitical reality. They reveal the relative decline of the United States and Europe as compared to particularly dynamic emerging economies – though these economies have yet to prove themselves. But the current crisis could also reverse the “decline of the American Empire.” Above all, it could show that the stock markets are not an isolated world, totally disconnected from reality, as the Eurozone crisis demonstrated. This crisis was too quickly reduced to the problem of sovereign debt; in reality, it mirrored a serious competitiveness crisis, with deep roots and potentially daunting political and social consequences.

Clearly, the interdependencies that result from globalization are not only limited to the world of finance. Financial and economic disorder often results in geopolitical instability, which in turn fuels market instability. It is a vicious cycle that can only be broken if states regain control of the markets. This can be accomplished through solid economic policies and, above all, greater global cooperation. Again, a realistic approach is necessary. It is unlikely that the tools of the 20th century will be well suited to the challenges of the 21st century! More specifically, it seems the time has come for revisiting the international institutions born in the aftermath of World War II. In Europe’s absence, could this be a task for the new leader of the US and for China?