America and Europe can rise from the ashes

At a time when falling property values struggle to match the accumulated trillions of mortgage debt, when supposedly safe shares fall to zero overnight, and when the unprecedented obligations taken on by the US Treasury have eroded the credibility of even the dollar itself, predictions of America's decline have a certain degree of plausibility.

Naturally, instant journalistic books like Fareed Zakaria's The Post American World are now echoing what everybody knows: that China's economy has been growing fast for almost 30 years, and India's too in the last decade; that the Arabs in the Gulf are enjoying a carnival of consumption in which every sheikhdom is acquiring its own vast international airport and major flag airline for a future of many empty seats; that in Moscow there is a lot of oil and gas money flowing around, while political power is all in the Kremlin, and grim poverty remains the rule in a hundred smaller towns; that European economic growth is impeded by 'structural obstacles' like the deep conservatism of both trade unions and professional orders, while the European Union's political integration is now not even advancing at glacial pace.

'A Mediterranean's worth of private pools'

And, finally, that the immense accumulated wealth of the United States - the country of 19,000 airports for private aircraft and a Mediterranean's worth of private pools - is being eroded by the refusal to accept pragmatic remedies for national problems, from illegal drugs to mass transport and, above all, health care. This now consumes 17 per cent of the American national income. 97 per cent of 97-year-olds get subsidised quadruple bypass operations.

All this we know already, but what we need to know to determine the future standing of the United States - and Europe - is how they will compare with the other major powers. Will China's Communist party continue to rule? Will it collapse - a big earthquake in Beijing might be enough to release the accumulated resentments of decades? Or will the party reform itself democratically, losing elections before they win them truly, as Taiwan's Kuomintang has done?

Only then would China outperform the United States, because a democratic, stable and innovative country with 1.3 billion inhabitants would exceed its smaller rival in every form of human achievement. By contrast, continued Communist rule would continue the errors inherent to dictatorship, starting with the massive waste of capital. In every province and part of China there are smaller versions of the megalomaniac projects pursued by central government: the Yangtze dam that they drowned substantial towns to build; the hugely expensive 1,142km high-altitude railway to Lhasa; the Beijing Olympics that forced thousands of factories to close or relocate in a futile attempt to control the capital's sickening air pollution; and the Yellow River schemes that have actually increased desertification.

Local follies start with lavish party headquarters and extravagant leadership residences, where families often remain even after the leader dies. All this waste, combined with over-investment in the private sector, reduces the overall return on capital to very little – and eats into the real value of Chinese savings. This is one reason why China under Communism won't reach Korean levels of productivity, let alone compete with American innovation in the long term. This is a country which continues to depend on imported technology, designs, and structural models – even the major Olympic buildings were all designed by foreign architects. At present, China is still growing very fast as a low-cost producer, but only fools - and the writers of instant books - project its continuing fast growth in a future of rising costs.

'Parliamentary deputies sell their votes for hard cash'

India does not suffer from a democratic deficit but from the opposite: an increasingly corrupt populism which threatens its economic growth. The two largest parties, Congress and BJP, are still headed by respectable politicians, but they have been losing ground to the smaller parties that make and break governing coalitions. While these nominally represent castes, regions or extreme ideologies, their parliamentary deputies increasingly sell their votes for hard cash, and some can only vote because they obtain day release from prisons where they are serving sentences for extortion, corruption, fraud or even murder. At state level - though there are exceptions - political corruption is much worse. Politics has become a day-to-day affair of sharing out resources, with little room for planning and less money for public investment.

'Now Tamil Nadu is simply ungoverned'

While China is over-investing in infrastructure, India is grossly under-investing in roads, airports and electricity generation, while also resisting privatisation. The small centralised civil service elite struggles to preserve old British standards, and at state level, bureaucratic incapacity and increasingly overt corruption are common. The state of Tamil Nadu, with as many people as Germany, was once very well governed by Brahmins. Now it is not even misgoverned by the lower caste officials but, for the most part, simply ungoverned. Perhaps economic growth will reverse these trends, but otherwise bad government will also compromise this country's economic future.

With a falling population, and an economy that depends, as in the Third World, on raw material exports, Russia is not a serious competitor for the US or Europe. All it can do is support whichever anti-western forces are active, from Chavez in Venezuela to Mugabe's ruinous dictatorship. Once hopes faded for a true democracy, the world had expected that Vladimir Putin would at least build a respectable authoritarian regime, with power concentrated in the Kremlin but a free economy. Instead, Putin has created a unique regime of centrally administered gangsterism, in which out-of-favour local capitalists and successful foreign investors are threatened with criminal prosecution for imaginary offences, while assassins are well protected. There is lots of money for all manner of luxuries, but not for investment in research, development, agriculture or industry. Therefore, the end of the present oil and gas boom – and all booms do end sooner or later - will sink the entire Russian economy.

All this means that the United States and Europe, for all their problems, will stay on top for a long time to come. The real competition is between the two, however friendly it might be. Because the American advantage is its federal government, the extent that the EU integrates will have a great effect on the future of transatlantic competition. Notoriously, member states have increasingly resisted the unification measures that the Brussels Eurocrats keep proposing – everything from the nomination of a European President to uniform standards for cheese.

But now there is another path to integration, opened by what seems its opposite: the increasing de-centralisation of Europe into regions and emerging quasi-states such as Catalonia, Scotland and even northern Italy. These disparate regions all need a layer of government above them to deal with extra-regional economic and political matters – which the state they seek emancipation from cannot provide. This creates a much greater need for a European federal government than the Eurocrats can possibly generate, and may circumvent the obstacles to political integration by the member states themselves.

As for the United States, will it confront its problems politically, or will Americans once again prefer to solve their problems by private action? The former might be better, but the latter is more probable because there is still no consensus on public problems from the federal deficit to health care. Indeed, it is still taboo to suggest that a 97-year-old cardiac patient should be refused an operation.

By contrast, the private path of innovative economic growth is now wide open. The energy sector is undergoing a transformation, not because of fears of global warming - many Americans think that palm trees are very nice - but simply because the virtue of fossil fuels was their cheapness, and they are not cheap any more. We have already seen technical and organisational innovations, new investments of all sizes, and fraud. Alongside dozens of energy-saving procedures for everything from airports to steel mills, competitive investment in geothermal energy, there is also the disastrous maize - ethanol fraud that John McCain was brave enough to denounce in the leading ethanol state of Iowa.

'My brother's car runs on restaurant oil'

That my brother's car in Denver now runs on used restaurant oil is less significant than the fact that his and millions of other American minds are now focused on energy conservation, production and substitution - foolish priorities when oil was still very cheap. With the technology ready and unit costs very low, any entrepreneur or municipality can now put commercial ventures, like the breakthrough Israeli electric car scheme (right), into practice. Unlike subsidised solar and wind-generation, or nuclear reactors that take 10 years to build at best, these fast, entrepreneurial innovations can launch a new American economic boom.

This is what should frighten the oil exporters, not idle talk of new nuclear reactors or anything dependent on the weak US public sector. Indeed, Congress hasn’t even managed to agree on fast authorisation of new nuclear reactors, and even that would still have taken years of litigation.

So given all these things, perhaps the future of both the United States and Europe will be shaped by their true strengths - private innovation on one side of the Atlantic, local and regional authenticity on the other, rather than the weaknesses that now generate fears of decline. ·