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This article was originally published in Handelsblatt on 6 November 2009.

Last year’s financial crisis originated in the United States, and it is the US that is most impacted by the crisis, the effects of which will play out over a number of years. Yet, the US is far from alone in having to adjust. Virtually every other country in the world, including in Europe, has already felt some dislocation from the crisis. And there is more to come. With the role of the US at the centre of the global economy now having been weakened, countries must navigate the accelerated re-alignment of the global system.

Much has already been made, and rightly so, of the important role the US economy played in driving global growth for most of the past decade. Much has also been made of the extent to which this phenomenon was unsustainable as it was powered by consumers’ over-reliance on debt to finance excessive spending. As such, there will be no early return to high consumer-driven growth in the US in the next few years. Instead, the global economy is now fully embarked on an accelerated transition from one major engine to multiple engines of growth.

The question is not whether this change will happen over the next few years. It will. Indeed, it is part of the New Normal that will emerge from the crisis. The pending questions relate to the timing and intensity of the process.

The emerging engines of growth are not of sufficient scale and readiness to fully compensate for the weaker US engine. As such, while the New Normal involves more diverse and sustainable global growth over time, the corresponding level of global economic activity will be less than that delivered before the crisis by the US-centred uni-polar system.

Many European companies have already recognised the west-to-east shift in the external sources of demand for their products. For some, this involves redirecting and re-sizing their activities for a world in which buoyant US consumers are only gradually replaced by the expanding middle class in such countries as China and India. For others, it is about recognising that funds from the east will be larger drivers of asset purchases and tourist revenues.

European governments are also adjusting to this shift, which, in some cases, erodes long-standing entitlements associated with the world of yesterday. Nowhere is this more evident than in the move from the G-7 to the G-20 when it comes to global policy coordination; and in the IMF where efforts, albeit still too timid, are underway to shift some voting power away from an over-represented European block and to under-represented emerging economies.

All these changes are real and permanent. Yet they are only part of the challenges facing Europe in navigating the multi-faceted re-alignment of the global economy that has been turbo-charged by last year’s financial crisis. Indeed, the changes in the globe’s growth drivers may well turn out to involve relatively easy adaptations when compared to those necessitated by what is implied by other transformations in the role of the US in the global economy.

On the eve of the crisis, and by virtue of its position at the core of the global economic system, the US supplied at least three other important “public goods” to the rest of the world. First, its currency, the US dollar, performed the role of the global reserve currency; second, its large and liquid financial sector was material in the cross-border mobilisation and allocation of loanable funds; and third, its government debt constituted the true risk-less* (or real “AAA”) credit rating that served as a benchmark for pricing securities around the world.

The global standings of all three of these public goods have been impacted by the crisis, and in ways that will only become fully evident over time. Given the multi-year shock to each of the global public goods supplied by the US, one can predict with a high degree of conviction and foundation that the global system will not normalise to what it looked like in 2007. Yet predicting what will transpire exactly is more difficult.

System engineers will be familiar with the core/periphery dynamics that are now in play. In most complex systems, highly reliable circuit breakers are designed to protect the core from the shock-prone periphery. These circuit breakers become less effective in protecting the core from itself. As such, a crisis that hits the core – as was the case for the global economy last year when the US stumbled – will tend to have important, long-lasting and, in some cases, unpredictable systemic effects.

At the most fundamental level, there are no readily available alternatives to fully replace the US in the provision of global public goods. Consider Europe for an illustration. The euro constitutes an important international currency but it does not as yet have the characteristics to substitute for the dollar as the global reserve currency; and European governments are not keen on such a replacement. Europe’s financial markets are developed but they are still too fragmented and narrow to substitute for the US on the global stage. Finally, the credit standings of strong European countries, such as Germany and France, are subjected to periodic concerns on account of what is happening elsewhere in the European Union.

Given these considerations, the post-crisis global system is not one in which its core is immediately rejuvenated; instead, it involves countries having to navigate the inherent uncertainties associated with a weakened core. Governments would be well advised to factor this explicitly in their formulation of national and regional policies, investors would be well advised to insist on higher expected returns to commit their funds in such a world, and the community of nations should be more energised and focused on collectively influencing potential outcomes rather than have them determined by the unpredictability and potential disruptions of a weakened global system at its very core.

* All investments contain risk and may lose value.