Stanfield Professor of International Peace Jeffry Frieden, who is affiliated with Harvard University's Department of Government, was interviewed by Daily Sabah while conducting research on the politics of international monetary and financial relations. He spoke about economic competition between China and the U.S., the future of the euro, the relationship between emerging markets and the world finance system and threats posed to the Russian economy after the imposition of Western sanctions.Daily Sabah: According to the National Intelligence Council's recent estimates, China is going to overtake the U.S. in terms of gross domestic product (GDP) around 2036. What are your thoughts about this? And what do you think we'll see in the next two-to-three decades in the global economy?Jeffry Frieden: Two or three decades is a long time, right? So, let me just talk about a few factors that are, I think, probably relevant. The first factor is total GDP. Another factor is what that means for the structure of the economy and its potential economic influence around the world. And the third factor is how that translates into political influence around the world. Unless there's a terrible crisis there, China's total GDP will surpass that of the U.S. in the next 20 or 25 years. That will happen, but China has four times as many people as the U.S., so even if China's GDP were equal to that of the U.S., it would still be a poor country – and poor countries face certain economic constraints.The principal goal of the Chinese government is to develop the Chinese economy and to make it a richer economy. Surpassing the U.S. is only part of the way on the path to being a rich, developed economy. They have a long way to go before they're as rich as the West – a long, long way. And obviously just given the populations, the Chinese economy would have to be four times the size of the U.S. economy for China to be - for the average Chinese person, for per capita GDP - to be that of the U.S.Secondly, Chinese foreign investments are almost entirely made up of the foreign currency reserves that the Chinese government has. So, if you're talking about global capital markets of $100 trillion, of which China accounts for maybe $3-4 trillion, it's nothing. China is not a major player in international financial markets. It's also not a major player internationally in international investment. If you're talking about trying to attract foreign investment, if you're a developing country trying to attract foreign investment - commercial-based investment - it's really the U.S., Japan and Western Europe that you're talking about. So, that's economic influence. One of the indications of that is the fact that the renminbi (yuan) is not an internationally-traded currency.But it's also that China's financial markets are nowhere near as developed as those of the U.S., the U.K. or other major financial centers, so you can't really be a financial center or a really major financial power until your financial markets are very deep, very broad and very stable, and China's are none of the three.Economic influence will come for China, but it's a gradual process and it's part of the broader trend of the maturation of the Chinese economy. As the Chinese economy matures, as its role in international trade, international finance and international investment grows, its influence over those things will grow as well.The third factor, the third dimension, is politics. How much does China want to influence international politics? The answer is a lot. It's pretty clear the Chinese want to play a major role in world politics, and that's where we have examples from history where countries are able to, to use an idiomatic expression and punch above their weight. That is, Russia or the Ottoman Empire undoubtedly had more diplomatic and military influence than their economies would have allowed in the mid- or late-19th century.So, the fact that Russia was an underdeveloped economy didn't keep it from being one of the major powers, and I think China is on track towards something similar. Long before China reaches American per capita GDP or even aggregate GDP, China will be playing a much bigger role in world politics because it wants to. The growth of the Chinese economy will allow the Chinese government to pursue more aggressively its international political and diplomatic goals, so that, I think, is where the change will come; not in the purely economic terms, but on the political side.DS: What do you think about the currency wars, and the future of the euro and the dollar?JF: Well, I think that for the dollar, there are positive and negative trends. The positive trend is the dollar is an international reserve currency and benefits from the fact that there are no obvious candidates to replace the dollar. There's an old line that the first rule of wing walking is don't let go of something until you have something else to hang onto. So, if you were thinking about, on purely economic grounds, looking for a good, stable reserve currency, where would you go? You're not going to go to the euro because the euro is in big trouble these days. Maybe five or 10 years from now that might be an option. You're not going to go for the yen, because with the yen, again, especially in the context of economics, they're trying to push the yen down. Another option, the Swiss franc, is tightly controlled now by the Swiss National Bank. The British pound basically traps the euro. The renminbi is not an international currency, so there's no choice. I mean, you really have no choice but to go with the dollar.Ten years from now, it's entirely realistic that the euro will be a plausible alternative to the U.S. dollar, but right now, it's not. Between the dollar and the euro, it's not so much a question of rivalry. The way I think about it is more that the way things seem to be developing, that is, there is an area of the world in which the Europeans clearly have a geographical, cultural and socio-economic advantage in terms of influence - economic influence, let's say: Europe and its periphery, including Eastern and Central Europe, many countries of which are now in the EU, the Middle East, North Africa and the former colonies. Europe engages in a lot more trade with the Middle East, North Africa, the former colonies, Sub-Saharan Africa and India than the U.S. does. I think that's likely to persist because Ukraine, Belarus and Russia, despite current problems, are sort of the natural market for and source of investment for Europe, broadly defined, including Turkey, by the way. My expectation would be that that region of the world will gravitate towards Europe and gravitate towards using the euro.DS: Do you see the euro's future as bleak?JF: I think it depends whether you mean in the short-term, the medium-term or the long-term. I think Europe is in terrible, terrible trouble now. I mean, the eurozone crisis is the biggest crisis and the biggest blow to European integration since the European Union was created - the Common Market was created - back in the 1950s. So, it's a terrible, an enormous challenge, and they have not been very good at confronting it. We're now in the sixth or seventh year since the crisis and Europe is still politically paralyzed in many dimensions.If you're asking me if I am optimistic about the eurozone or about the EU, I would say over the next three-to-five years, it's going to be really difficult. Over the next 15-20 years, yes because I think that the overall momentum for European integration is extremely strong. I think that these problems are resolvable, that it will take some time and effort and it will be politically difficult to resolve them, but I do think they will be resolved. And at that point the EU will be able to start moving forward again, but that's going to take a while.The U.S. gave the Europeans incentives to integrate into the immediate post-World War II period, and the fact that the Europeans had the military protection of the U.S. provided them with something of an umbrella, which allowed them to focus on economic ties. But that was 50, 60 years ago. I think that at this point, European integration has taken on something of a life of its own. There are very strong interests in favor of continued European integration, so what's the alternative? The EU falling apart? Well, they can talk all they want, but the fact is that the only growth area of the German economy for the past 15 years has been investment in and trade with the EU. If you talk to people in the German business community, they're very aware of the fact that Germany is entirely reliant upon its economic ties with the rest of the EU. German economic growth has been based in the last few years on its investments in Central Europe, which are countries that are certainly in many cases in the EU - many of them are actually now in the eurozone as well. So, German taxpayers can complain all they want about what's happening with the eurozone prices, but the fact is that the German business community and German financiers understand that their future is in the EU. And the same thing is true about the other member states, so I don't think there's any real possibility of the EU breaking up, and I think that what we've got at this point is a functioning single market.I think the future of individual European states maintaining their own economic independence, being an individual, is small. This is a world that is going to be dominated by big conglomerations of people. It's going to be the U.S., the EU and China. How could Belgium, Austria or even France or Italy hope to provide a counterweight - or function - if it weren't part of a larger economic unit? I think that when the euro was originally created, a lot of people in London felt that it was a threat to London's position as a financial center. I think the experience of the past 15 years indicates that London can still be a major financial center even if it's not in the eurozone. In Europe, there really isn't another well-developed financial market. In fact, there are some people in London who think that not being in the eurozone is an advantage.DS: Why do they think so?JF: Because it provides London with some independence. Think of Hong Kong or Singapore as financial centers; part of their attraction is that they're not subject to American, European or Japanese authorities. So, in as much as London is not as subject to the structures of the European Central Bank (ECB) as, say, banks in France or Germany, they have more freedom to innovate; they have more freedom perhaps to find ways around existing regulation. At this point I think the general opinion in London - and I'm just going by on what people tell me – the general opinion in London is that London can do perfectly well with the U.K. out of the eurozone.DS: What do you think about the emerging markets, China, India, Turkey, Brazil and South Africa?JF: I think what we found over the last 10 years is that the emerging markets are still heavily subject to the vagaries of international finance. You'll be very familiar with what's happened over the last 10 years, which is when interest rates in the West went down to zero or close to zero. What we've seen over the last 10 years is how subject the emerging markets are to the vagaries of international finance, which can be both a good thing and a bad thing. So, when interest rates went down to zero in the West, of course investors started looking for opportunities elsewhere, and hundreds of billions of dollars flooded into the emerging markets. And after the crisis, when interest rates also went down to zero - in 2008, 2009 - again, hundreds of billions of dollars flooded into the emerging markets. So, between 2009 and 2013, there were some really remarkable developments. The emerging markets were able to borrow internationally in their own currencies. In emerging market governments, this has never happened before. The government can sell its debts to foreigners in its own currency. That's a first. So, a trillion dollars were lent to developing countries' governments in their own currencies. That led to a big appreciation of their currencies. Then, as their currencies rose, people started saying, "Oh, these currencies are very reliable, they're very strong;" they started believing in them. So, foreigners started investing in or lending to a lot of private companies in the developing world, in the emerging markets. And in just four years, the emerging market governments borrowed a trillion dollars from the rest of the world. So, the currency is rising, rising, rising, and that's the point at which some start complaining about a currency war, saying our currencies are getting so strong because all this capital is flooding in, it's making it impossible to sell our goods on world markets. Well, you know, as soon as people started talking about tapering in the U.S., the Fed starts talking about possibly, maybe at some point, raising interest rates; capital floods out of the emerging markets, and the real and the rupee collapse. And that causes a lot of problems, as we know, and as Turkey knows as well. When your private corporations have borrowed in dollars and euros and the local currency collapses, that means that the real debt burden has gone way up because most of the companies that borrowed are doing business primarily in local currency. So, for a Brazilian construction company that borrows $100 billion and earns only in Brazilian currency, when the currency drops by 20 percent, that means that the cost of the debt has risen by 20 percent. So, a lot of these countries are in big trouble. This is just an illustration of the fact that a lot of what happens in the emerging markets depends on what's going on in international finance.In this current environment, the emerging markets really, I think, have learned that they can't take access to international finance for granted; they can't take constant growth or interest in their economies for granted. They have to be careful, which is probably a good thing to be – careful. But if you're asking about the long-term, I think these economies have substantial, tremendous potential.DS: Where is Russia going to be in terms of its economy?JF: The Russian economy is in a very sorry shape. My view is that in the medium- to long-term, countries cannot sustain military and political influence if they don't have the economic capacity. In the short-term, they can. I mean, we've seen, as I said, that Russia was an economically weak country, but it was able to keep a large army, you know, in the 19th and early 20th century. Eventually that collapsed, but for a while they were able to be more powerful than their economy should have allowed them to be. Russian President Vladimir Putin can use the fact that he's got the legacy of the Soviet Union – he's still got a big army, they still have all the oil money that they've been accumulating over the last 15 years – to be a political, diplomatic and military influence. But unless there's some major changes in the Russian economy, it's going to be on a declining path. Unless there are major changes in the Russian economic model, I think they will be losing more and more political and military influence over the next 15-20 years.